Thursday, December 21, 2006

VoIP Problems Continue

I don't want to be known as the Anti-Skype but I still have very serious concerns regarding eBay's involvement in this business. I do not own shares in eBay and I am just a former seller who decided there was no longer any upside to doing business on eBay.
However, I do care about the current seller base and the issues they are facing and eBay's $2.5 Billion purchase of Skype, in my opinion, has diverted attention and resources away from eBay's "bread and butter"; the marketplace business.

Imagine what $2.5 billion in investment could have done for the Marketplace business. The ROI would have been much greater and achieved faster than will ever happen with Skype. Buying Overstock.com, StubHub.com and investing that $2.6 Billion in growing more TSE marketplaces (Tailored Shopping Experience) makes far more since than getting into a completely new business with tons of competition. eBay could have easily done a marketing deal with Skype rather than buying the company.

Om Malik writes on his blog today:
“As a reader put it nicely, VoIP business is no different than the long distance business. High costs of acquisition, and very low margins. In other words it is a sucker’s game. One IP Voice, learnt this the hard way, and had to file for Chapter 11 Bankruptcy protection as it tries restructures. Good luck! The company sells VoIP to small and medium sized businesses. Well good luck with the makeover, because selling VoIP to SMB is beset with precisely the same problems as the consumer market. Too many players, too little profit. We will see more of these press releases in 2007.”

Skype is not going to go bankrupt but faces the same issues this small player faced; too much competition and very low margins. (I faced the same issues on eBay) eBay has made the hard decisions before, see the store fee increase and eBay China, it is time for them to look for an exit strategy for Skype. Meg Whitman has said before; “it is okay to make mistakes as long as you fix them quickly.” Skype is a mistake that needs to be fixed so that eBay can concentrate on what it does best.

4 comments:

Anonymous said...

I hear what you are saying and don't necessarily disagree but I do have a few observations.

First, investing $2.5 billion into a new business line is not mutually exclusive with investing in the marketplaces business. If a company of eBay's size and resource base can't manage an additional business line then the company has important structural problems.

Second, regardless of whether Skype was the right or wrong target, eBay does need to diversify away from its marketplace business which is reaching maturity in most markets. I agree there are some other companies such as overstock and stubhub that might have helped diversify but those are still "marketplace" businesses with a high degree of correlation.

Third, regardless of whether eBay paid too much for Skype, it is undeniable that Skype is the leader in consumer PC VoIP software. If VoIP tends towards a "natural monopoly" (like eBay and PayPal did) then getting your hands on Skype at whatever cost could, one day in the future, be the best decision eBay ever made. That is a big "IF" but one which has not become clear yet. Btw, the more VoIP bankrupcies we see this year, the more it supports a "natural monopoly" model.

Randy Smythe said...

I actually agree with all of your points. My post did not try and deal with those issues and certainly was from the seller’s perspective. In my view, most sellers see Skype as a distraction that has drawn attention away from the problems with the marketplace.

I agree completely with your first point. Spending $2.5 Billion on a business that can expand your reach or open new markets is good business and eBay has the resources. I just believe eBay overestimated the synergies with Skype as well as their ability to integrate with the Skype culture. Maybe the Skype culture isn’t the problem it could be eBay’s corporate culture that is the problem.

Secondly, I agree eBay does need to diversify but needs to find more opportunities like Shopping.com rather than jump into a business with great promise but huge risk, but I believe they need to make sure there core businesses are running optimally first.

Thirdly, I don't have enough information about the PC based VoIP market to tell if the Skype deal will be a good bet long-term or not. I just don’t think eBay needs to be a Telco. Leave that to the experts. EBay should concentrate on opportunities in paid search or online advertising that work seamlessly with their core business rather than trying to force a new business into their existing core.

Maybe this re-configuring of Skype management and going back to the original Skype employees will have the desired effect. Skype needs to be run as a stand alone business they should stop trying to force it into their Core business. Get rid of this mantra “The Power of Three”

Thanks for your comments.

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