Tuesday, September 13, 2005

eBay/Skype: Royal Wedding or Royal Mistake?

eBay’s ability to extract value from their Skype acquisition hinges on the following:

(a) eBay’s successful integration of Skype’s VOIP into the eBay suite of eCommerce services: eBay, Paypal, Shopping.com., Classifieds (Kijiji/Craigslist/Marketplatz/Mobile.de/Rent.com/etc.);

(b) The market evolving toward proprietary VOIP networks;

(c) VOIP being the lead purchase in the communications suite.

Point (a) is pretty straightforward. The synergy makes sense on paper (or whiteboard) and it is a matter of making it work in practice. Implementation on this account is largely within eBay’s control. In a nutshell:

Paypal + Skype:

  1. Paypal is used to pay for Skype = more Paypal users = Paypal grows dominance as payment mechanism, creating barriers to entry by Google and Microsoft.
  2. Skype taps into Paypal vendors for a pay-per-call (PPC) add-on with associated SkypeOut revenues.

eBay + Skype:

  1. eBay taps into the Skype user base, comprised of bargain-hunting, technically savvy, early adopters (nice correlation). eBay adds PPC to improve communication, increase sell-through, enable international sales and raise barriers to entry by competing auction solutions.
  2. Skype taps into the eBay user base of bargain-hunting, technically savvy early adopters (buyers and sellers) and introduces them to VOIP with PPC.

Shopping.com + Skype:

  1. Shopping.com benefits from better communication, helping to grow the percentage of users who buy, versus just research and buy locally. Improved communication = improved comfort = improved sell-through rate.
  2. Skype taps into yet another base of technically savvy bargain-hunters.

Classified Ads (Craigslist, Kijiji, Marketplatz, Mobile.de, Rent.com, etc.) + Skype:

  1. Classified users can get additional information and schedule to meet/transact, it can all be anonymous too.
  2. Skype enables eBay to monetize the large number otherwise free transactions by providing PPC services. And of course taps into yet more technically savvy bargain hunters.

Point (b) is a little more challenging. Will Skype continue to win the hearts and minds of users, resulting in a proprietary network/client combination? Or will something like the SIP protocol and Gizmo project or Asterisk or other such clients/PBXs using an open and interoperable network win the market?

If the telephone network is any indication, it started as a collection of proprietary networks, evolved into national networks and then the national networks worked among themselves to interoperate. Skype leapfrogs much of this with an instantly International network, but does it have the legs to remain the dominant proprietary network. Will, for example, IP phones circumvent the need for Skype? Will Skype license its solution to mobile phone companies to leapfrog POTS (plain old telephone service). This story is not yet written, and there are successful examples for both proprietary and open networks. The open TCP/IP protocol beat out Netware’s proprietary IPX/SPX despite a solid early lead. On the other hand the IM clients are all still proprietary networks.

If eBay can pull off point (a) that would be goo, but they need success on point (b) as well, in order to recoup the investment in Skype. If they also pull off point (c), described below, then the acquisition of Skype will go down in history as a great deal by a visionary company.

Point (c) is straightforward. I firmly believe that there will be a communications suite. People will use one platform for all real-time communication. That one platform should provide voice, file sharing, chat/IM and potentially even slide/whiteboard presentation capabilities. The $64,000 question is whether users will want their voice solution to handle IM or whether they will want their IM solution to handle voice. Which feature drives the user’s product selection?

Why will these features be offered in a combined platform? Because they go together like chocolate and peanut butter. Because you want to communicate with people, and communication involves all of these capabilities. I’m on the phone with someone, I want to send them a link, copy a quote, send emoticons (conference calls especially). Or I might be IMing and we get to a point that requires more verbal interaction, so we shift to voice. Also, keep in mind that Microsoft taught the world about the power of bundling with its come from behind to own the market effort with Microsoft Office.

If users want a voice platform that handles IM, Skype could dominate this field. If they want IM that provides voice, then AOL, Yahoo, Microsoft and others are in the lead position. If you ask the average person on the street, which of the two functions is most important, they will say voice. This bodes well for eBay/Skype. If they pull this off, it will be huge!

My recommendation is simple: eBay needs to buy Cerulean Studios. Their Trillion product is a meta-client for IM that operates across AIM, ICQ, MSN, Yahoo Messenger, and IRC. eBay needs to add this to Skype, in essence saying, get our VOIP solution and you can interact with any IM folks as well. Embrace and extend. Cannibalize IM with a meta-client and make everyone play on your home field: voice.

Wildcard Alert: Microsoft could also bundle all of this into their next operating system. That, of course, has the potential to reshape a market’s dynamics just as it did with the IE/Netscape market.

In short, it looks to me like it could be a great bet for eBay, given the current market conditions and resulting prospects. But those prospects could change with customers wanting voice added to IM, instead of vice-versa or with a killer Windows communication client.