Summary
eBay's original intent behind its expensive acquisition of Skype has not worked out, although this service is popular with some segments of international telecommunications users. Due diligence of Skype's prospects should pay careful attention to the likely strengths of new and improved alternative competitive offerings for voice calls as well as to its own ability to generate additional sources of revenues.
Analysis
eBay paid $2.6 billion for Skype in 2005 and wrote off $1.4 billion in 2007 (including a $530 million earn out for its founders). In 2008 Skype reportedly generated $551 million in revenues although its margins have remained thin. It claimed to have over 400 million registered users as of end-2008, and undoubtedly Skype has become a useful means for communicating with far flung correspondents who have broadband internet access (I am one of them). However, eBay never figured out how to integrate Skype into its auction business so as to generate additional revenues and profits for itself. The question remains what Skype can do as either an independent entity or after an acquisition by another company so as succeed as a VoIP play, and/or move beyond being essentially a VoIP service provider, and develop additional ways of generating revenues from its registered users. Other attractive alternatives to Skype for voice calls are growing (e.g. Pingo's SoftPhone) and more are expected (e.g. from Google). An interesting and controversial prospect is the availability of VoIP on mobile handsets, including Skype which is aggressively pursuing this capability, with access to broadband wireless service,which would alleviate the frustration that users experience (as I do) at the outrageously large differentials in the retail prices of calls via Skype or traditional phones to mobile as compared to fixed phones in areas such as Europe. Major mobile operators are naturally reluctant to allow this kind of calling since they still enjoy high mobile termination charges for voice calls , although relative newcomers such as 3 in the UK are using VoIP over their mobile data services as a competitive differentiator. It will be interesting to see what Skype's anticipated IPO presentation or a buyer (whether its original founders, backed most likely by a private equity firm, or another company for "strategic reasons") will have to say both about VoIP over mobile networks and whether and how Skype should and can move beyond VoIP services.
