Tuesday, October 2, 2007

Why does eBay need Skype ?

Agreed that Skype under performed, that its quality can be sometimes quite indifferent. But what was eBay doing in the first place, paying US$2.6 billion for Skype, which was offering a service that was fast commoditized, in a market where competition was coming from multiple categories of players ?

It is not that Skype brought to eBay customers for its core auction business. Nor would auctioneers and bidders stop doing business on eBay if they couldn’t click-and-call through Skype. It is when a company starts wanting to own all the plumbing and fixtures, which is not part of its core business, that problems begin. Internet telephony is certainly not eBay’s core business.

On Monday, eBay, of San Jose, California, said it was taking a $1.43 billion charge related to the acquisition of Skype, according to a report in the International Herald Tribune.

Since the purchase in 2005, Skype's membership rolls have swelled past 220 million. But the company has not had as much success making money as it has had growing. Skype does not charge its users for calls to other Skype users. There is only a small fee for calls to landline numbers and cellphones, according to the International Herald Tribune.

In the event, Skype earned $90 million during the second quarter of 2007, far below eBay's projections.

Skype was one of the first movers in the pure-play VOIP (Voice over Internet Protocol) market, but its share of international VOIP traffic was in 2006 smaller than that of the international carriers it was expected to displace, according to TeleGeography, a research division of PriMetrica Inc. While the volume of international traffic routed via Skype was significant, the quantity was still small when compared to a global switched and VoIP traffic base of 264 billion minutes, it said in a report. Computer-to-computer traffic between Skype users in 2005 was equivalent to 2.9 percent of international carrier traffic in 2005 and approximately 4.4 percent of total international traffic in 2006.

The company’s business is said to have flagged because of less-than expected business in its paid VOIP calls business to landline and mobile phones, even as Skype-to-Skype calls boomed.

It appears that VOIP services offered by carriers, and PSTN calls, continue to dominate the market, despite forecasts that VOIP would ease out PSTN. It may be true that VOIP, because it is cheaper, will progressively ease out PSTN. But the new business will probably go to the large carriers who have the capital to invest in infrastructure, an existing stable customer base, and existing originating and terminating connections for calls.

That is why we have a new crop of VOIP service providers that prefer to work with the big telcos, providing the VOIP piece, while originating calls and terminating calls through the telcos. “ We put money in the telcos pockets. We wouldn’t have fight with the telcos because they are established and strong,” a Jajah Inc. executive told Network World some months ago.

The success of pure play VOIP is as yet not certain. TMCnet reports that Paul Budde Communication, an independent global telecommunications research and consultancy company, has released a report, called 2007 North America — Telecoms, Broadband and Mobile Statistics, which points out that North American cable providers are reaping the benefits of a consumer market looking for less expensive phone service coupled with added features and ease of billing.

The competition to pure-play VOIP service providers is hence multi-pronged.

Which brings me back to my question – what is eBay doing slugging it out in the patently unpredictable VOIP market. What benefits does it expect from deviating from its core online auction business ?

To be sure, some auctioneers may like to have “click-to-call” features on eBay. But eBay needn’t have bought a large VOIP firm to deliver that. Whether eBay encourages it or not, any number of VOIP players are offering click-to-call “buttons” and other services on eBay, social networks, blogs, wherever you want. In the end they meet eBay’s fond desire to offer click-to-call. But first eBay may have to spit out Skype to folks more at ease, and street smarter in the VOIP market.

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