The $4 billion Skype / Ebay deal makes great business sense and possesses enormous potential if you stop and think about it. Despite the press releases and articles, the Skype acquisition by Ebay seems to me less about auctions and more about Paypal and global telephony. It is no coincidence that Ebay-owned Paypal recently launched a micropayment solution to add flexibility to their current fee structure for small dollar amount transactions. A Paypal and Skype vehicle could launch Ebay into the world of global telephony using their communications network and their payment system, which is the default internet currency. But that’s just the tip of the iceberg.
Skype is different
Skype has been variously compared with traditional VoIP companies like Vonage and Packet8 or instant messaging applications like MSN or Yahoo that have PC-to-PC phone capabilities, however that overlooks the fact that Skype is neither a true VoIP provider nor a simple instant messaging network with voice capability. Skype has been developing a new attitude and a revolutionary model of telecom by working closely with network providers and hardware manufacturers to move beyond the desktop using Skype-based solutions to bridge telecom and the Internet over broadband and WiFi. Unlike other VoIP solutions, Skype has actively sought out ways to extend VoIP as its own platform, bringing in the best from the worlds of telephony and the Internet. Competitors like Vonage are largely stuck in the mold of the 20th century telephone or cable company by requiring additional hardware and large up-front costs to the consumer. Skype offers an unbeatable value proposition for the end-user. It’s free. To make Skype-to-Skype calls requires no cost to the consumer, and this is especially attractive for what amounts to a new communications paradigm for most users. Once you’re ready to graduate to SkypeOut, Skype’s PC-to-phone services, the initial cost is about $12 with no monthly commitment. Sign-up for your own local SkypeIn (phone to PC with free voice-mail) telephone number and spend another $12. For a complete phone solution you have paid a lot less than the setup fee for a company like Vonage. Let’s not forget other ridiculous consumer unfriendly costs like bureaucratic federal Regulatory Recovery Fees, onerous contract termination fees, reactivation fees, and assorted restrictive taxes (3% excise tax / sales tax, etc.). That’s the old way of doing things. We’re now dealing with telecom as software and there’s no need for the unnecessary costs, complexity, and bureaucracy intrinsic to the traditional telecom model. Consumers demand ease of use, simplicity, low-cost, and low levels of commitment, all of which Skype provides as the center of their strategy.
Mr Zennstrom says a core aim of Skype is to charge customers as little as possible. Skype is disruptive, he says, because its customer acquisition cost is close to zero, unlike Vonage, which he claims spends around $400 per customer. “Our model is to make very little from each customer. We think the less we can make per customer the more competitive we will be.”
Skype as a 21st century AT&T
If you’ve spent any time with Skype you’ll notice that a large percentage of its users are European and Asian. European and Asian consumers exist in markets that are radically different from their American counterpart, and Europeans and Asians use technology in vastly different ways than most Americans. For one, they use their phones for more than talking since voice is more expensive in those markets. They send many more SMS messages and download more ringtones than their American counterparts. As a result, ringtones and SMS have become highly profitable for cellular providers whose costs amount to data transfer and royalties in the case of ringtones. You can imagine several avenues where Ebay could make inroads in this marketplace by translating their brand and knowhow into profit. What would prevent Ebay from partnering with cellular providers to offer SMS and advanced messaging with Skype, bridging the gap between the mobile phone and the desktop as AOL does now? You could set up Skype to use the same ringtone you use with your mobile. Contacts could be synced between your mobile phone and Skype since each Skype contact would have a Skype name and an attached number. Messages could be sent over Skype directly to handsets. Imagine sending a file from your computer to one of your friends’ mobile phones. In the future, Skype could evolve in this fashion so that everyone has one true point of contact. To reach you anywhere by phone or IM you would simply need to give your telephone number or Skype name. From Ebay’s perspective, Skype gives them a hook into the mobile phone via both voice and messaging.
European and Asian consumers also differ from Americans in how they use the Internet. In Europe and Asia many consumers use Internet cafes and communal settings for high-speed Internet access. Ebay / Skype could easily partner with Internet cafes and WiFi hotspot providers to offer pay-per-call global calling using their Paypal micropayment framework. This would have the effect of driving new users to both Ebay and Paypal as well as providing an actual sustainable revenue model for WiFi networks. Skype already has an offering with Boingo, called Skype Zones that provides Skype access at Boingo WiFi hotspots for a low flat monthly rate. Imagine a scenario where Skype-enabled handsets could make calls over wireless internet without using valuable plan minutes. If I ran T-Mobile or Cingular, I would be concerned about the future growth of a product like Skype. Just as consumers ditched their home phones for mobile phones, so could mobile phone users migrate the bulk of their calling over the Internet.
Skype’s ideal environment could emerge in business telecom. Imagine entire call centers and corporate workplaces linked together with the one-two punch of Skype voice and IM with cheap outbound and inbound calling rates and instant messaging capabilities. Moving and adding staff would be as simple as installing Skype on their desktop. Everyone could run their desk or “office” from any Internet accessible location. Skype is already set up to allow SkypeIn calling from several different local call-in numbers. From a business perspective this allows you to have local telephone numbers anywhere you do business. Add to this Skype integration with the company website. Using Skype you could easily funnel your customer phone and instant messaging traffic to customer support or sales staff. This is what Meg Whitman is referring to when she talks about generating revenue through lead generation.
Paypal as the de facto global currency
Paypal is the hands-down Internet standard in user to user fund transfers over the Internet. Imagine paying for items over your mobile phone using your Paypal account. Coincidentally, Paypal announced today that it is doing just that with a company called Bango.
Bango has entered into an agreement with PayPal, to enable content owners to deliver low cost, direct-to-consumer mobile content, paid for using a PayPal account and one-click purchasing from Bango.
With this agreement, mobile phone users can approve purchases of content such as ringtones, games, wallpapers and videos using pre-approved PayPal payments. Existing PayPal users activate their accounts to pay for mobile content with a one-time visit to www.bango.net on a personal computer. They register their phone with Bango and make purchases through Bango, with funds deducted from their PayPal accounts. …
Bango gives content providers the services to ensure easy access to their branded content, collection of micro-payments, detailed tracking of user spending patterns and the tools for viral marketing.
To ensure a streamlined user experience, the Bango system automatically presents the best payment option depending upon the user’s network, territory and previous payment history. Payment options include on the phone bill (using the operator’s own billing system or Premium SMS), PayPal, credit/debit card, IVR or retail PIN.
Skype could be used to drive users to Paypal’s micropayment system starting in this case with mobile phone content and later with Skype calls. The situation could evolve where you could use your mobile phone / Skype handset as a payment method. This is something many companies are attempting to do especially in Japan. The difference here is that Ebay has its own payment vehicle and now its own user gateway. Paypal’s micropayment plan is essential because without allowances for smaller transactional amounts fewer producers and users will migrate to the Paypal system.
Ebay knew everything about Skype going into this acquisition.
The number one reason why this deal is a no brainer for Ebay: Ebay knew everything about Skype going into this acquisition. They knew exactly how much revenue Skype was bringing in because they own Skype’s number one payment method… Paypal. This allowed them to see everything they needed to know. What people were buying, how much they were buying, and where they were buying from. This information allowed them to figure out several things: that Skype was popular (number of SkypeOut units purchased divided by number of average users connected at any time ALSO number of times downloaded divided by number of additional services purchased), that it had good conversion rates, and that it was a truly global phenomenom (number of international Paypal accounts purchasing Skype services). They could also use this information to see how many people who bought Skype had active Ebay buyer / seller accounts, which may have been even more compelling.
One thing is for sure, it’s not just about the auctions.