Skype May Not be All That, But VoIP Probably Is

By Eric Nee  |  Posted 11-05-2005

Meg Whitman, CEO of Ebay Inc., is one of the savviest executives in business, so it's wise to pay attention when she agrees to spend what could end up totaling $4.1 billion to buy Skype Technologies, an Internet phone company that generated just $7 million in revenues last year. Is this a rerun of the dot-com bubble, or was Whitman smart to make such a big bet on an Internet phone provider that is leading the way to integrated Internet communications? And if it is a smart move, is this something of concern only to e-commerce firms such as eBay, or should all large organizations begin plotting similar strategies?

As a company, Skype has some obvious strengths. Boasting more than 54 million customers, Skype operates what is by far the largest Internet phone (VoIP) service in the world. That makes it bigger than Sprint, for one, which has 40 million customers. And Skype shows no signs of slowing down: The company adds an average of 150,000 new customers each day. And then there is Skype's peer-to-peer technology—an asset that is underappreciated by many observers—which reduces the amount of infrastructure the company needs to operate, allows it to add new customers at a rapid clip and makes it easy for Skype and its partners to add new services.

But most of Skype's 54 million customers don't pay the company a nickel for using its service, because computer-to-computer phone calls to other Skype customers are free. (Skype makes money by charging customers between two cents and five cents a minute to call a land line or mobile phone.) And competition for such services is increasing. Microsoft acquired the VoIP provider Teleo in August; Google recently unveiled Google Talk; Yahoo! has added calling features to Yahoo! Messenger; and AOL introduced TotalTalk this fall. And let's not forget the phone companies, cable companies and other traditional telecommunication providers that are also pursuing VoIP.

It is no wonder that so many on Wall Street have been less than enthusiastic about the steep price eBay paid for Skype. EBay's stock dropped nearly 5 percent when rumors of the acquisition began circulating, the week before the deal was announced. And analysts at Bear Stearns and CIBC World Markets downgraded the stock a week later. Even some industry analysts have pooh-poohed the acquisition. "It's hard to see how they make money off of the deal," says -Maribel Lopez, an analyst with Forrester Research. "Skype doesn't provide any sustainable advantage for eBay."

But Whitman may still pull a rabbit out of the hat if she can hold on to Skype's 54 million customers, and find new ways to get them to pay for additional services. She may even be the first to take the long-awaited step of transforming VoIP from a neat technology that saves money on long-distance bills into a strategic corporate tool.

Today, Skype offers instant messaging and real-time voice communications. Incorporating these services into eBay will make it much easier for buyers and sellers to communicate with one another, with the expectation that this will lead to speedier sales and increased satisfaction. The biggest impact of voice will be on high-ticket items—cars, musical instruments, jewelry and industrial goods—which make up about 40 percent of the total dollars spent on eBay. At some point during the transaction of these expensive products, many buyers want to ask the seller a question, or coordinate the final sale. With Skype, instead of sending an e-mail query and waiting for a reply that may or may not provide a complete answer, buyers will be able to click on a Skype button and talk directly to the seller.

The impact of VoIP, instant messaging, and other Internet communication technologies will be felt first at firms such as eBay, which runs its entire business on the Web. As Whitman said when the deal was announced: "Communications is at the heart of e-commerce and community." But the impact of these technologies extends well beyond e-commerce: They will one day become ubiquitous at all types of organizations and businesses.

To understand how integrated Internet communications will affect organizations, let's start by looking more closely at Skype. Skype isn't a phone company in the traditional sense of the word. It doesn't own any wires crisscrossing the country, or municipal buildings stacked with switching equipment. Instead, Skype develops software that piggybacks over the existing Internet infrastructure and allows users to communicate with one another. Think of Skype as an integrated platform for all types of communications—voice, video, text, photos, graphics, data and other types of information.

As imminent as Internet voice communications is, it is only the beginning. In the near future Skype plans to offer real-time video communications as well. Video would allow people to sell a variety of services, such as business consulting, over the Web. A community newspaper in Montana could use eBay to purchase an hour of face-to-face time with a media expert in New York City, for example, to help it devise a new strategy to reach advertisers. Skype's plan is to provide the basic tools for communication—voice and video—and have partners develop new applications on top of the basic platform.

More than 1,000 developers are working on add-ons to the Skype platform, and more than 200 Skype-enabled applications are already available. One of these is SkypeForce, which integrates Skype's Internet voice service with Salesforce.com's customer relationship management software so that, when a customer calls a salesperson over Skype, the software automatically displays information about the customer stored in the Salesforce.com database. Another application is from Advanced Reality, which offers its JYBE collaboration software, allowing groups of people using Skype to simultaneously browse Web pages, share documents, talk to each other and send instant messages.

EBay had its reasons for buying Skype's 54 million-strong customer base. Right now there is little overlap between Skype and eBay customers: Just 1 percent of Skype's U.S. customers use eBay. Most of Skype's customers, 48 percent, are in Europe, followed by Asia, which accounts for 27 percent. Skype's popularity in Japan and China, where eBay has a relatively small presence, was one of the reasons eBay bought the company, says Stuart Henshall, founder of the San Francisco consulting firm Mosoci, and the blog Skype Journal.

But most companies don't need to purchase their own VoIP company. Instead, they will be able to buy or lease comparable technologies from a host of suppliers. "Fundamentally, IT is an open system," says Forrester's Lopez. "Skype pioneered the integration of voice, IM and long distance, but the competition is growing daily."

That doesn't mean that these new technologies will be easy to adopt and use. CIOs, developers and users will face the usual set of problems that arise in every emerging market. Chief among these is the issue of standards. Skype, for one, has chosen to develop its own protocols for interconnecting with its platform, ignoring existing standards such as the session initiation protocol (SIP). This may prove to be a problem for Skype in the future.

Whether eBay's purchase of Skype was irrationally exuberant is still up for debate. On the other hand, the importance of the technology involved in the deal is not.

ERIC NEE, a longtime observer of Silicon valley, has served in a variety of editorial positions at Forbes, Fortune and Upside magazines. His next column will appear in January 2006.