Why Did eBay Bid on Skype?

Why is eBay spending $2.6 billion to buy a $60 million Internet phone company called Skype that has yet to turn a profit? During a presentation to investors this week, eBay CEO Meg Whitman used 75 PowerPoint slides to justify her intense, and expensive, interest in Skype, but analysts were skeptical. Whitman enthusiastically pitched the idea that Skype, a free service that lets users talk to each other via computer, would increase eBay's transaction volume by making it easier for buyers and sellers to talk to each other. She theorized that eBay could start collecting new fees from its users by charging for some premium Skype services. (In fact, eBay has pledged to pay $1.5 billion more if Skype meets its revenue targets over the next few years.)

Rajiv Dutta, eBay's chief financial officer, did not exactly clarify matters by posing the rhetorical question, "How do we make 1+1 equal to greater than 2?" Tech blogs are atwitter trying to figure out what's really behind this. Internet telecom pioneer Jeff Pulver hailed it as a new frontier in marrying e-commerce with communications. But longtime Web observer and Business 2.0 writer Om Malik, suggests that the deal is a desperate attempt by eBay to find new subscribers and to stem fraud. EBay is not alone on the internet phone bandwagon. In the past few weeks, Google introduced Google Talk, a voice/instant message service, and Microsoft announced that it would buy Teleo, a competitor to Skype.

Yahoo and AOL have their own voice-over-instant message services. All these deals have generated as much confusion as excitement. Is eBay just trying to acquire Skype's 54 million users? Maybe GoogleTalk will let you click to dial a phone number of someone you've just Googled. Will Teleo mean yet more software bundled with Windows? None of these questions are likely to be answered any time soon. Making phone calls over the Web (also known by the acronym VOIP, for Voice Over Internet Protocol) is one of those radical new technologies that surely will change our lives, but no one is quite sure how. Big Internet players know they can't ignore VOIP, even at the risk of stumbling around as they figure out how to make it work for particular businesses. VOIP's young upstarts have already caught the giants flat-footed. Major telephone companies, for example, dismissed VOIP as something too unwieldy for the average consumer. With Vonage now celebrating 1 million consumer subscribers, AT&T and Verizon are racing to offer competing services.

Similarly, skeptics thought making calls via PC wouldn't catch on; Skype has 54 million users, and says it is adding 150,000 new ones every day. All that potential, of course, may not be worth the $4.1 billion that eBay has pledged unless the company can use it to truly transform its business. To do that, eBay will have to integrate voice into the fabric of each listings. Bidders on eBay are comfortable emailing sellers with questions about an item; will they use a "Skype me" button just as readily? More importantly, will eBay sellers pay for the privilege?