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eBay Opens a Whole New Channel

By Rob Hof With the $2.6 billion purchase of Internet-phone service Skype International on Sept. 12, eBay (EBAY) is making its boldest bid yet to remain the most potent force in e-commerce. eBay Chief Executive Meg Whitman, dogged by concerns about slowing growth in the core U.S. market, said Skype will help not only recharge eBay's existing and new businesses but will also help it ride an entirely new online-communications wave. "Together, we can pursue some very significant growth opportunities," Whitman said on an early-morning conference call. "We can create an unparalleled e-commerce engine."

The deal is a marked departure for eBay, which to date has acquired only companies directly related to e-commerce. Whitman specifically denied that eBay is trying to become a broader Internet portal, like Yahoo! (YHOO) and Google (GOOG). But it's clear that eBay views Skype, whose software lets people use personal computers to makeree phone calls via the Internet, as a potential blockbuster business in itself.

TINY FRACTION. Scot Wingo, CEO of ChannelAdvisor, sees eBay trying to keep up with its more diversified rivals. "They're all battling for the hearts and minds of Internet consumers," says Wingo, whose firm helps merchants sell on the major shopping venues from eBay and (AMZN) to Yahoo and Google.

Whitman acknowledged that Skype will help eBay capitalize on an entirely newopportunity -- in this case, communications. And eBay Chief Financial Officer Rajiv Dutta said it justified the acquisition largely on Skype's existing businesses. Those include giving customers the ability to call land-line phones for about 2 cents a minute and receive incoming calls on a PC from traditional phones.

However attractive those services, eBay isn't getting Skype on the cheap. Three years after its founding, it remains unprofitable, and its revenue remains a tiny fraction of eBay's expected $4.4 billion in sales this year. Moreover, Skype faces new competitors such as Google, Yahoo, and a raft of startups.

CALL FOR SERVICE? But Skype is growing fast. It revealed that its revenue this year is expected to surge to $60 million from $7 million last year. And eBay forecast that sales could reach $200 million next year and that Skype would turn profitable at the end of 2006.

What's more, eBay reckons that the Skype transaction will bolster existing businesses, much the same way as its 2002 purchase of online-payment service PayPal. The key appeal for eBay at the outset is the ability to offer its buyers and sellers an entirely new way for people to do business online. In addition to paying eBay listing and completed-auction fees, sellers also could pay eBay a fee for getting an Internet call, or lead, via Skype.

It's akin to how sellers pay Google for leads via paid ads in search results, except buyers would be calling -- via PCs -- instead of clicking. Lead generation, Whitman says, holds the potential to accentuate some of eBay's existing categories, such as used cars, business and industrial gear, and high-end collectibles -- which together account for 40% of gross revenues worldwide. "A number of sellers do put phone numbers in their listings, such as in real estate, so there's some apparent demand for this," says Wingo.

IN THE HAGGLE ZONE. eBay also will try to use Skype to bolster a push into new markets, such as new cars, travel, real estate, and personal and business services. Those markets already are accustomed to paying for both leads and for talking directly to customers throughout the purchase process, Whitman noted. Indeed, she said this business model would be ideal for some of eBay's new forays, such as its Kijiji international classified-ad site and its recent purchase of the shopping-comparison site, which makes money from Google-style referrals.

That's a particular advantage, Whitman says, in international markets such as China, Eastern Europe, and Brazil, where online trust isn't as well-established and where haggling may be more of a cultural force. Indeed, Skype is especially strong internationally, particularly in areas eBay hasn't yet penetrated deeply: Eastern Europe, the Nordic countries, and Asia -- especially China and Japan, where consumers have glommed onto free phone calls and might be drawn into online shopping via the eBay link.

For all that, buying Skype is a gutsy move for a company that for most of its 10-year history has stuck to its e-commerce knitting -- even as other Internet leaders from Yahoo to Google continue to expand their reach. Although Whitman took pains to draw parallels between the Skype acquisition and eBay's purchase of PayPal, this deal contrasts with eBay's previous expansions, all related to e-commerce in one way or another.

WHY BOTHER? Even more challenging, eBay is venturing into territory without the overt request or blessing of its buyers and sellers. Traditionally, they've guided eBay into new markets through their activities, such as embracing PayPal years before eBay bought it or requesting new features. When eBay has gone off on its own, such as doing a deal with Christy's for live auctions, its efforts have fallen flat.

In Skype's case, it remains to be seen whether the bulk of eBay's sellers -- small to midsize businesses drawn to the marketplace by the low cost of selling online -- will be interested in voice services Skype might offer. Wingo, for one, talked to 50 top sellers and found little support from them. "They're saying, 'I can barely keep up with e-mails. I can't afford to hire someone to take calls.' I don't think your average DVD seller will be too thrilled." One top eBay seller, Jay Senese, last week told BusinessWeek that he couldn't imagine any reason to use voice services.

Skype also would be eBay's biggest acquisition yet, and the price tag may swell further. Besides paying $1.3 billion in cash and $1.3 billion in stock, eBay is on the hook to pay $1.5 billion more by 2009 if Skype meets aggressive growth and profit goals. Even the prospect of a rumored $3 billion price last week knocked eBay's stock down nearly 5%, though it was up 1% midday on Sept. 12.

SOME SIMILARITIES. On the other side, Skype painted eBay as the ideal partner to help fulfill a vision of becoming the prime communications power on the Net. CEO Niklas Zennström and co-founder Janus Friis will join the eBay executive team, and Skype's results will continue to be broken out from eBay's. "We can't think of a more powerful platform to extend our vision," Zennström said on the conference call.

eBay and Skype have some similarities, despite inhabiting entirely different markets. Mainly, they both share the coveted quality of becoming more valuable the more members they have. Indeed, along with PayPal, which had the same characteristics, this would be eBay's third business that has grown from so-called network effects. "eBay recognizes the value of network effects more than any of the other players," says Legg Mason Wood Walker analyst Scott Devitt.

The big question remains whether eBay has overpaid for a business that's unprofitable, beset by lots of competition, and unrelated to its core business. Whitman noted in the conference call that "our overarching goal is to grow faster than e-commerce" overall. Investors will have to decide in coming months and years whether she overreached in the pursuit of growth.

Hof is BusinessWeek's Silicon Valley bureau chief

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