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.

3:45:09 PM    comment   

EBay today purchased Skype, a company whose 2005 revenues will total an estimated $60 million, for $2.6 billion plus an extra $1.5 billion should it meet certain undisclosed "performance targets." A J.P. Morgan analyst called the deal "strategically positive." Somewhere tonight, the Pets.com sock puppet is laughing in his beer.

3:40:47 PM    comment