Why eBay Really Bought Skype

The long post in a nutshell: I think eBay wants to use Skype as a distribution platform for content, micro-paid for through PayPal and accessible on a wide range of devices.

There was no lack of expert opinion (here's a good one from a VC) regarding yesterday's purchase of Skype by eBay for a whopping $4.1 billion. The big question, of course, is why it paid so much for a VoIP company that doesn't apparently fit into eBay's ecommerce business model.

Even though I have never witnessed negotiations involving that much money, I can't imagine eBay just bursting in and throwing a huge pile of cash in front of Skype, take-it-or-leave-it style. I imagine the negotiations included at least some giving and taking and the price must have come down from Skype's initial demands. Which means that Skype valued itself even higher than the final $4.1B. Venture capitalists are by definition (Marx's definition, anyway) greedy, but not unreasonable. They must see something we don't.

Or do we.

Judging by its press release, eBay seems to be entering a pay-per-call business, that is advertising whose effectiveness is judged by the number of phone calls placed to the business through an ad unit, something like those late-night direct response TV shows. It also talks about integrating voice communications into the current marketplace to streamline shipments and payments. Fair enough.

On the surface, eBay is entering communication business and there's plenty of room for growth. We will see a tighter integration of Skype with web browsers and desktop applications. Already there are Skype toolbars. When the company develops a browser plugin, then "callto://" links will bring webpages and telephones much closer. Besides, Skype also finally puts eBay on users' desktops - a coveted screen real estate for any business - although how this plays out remains to be seen.

Since eBay owns a part of Craigslist, it also pieces together a puzzle that is a thriving marketplace, a vibrant and rapidly growing community, and a robust and versatile telephony and instant messaging application.

eBay could also develop a store-front platform for individuals and small business that will be richer in features than anything ever before. The online stores will be able to process offline orders that come by phone, and do so automatically through voice menus, dramatically widening their reach. eBay will get a tiny cut from each transaction. Tiny cuts do add up.

All this, however, is the "glass-half-full" part of the equation. Another quote from the press release hints at the other part: "The acquisition also enables eBay and Skype to pursue entirely new lines of business."

This new line of business is content distribution, and as Apple has so dramatically demonstrated, that's where the real money is.

After Skype had released its API, someone has developed a small application called DialMP3. In developer's own words, "DialMP3 allows you to listen to any mp3 in your collection on your phone, wherever you are, as long as you can send an email (most mobile phone companies allow you to send SMS's to email addresses)."

Admittedly, the process is still a bit awkward, but consider the potential. Imagine a music library into which you can dial either with your Skype, or your cell phone, or even a land line. Finally, all those "free nights and weekends" will be put to good use. Also imagine each user paying a token amount - say, $0.01 - for each content unit, a song. The sound quality is good and the transfer is fast thanks to the Skype's distributed model. Payments are painless and barely noticeable, and are debited directly from your PayPal account. Who needs satellite radio then? Who needs (oh my God) iTunes?

The promise of this Long Tail story is huge. If you run a podcast for which your audience is willing to pay, now you can "monetize" it without resorting to "podvertising", a model few have managed to figure out anyway. It will be in eBay's best interest to encourage indie content, since it will get a tiny cut from each transaction, much like Google now gets filthy rich on other advertisers' backs. Audio books and music, archival speeches and customized playlists - slap a phone number on it and you are in business. Besides, Skype is also capable of video conferencing; consider it a model for streaming video content on demand.

Suddenly, the $4.1B begins to look like a real bargain.