eBay admits to failing to turn Skype into cash cow

eBay is taking longer than expected to generate a financial return from Skype since acquiring the pure-play VoIP provider in October 2005, the online-auction site's CEO has admitted.

Skype has struggled to effectively leverage its link with parent eBay and sister company PayPal to further develop its own telecoms services, say analysts.

EBay's fourth-quarter results, published last month, show that Skype is falling short, albeit narrowly, of the revenues predicted at the time of its 2005 acquisition. The results show that Skype's 2006 revenues were $195 million (Eur150.2 million) against the $200 million suggested at the time of its sale.

EBay acquired Skype for an initial $2.6 billion in cash and shares, although the amount could rise to $4.1 billion in 2008 or 2009, depending on its performance (TM, 20 Sep, 2005).

In addition, at the time of last year's takeover it was predicted that Skype would break even in 4Q06, yet in last month's results eBay did not say that the service had reached break-even. No one from eBay was available last week to comment.

Speaking on a conference call for last month's 4Q results, eBay CEO Meg Whitman said: "Another challenge worth noting is that while Skype continues to experience stellar growth in terms of its user and adoption rates, the monetisation efforts we outlined at the time of the acquisition are not developing as quickly as we had hoped."

She added that eBay is working on new ways to monetise Skype, including launching a service that enables Skype users to send SMS to mobile phones. She also said that subscription-based pricing, already offered in North America, should further push up revenues when launched elsewhere.The basis of eBay's problem is how it has chosen to integrate Skype, say analysts. The acquisition was not based on how eBay was going to develop Skype's telecoms business, they say, but how the VoIP provider could drive customer loyalty at the parent company by easing transactions between buyers and sellers on the auction site.

Whitman talked about a "positive reception" for the SkypeMe buttons that have been added to many eBay sites, but some analysts question whether this is a service that eBay users really want.

Instead, Skype runs the risk of alienating its core telecoms users with some of the tactics it has adopted to drive revenue. Skype last month introduced a connection charge for every SkypeOut call made as part of its Skype Pro subscription package.

A connection charge is more common in circuit-switched (i.e., incumbent) charging than VoIP. For subscribers who buy call credit in British pounds, the charge is 3p (Eur0.05) per call.

"It's indicative of how they're going," says James Enck, a telecoms analyst with investment bank Daiwa. "They are looking at ways to squeeze customers for revenue with an old telco trick."

In addition, says Enck, Skype has lost its price leadership to rivals such as Yahoo and the Gizmo Project. The perception of its low-price calls has always been a major part of its marketing.

"There are so many alternative VoIP services such as AOL, MSN or Google offering free PC-to-PC calls or cheap breakout calls to the PSTN," says Lars Godell, principal analyst at Forrester Research. "The market is crowded, and the bigger players with large customer bases, such as the telcos, are in the market too."

Michael Natusch, head of Arthur D Little's UK telecoms, information media and electronics practice, outlines seven recent occasions when Skype has failed to effectively develop or deliver telecoms offerings - both services and products.

The list includes making significant inroads into the SME market. "Skype hoped that SMEs in particular among business users would find it attractive because it's cheaper than BT, but they have not really pulled it off," says Natusch.

Other factors he highlights include the delayed launch of Wi-Fi phones last year and not teaming up with major mobile groups such as Vodafone to include Skype in cellular handsets. Skype has joined forces with smaller mobile operator 3 instead.

The way forward now for Skype, says Godell, who believes the company should not have been acquired in the first place, is to license its technology to other telecoms providers or ISPs as a wholesale product rather than concentrating so much on retail operations.

However, as Whitman pointed out in her eBay results presentation, in terms of non-financial metrics, Skype has largely been a success since it was bought by eBay last year.

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