The first salvo was from Yahoo when it acquired Dialpad. The counter punch then came from Google with its release of Google Talk. Now comes the big haymaker with Ebay’s acquisition of Skype. Many observers can easily comprehend the logic of both Yahoo and Google entering the market for voice services. However, almost everyone is dumbfounded by Ebay’s multi-billion dollar aquisition of Skype. One is clearly reaching if one can pin-point any synergy between the two companies.
Coincindentally and fortunately I now work in the telco space so I now take in a daily dose of blogs concerning this space. Two recent blog entries are of significant relevance to understand the logic behind the eBay acquisition. Trust me, there is some logic behind this madness. Also what better source to know the true value of Skype than eBay? Afterall, doesn’t eBay see all Skype transaction occurring through Paypal?
First let’s head of to an interesting interview of the CEO of SIPphone ( a Skype challenger). Michael Roberson the CEO opines:
At SIPphone we believe all calls are eventually going to zero, so we have to think of different ways to make money around the voice experience vs. just charging per minute and charging more if they fall outside arbitrary city, state, country lines. When calls become free, it doesnxe2x80x99t mean you wonxe2x80x99t pay for the broadband connection or the wireless connection, but the actual phone call itself is going to free. New companies in VoIP will have to think about new ways of making money beyond charging per call.
further more ads a insightful annectdote:
I went to one of the large carriers and I told them, you wonxe2x80x99t believe the explosion of PC to PC calling wexe2x80x99re seeing at SIPphone. He said, You know, geeks might talk to each other on PCs, but I donxe2x80x99t see normal people using their PCs to make calls. And I was struck by a very similar conversation I had about seven years ago with the record labels when I said, You wonxe2x80x99t believe whatxe2x80x99s happening, people are listening to music on their computers. And I remember them saying, well, we donxe2x80x99t think the average person is going to listen to music on a computer. And you tried to explain to them, well, look, you can do so much more with a computer xe2x80x94 you can organize your music and make playlists and burn CDs. They couldnxe2x80x99t get it.
The traditional large telecom are in serious trouble. Telepocalypse, a blog catering to the impending doom of the telco industry has been harping about this for years. The blog has one of the most insightful explanations behind the Skype acquisition. In fact, in a entry prior to the eBay acquisition Martin Geddes the author wrote:
eBay is a real threat to Google, and eBay buying Skype would be a setback for Google.
In his latest piece he writes:
Google and eBay are already in the business of generating sales leads. The Skype community, for all its size and vibrancy, is not being bought because they can be pitched to and turned into eBay users. [snip] There are two conveniently located stones under which to look: transaction revenue, and the freefone number business.
Google and eBay are extremely disruptive forces working to disintermediate the advertising, banking and now the telecommunication industries. This delivers a much needed dose of fear to the incumbents. There is no motivator like fear to get people off their asses. Unlike greed which has a effect of preserving the status quo and we’ve see today what that looks like.
Jeff Pulver writes:
I suspect that historians might come to recognize todayxe2x80x99s announced acquisition of Skype by eBay, as one of the great indicators of the historic transformation in communications. Today’s move by eBay in purchasing Skype is transformational because it signals the ability and value of an xe2x80x9cApplications Companyxe2x80x9d adding a xe2x80x9cCommunications Companyxe2x80x9d to its portfolio. The acquisition turns the entire telecom industry picture on its head, and demonstrates that voice, presence, text messaging and other IP-based applications will be essential for the company of the future. [snip] Unlike traditional voice communications providers, eBay gets the concept of community and community building.
Ultimately to properly value the acquistion one should consider the strategic position eBay has captured. Trying to gleem any sense of synergy between its current business and Skype’s business is a waste. Enhancing eBay’s auctions with the convenience of voice interactivity isn’t worth the billions eBay shelled out. Techdirt may be right on the money that eBay indeed has too much money. However, where can one alternatively spend a billion dollars and gain a real competitive edge against the likes of Google? What’s Google going to do with the $4 billion it recently raised if there’s nothing worth buying?
Google is now going to have to play an uphill battle. That battle was made conspicously apparent when Google released GoogleTalk. Why does Google continue to insist on invitations to grow it’s Gmail accounts? Why is the only other registration mechanism is to use a mobile phone? I take it that Google understands the value of tying one’s digital identity with something tangible in real world. That is you have a Gmail account because of your real world contacts or your ownership of a mobile phone.
Interestingly enough, it is eBay that has the enviable position of providing digital identities with true value. eBay’s reputation system is without competition. A seller’s ability to command a premium bid is affected by his reputation. Buyer’s without established reputations are sometimes barred from bidding. Paypal’s verified attaches a real bank account to an identity. When one attaches a credit card to an identity, the address becomes verified and adds additional reputation for a buyer.
Now granted our assumptions are correct that voice calls will tend to zero. Even under this scenario, the value of a contact number remains the same. In countries with weak credit systems, one of the tried and true mechanisms of ensuring payment is to use the carrier’s billing system. One needs to pay or be virtually excommunicated.
eBay by acquiring Skype has snatched away Google’s best vehicle for building it’s identity platform. Google will now have to grow it the old fashion way, they have to earn it. If voice calls tend to zero, then obviously Skype’s revenue will also tend to zero. The bet is that Skype can squeeze out the last remaining drop of revenue, while giving eBay enough lead time in the identity space to out run it’s rivals.
Finally, for those contemplating a new breed of voice and data interaction. Well seriously, one doesn’t bet billions of dollars on a speculatively new way of generating new transactions. It is important to remember that it takes more than brokering and rich interaction to enable transactions. The parties reputations will continue and always play an essential role in deal making. It’s fundamental and at this level of the game with this kind of competition it could indeed be worth billions.