EBay Pressured to Move on Skype

Analysts worry that the online auctioneer is moving too slowly on its multibillion-dollar investment. Will more content allay their concerns?

When eBay Chief Executive Meg Whitman acquired Skype in fall 2005, she said, "by combining the two leading e-commerce franchises, eBay and PayPal, with [Skype], we will create an extraordinarily powerful environment for business on the Net." The deal, valued at $2.6 billion in cash and stock, plus an extra $1.5 billion in additional payments through 2009 if certain performance targets are met, set Wall Street tongues wagging.
Among the hoped-for gains: added business lines, new buyers and sellers to the auction site, and a jump-start for growth. But more than a year after the deal was struck, many analysts question whether eBay (EBAY) has done all it can to harness Skype and its technology. Some investors concur, as evidenced by the 20% decline in eBay's share price since September, 2005.
Some of the slump is due to concerns that eBay's core auctions business, accounting for 66% of sales, is slowing as e-commerce and online search competitors muscle their way onto eBay turf. Still, "strategic questions remain about Skype," says Laura Martin, an analyst with Soleil—Media Metrics. "It's still unclear how it benefits the core eBay platform. And monetization [on eBay's investment] has been slower to occur than we had hoped."
Slow Mover
Analysts including Paul Keung, who covers eBay for CIBC World Markets, speculate that Skype didn't reach its first set of performance-based goals, resulting in missed payments, or so-called earn-outs. A recent management shuffle sent Skype President Alex Kazim back to an executive post at eBay after only six months. Skype declined to comment on earn-outs and claims Kazim left because his new responsibilities made for a long commute.
Sure, there's been movement in the right direction. The Web-calling outfit is expected to book $195 million in sales in 2006, three times the 2005 figure; in December, Skype introduced a subscription-based calling plan, and it's expected to announce other service fees and more paid service plans later this month.
The problem, say many on Wall Street, is the lack of a broader vision for Skype. "This is probably enough to offset regulation fees," Michael Arden, an analyst with consultancy ABI Research, says of the new fees. What's lacking is greater and speedier integration with other eBay properties and a grand, sweeping plan hinted at by Whitman and others at eBay back in 2005.

Skype's Potential
The company says big changes are on the way and that more of that vision will come to the fore. "We are working on developing new e-commerce- and content-oriented, and advertising-related revenue streams," says Don Albert, vice-president and general manager of Skype North America. For now, most of the company's sales derive from telecom services like SkypeOut, which allows for calls from PCs to phones. "Over time, we see these [other revenue streams] accounting for the larger share of Skype's revenues," Albert says.
Consider the potential in online search ad revenues. Since last August, Skype has been working with search heavyweight Google (GOOG) to enable so-called click-to-call ads, which let the user place a call to a desired number directly from a list of ads that appear next to search results. The new feature, due to be in place in late 2007, could let eBay offer a completely new category of listings—and maybe even to share in online advertising dollars collected by Google.

The company is also toying with the idea of offering contextual advertising as part of its new text chat and Skypecast feature, allowing dozens of users to join regular live conversations on various topics, or even virtual concerts, where members sing and play music instruments for each other. It's easy to imagine how a weekly chat on gadgets might feature ads for the latest phones from the likes of Motorola (MOT) or Nokia (NOK), which announced on Jan. 8 that it will integrate Skype into its new tablet PC. For now, Skypecast use is still limited.

eBay's Offerings
More promising are the possibilities of integrating Skype with other eBay properties. The auction site is expanding use of Skype Me! buttons in various auction categories. Limited data seems to show the feature helps clinch sales. Yet, sellers using Skype Me! buttons are "few and far between," because many sellers aren't interested in fielding phone calls, says Keung, who doesn't expect that attitude to change any time soon.
There's also wide latitude for integrating Skype with eBay's online payment service, PayPal. This year, PayPal will become the preferred payment method used on Skype worldwide. And, some time in 2007, Skype will enable users to send money to each other via PayPal, Albert says. That could increase eBay's share of the personal remittances business. Considering the size of Skype's user base (136 million users at the end of the third quarter), this move could hit money-transfer agents and banks hard and result in extra business for eBay.

All in all, though, telecommunications remains Skype's main focus. "We think there's a tremendous opportunity of capturing our consumers' telecom spending," Albert says. Indeed, while small today, the Web-calling business is expected to grow: Worldwide revenues from Voice over Internet Protocol (VoIP)—a fancy name for Web calling—will rise from $1.65 billion in 2006 to $19.1 billion in 2012, according to ABI Research. If Skype keeps its current 12% share of that money, its sales will reach nearly $2.3 billion by 2012. That would certainly be material for eBay, which booked $1.45 billion in the third quarter of 2006.

New Leader Needed?
All of which leaves some analysts wondering: What is taking you so long? "They need to do something soon," says Arden. "If [some big move] is not announced, Skype is going to be seen as a bad investment." Some wonder why eBay hasn't moved to combine its properties, including Skype, to, say, start an online brokerage firm, a social-networking site competing with News Corp.'s (NWS) MySpace, or a video-sharing site like YouTube. Others say eBay could have begun selling its Skype application to more large companies.
Some query whether Skype might do better under a visionary like News Corp.'s Rupert Murdoch, or under Virgin's Richard Branson, says Web-calling expert Jeff Pulver. "If they are not getting all they can out of it, the property is still valuable, they've grown it a lot," says David Prokupek, the founder of Geronimo Financial, which invested in eBay stock as the auction powerhouse's valuation slid. "We suspect Skype is more valuable today than when they purchased it. In this [mergers and acquisitions] market, maybe someone else could do more with it." A spokesperson says eBay has no plans to sell or spin off Skype.

Whatever it does, eBay needs to move soon. A slew of competitors are pushing into its market. Take, for instance, an outfit called Jajah, backed by powerful venture capital firm Sequoia Capital. The company allows for free calling between cell phones—a service that Skype users need to download additional software and to pay SkypeOut charges for (see BusinessWeek.com, 09/26/06, "Jajah's Mobile Ambitions"). It's just the kind of service eBay could make work. "They are pretty creative people," says Donald Yacktman, portfolio manager for the Yacktman Funds, which purchased eBay shares on price weakness last summer. It may just be a matter of putting that creative energy to work.

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