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September 16, 2005

eBay and Skype: Back to basics

Two weeks ago, I explained how Google needed Skype to move Google up the value chain from when an advert is clicked. I noted that eBay was Google’s real competition for connecting consumers to merchants, and eBay has a structured transaction environment. They don’t just do the search, they also help complete the transaction, including payment.

So, a fortnight later, and eBay buys Skype. What does it mean?

Companies like Dell, eBay, Google, etc. got big by thinking big. They picked a unique business model, and drove it to completion without losing focus. To understand this transaction, you need to look for where the big prizes are.

The obvious one is the wrong one. Google and eBay are already in the business of generating sales leads. The Skype community, for all its size and vibrancy, is not being bought because they can be pitched to and turned into eBay users. Or if it is, this story will have a nasty ending where all the heroes get bumped off and the princess just grows old and ugly.

There are two conveniently located stones under which to look: transaction revenue, and the freefone number business.

Banking is big, slow, cartel-like and lacking in innovation. eBay is unbundling part of the transaction chain using Paypal, and re-intermediating the settlement process. Remember that Paypal is largely a virtual payment mechanism, used to front other payment services. Communications services are a natural generator of the small transactions that Paypal thrives on due to its low comission fee structure compared to credit cards. Skype and Paypal also have an international footprint, leaving many parochial banks struggling to offer a competing product. They fit together nicely.

This is classic Innovator’s Dilemma stuff. Eat your way up into the big boys’ businesses by starting with the small stuff.

So the first big prize is to suck some of the profit out of the banking payments system. This is a big pool, and Skype is just a small straw. That makes the eBay/Skype transaction interesting, but not critically important.

Guess what? Telecom is big, slow, cartel-like and lacking in innovation. And it has some big prizes ready for snatching. Almost all of current retail VoIP plays are abount disintermediating high end-user toll charges. It’s a massive race to the bottom, where you get your monthly talk time by cropping three coupons off your Shreddies packet.

There are other puddles of money in telecom, though. One is the 800 number revenue bucket. I don’t have the figures to hand, but this isn’t a small deal. And because Skype is a child of the “stupid network”, it can evolve quickly to integrate new transaction-supporting functionality making the profit pool bigger.

I suspect that eBay’s ambition is to become the mediator of 800-number style interactions between consumers and merchants. The www.ebay.com web site is their text distribution channel, and Skype is the audio one. Each will have different sets of merchants, buyers and transaction structures. So don’t look for “eBay” functionality to appear in Skype, because they’re addressing strategically similar but functionally different needs.

One last thought. If you’re a telco, now is a great time to cross your chest and start saying your Hail Marys. Someone with deep pockets is about to give away telephony to support their adjacent transaction business. Browsers are free — as long as enough people tip Bill G., search is free — as long as enough people leave a few cents in Larry, Sergey and Eric’s pension plan. And telephony will be free — as long as you click the “pay here” button on your Skype-powered eBay telephony device often enough.

PS - eBay still hideously overpaid given the size of the effort needed to claim the prizes.

Posted by Martin at 10:25 PM


Comments: (post your comment)

Paul Jardine @ September 13, 2005 12:07 AM:

I think Ebay want more than just the 800 number revenue! (attractive though it is)
I think their play is based on a phenomenon that they see happening on their auction pages already.
Real companies selling real products use Ebay exclusively as their storefront. If Ebay can provide enough of the prerequisites for successful company operation, e.g. 800 numbers, then the have the potential to be THE place to start your online company (some would say it already is)
Given that this is global and the throughput could be mind-bendlingly large, any kind of morsel of revenue per transaction is huge.
I'm not sure they (Ebay) can pull it off while the market provides competition (e.g. Google?), but Skype gets them to market quickly with the basics. I would expect partnerships or acquisitions in financial software and logistics etc.
The fee structure at Ebay is quite severe, however, so I wonder how the free model Skype proposes will go down?

Jorge Ortiz @ September 14, 2005 04:48 AM:

I agree with your view of eBay as a transaction business and the efficiency of PayPal vs other payment systems when dealing with micropayments.

Skype can be the entry point for micropayments, an area where there is a very long tail of possible applications waiting to be exploited.

Much as Google grew by getting revenue out of people who would otherwise not advertise, micropayments is an area where there is a huge revenue stream waiting to be had but lacking an efficient payment system. Skype/Paypal may be the entry ticket to get people used to micropayments, after all the phone bill is the most widely spread micropayment system that we all use, but we are rarely aware that it is a micropayment system

Posted by dymaxion at September 16, 2005 12:33 AM



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