eBay Jumps the Shark
The big business headline today is that eBay is paying $2.6 billion to buy peer-to-peer Voice-over-IP software company Skype.
(Pronunciation guide: "Skype" rhymes with "hype")
What's missing from this deal is any semblance of business logic or sanity.
I will grant that, as an outside observer I don't have any special insight into Skype or the thinking of eBay management. But the optics of this deal are really really bad.
Starting with the price. $2.6 billion harkens back to the frothiest days of the dot-com bubble, when a whiff of an idea plus a couple engineers could command a billion dollars. Skype has been very close-mouthed about its financial performance, and estimates range from $15 million in revenue per year all the way to $100 million.
$100 million in annual revenue is pretty respectable for a startup, and would be enough to go public on, but even at that high end of the range eBay is paying 26x revenue. Not 26x earnings, but 26x revenue. At the low end of the range for revenue estimates, eBay is paying over 100x revenue.
(Though by the end of the day today we should have a better handle on Skype's financials, since eBay will have to disclose at least some information.)
The real head-scratcher is the business case. As in, I can't think of one. As near as I can determine, eBay thinks it can push the Skype service out to its millions of members, somehow turning the auction company into a next-generation phone service.
It should be noted that this is very different than the PayPal acquisition. PayPal was already used by many (perhaps most) PayPal members before eBay acquired it, and was an essential part of many transactions. eBay was essentially buying a piece of its own value chain that it didn't already own.
With Skype, this simply is not the case.
Just to make things worse, if Skype is ultimately successful, it will look more and more like a phone company. Already much of its revenue comes from providing access to traditional phone networks, and from traditional value-added phone services like voicemail.
The operational realities of a phone company are much different than those of an auction service or payment service. For example, if eBay management thinks that governments won't try to regulate Skype as they currently regulate phone companies, they're dreaming. Regulation will quickly become the driving reality of much of that business.
Finally, both eBay and PayPal are web-based services, while Skype is largely desktop software. As someone who runs a company doing the former, whose wife works in a company that makes the latter, those are two very different kinds of businesses. It is an open question as to whether the experience running a web-based service helps you at all when trying to publish desktop software.
In fact, the only similarity I can find between Skype and eBay and PayPal is that all three companies grow through a "network effect," which can be very powerful when it works in the company's favor. Unfortunately, there isn't much about the network effect that makes it a real synergy between two companies.
I think the reality is that eBay and PayPal are saturating their respective markets, and eBay management wants to use some of its currency to buy something--anything!--which can help keep it growing and maintain the stock price.
But that's not a good reason to spend $2.6 billion.
UPDATE: The actual purchase price is $1.3 billion in cash, $1.3 billion in stock, and up to an additional $1.5 billion in earn-outs if Skype meets performance goals over the next three years. Skype's revenue forecast for 2005 is revealed to be $60 million. So the price is at least 40x 2005 revenue, and possibly as much as 68x 2005 revenue. Or, as someone else calculated, it comes out to something like $25 for every person who has ever downloaded the Skype software, whether they use it or not. Ouch!