Novice Investing - The Skype Is Falling

Date: Monday 13th 2008f October 2008 10:39:36 AM

The Skype Is Falling - 05/16/2006

By: Novice Investing Staff

eBay Inc. (EBAY) spent $ 2.6 Billion for VOIP outfit, Skype, on October 2005. At a glance, the deal did not look like it is a good one for eBay. Now, six months into the acquisition, the deal got even sourer. Skype customers can now dial to other wireline and wireless phone users in the Northern America for free, from 2 cents per minute previously. That alone, will put a dent on Skype's revenue. While Skype reportedly boasts 40 million users, its revenue figure is laughable. For the year 2006, Skype is expected to book $ 200 Million in sales.

If you do a simple math, that is an equivalent of a 'mere' $ 5 per users. Try extracting $ 5 for each of your customers, PER YEAR. The administrative fee perhaps cost more than that. It is true that Skype is still new and it has not reached its full revenue potential. But, that might be harder to achieve as time goes on. Aside from the fact that it is offering free phone service for North American users, competitors such as Google and AOL are offering their own free web calling services now.

So, wait. Perhaps, Skype will be monetizing its service with ad-based business model. It might be but it won't work. Competitors are offering similar services for FREE and make money on other services they might use. Google is successful because it is offering text-based ad that help users, instead of distracting them. Having a text-based advertisement when you use Skype will distract customers and increase defection rate.

eBay has been known to integrate acquisitions into its core bidding marketplace. That might be the case here. At this point, justifying Skype's purchase with conventional money-making scheme is a futile effort. $ 2.6 Billion is a lot of money to spend on companies that have to constantly giving out freebies to attract users.


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Disclaimer: The sole purpose of this article is educational. This article is merely the opinion of the writer and is not in any way a buy/sell recommendation regarding eBay Inc. or any other securities.

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