Virtually all the big boys in the software and technology service markets have some sort of VoIP strategy. AOL, Microsoft, Yahoo!, Google… It was only a matter of time before Ebay and others got into the game. Will Amazon.com be far behind?
Today may be one of the biggest days for VoIP in recent years because sources say that EBay is looking to spend between 2 and 5 billion dollars for Skype, the world’s Internet telephony leader.
At $3 billion, EBay is valued at approximately 43 time sales and that is a staggering amount. Indeed this Wall Street Journal article mentions it is difficult to value Skype as it is software that can be easily duplicated.
What can’t be duplicated is the name that Skype has established and the momentum the company enjoys in the market at the moment. Furthermore, Skype has critical mass meaning hardware vendors are eyeing ways to add Skype’s proprietary Internet protocol into their hardware which means Skype can charge a dollar or so per Skype enabled device!
The competitor to Skype’s protocol is SIP and over time it is possible that SIP users will be more numerous than Skype users. Interesting I had a chance to interview Niklas Zennstrom at last year’s Internet Telephony Conference & Expo where he honored our show with his first keynote ever in the United States. I asked Niklas why he didn’t decide to support SIP and he told the audience that there were firewall issues, unnecessary complexity and cost associated with adopting SIP. Besides he said there are more Skype users than SIP at the moment!
Mr. Zennström is slated to speak at TMC’s ITEXPO once again this year and we are excited to host him and have him answer more questions about where he sees the market going.
The question we are all wondering about after hearing this news is what is an Internet telephony company really worth? I reported on July 13th of this year that BellSouth was reported to be in talks to buy Vonage for $3.5 billion and the valuation at the time would have been $4,375 per subscriber. People told me the number was astronomical and I must have heard wrong. Now, it seems like the numbers I heard make sense as Vonage too has momentum, critical mass and unlike Skype, every customer pays.
This gets us back to EBay. The company has been looking for ways to extend its business model. They purchased PayPal and part of craigslist, a VoIP service provider would be a nice addition as like PayPal it is a way to extend services to the vibrant community the company has built. Will they charge for multiparty VoIP conference calls where a number of potential EBay purchasers will ask a seller questions about a product in round-robin fashion? I can imagine questions like “So did your ‘57 Chevy ever have any water damage?” or “Are you sure you never dropped this PDA?”
In addition, the Ebay name and customer base may allow Skype to grow even more quickly. EBay could decide to turn the service into a complete broadband telephony solution ala Vonage and start taking on Vonage where it hurts, with a series of ads that challenge the famous WooHoo campaign Vonage has so famously deployed.
If the deal doesn’t go through (the Wall Street Journal Reports the deal is fragile), the VoIP industry will still reap tremendous rewards from this news. It shows that leading companies in the VoIP space are worth a potentially staggering price premium. Moreover, it further shows every technology company that they need to think about how to integrate VoIP into their strategies. They need to be exploring ways to get into the market.
This is probably the reason that our attendance at Internet Telephony Conference & Expo at the
M
September 8, 2005 at 11:45 amYour link to Craig’s List goes to a p-o-r-n site.
The correct link should be http://www.craigslist.org
Doh.
Rich Tehrani
September 8, 2005 at 1:22 pmThanks for that. I slipped on the URL addition but got the name right at least.
Kameran Ahari
September 15, 2005 at 1:13 pmThe number of similar commentaries I see regarding the acquisition of Skype by eBay begs of some critical thinking. Moreover, I thought a more sobering discussion about how having the “right” strategy is far more important than executing on the technical aspects of a particular New Product Development (NPD). Your initial blog deserves some candid discussion about the state of the external environment and continued Schumpeterian changes in the industry. I hope that my discussion is genuinely constructive and catalyzes organizations to revisit their strategy and business model.
Over the years, I have seen the leadership of a number of industry related organizations take a very critical view of non-conforming entities such as Skype. Innovative market leaders rarely follow the pack. To recap my June analysis of Yahoo / DiaPad deal, I stated the accelerated re-entry of major players in the search engine / online advertisement underscores:
• Further democratization of communications
• Barriers to entry falling
• Transparency of network ownership
• Price elasticity and continued downward pressure on prices
• Continued Schumpeterian changes within industry
• Significant revenue opportunity for the Internet / dot.com models
Furthermore, from the onset Skype’s strategy and business model conformed to the classical e-commerce / Internet model described by academicians like Henry C. Lucas, Jr. (University of Maryland, Smith Business School, MIT Press).
As with many other successful Internet business models that preceded them (i.e. Google, Yahoo, eBay, etc.), first Skype set out to replicate THE “network externality” (communications) based on a pure Internet model and secure themselves the defacto brand. How? They set out to achieve critical mass ahead of the business model. Those who study the history of successful Internet models know the #1 and #2 market leaders typically dominate the market share and hence brand equity attained for a particular product/service. Once this brand equity has been established, the barrier to entry for new entrants is formidable. As I will explain later, this is the core rationalization behind the valuation of the deal.
I see the valuation very logical. The valuation has nothing to do with multiples of existing revenue. eBay is not buying a revenue model. eBay is paying a premium for a “gold standard” that allows it to continue to capture new sources of competitive advantage. This is somewhat analogous to Google’s market cap. Before adopting an online ad revenue model, Google hardly had a revenue model. Nevertheless, Google’s investors had good sense to give them the necessary resources to garner the #1 market share position as the most popular search engine globally. In hindsight, I am sure Microsoft wished it could revisit buying Google instead of distributing $40+ billion back to shareholders. As Jim Collins’ empirical study shows (author of Good To Great), truly great companies distinguish themselves through consistently producing sustainable strategies. The Skype acquisition is all about helping eBay create new applications in the context of its core business process. In turn, eBay is betting that integration of Skype’s technology and community will keep it one-step ahead of the likes of Google and Yahoo who are rapidly encroaching on their business model. eBay is less concerned about compliance to standards and the PSTN model. Why? The superset of eBay stakeholders (e-tail customers, e-buyers, supply chain partners, and finally employers) can now communicate in real-time over the pervasive Internet transparently. Without a doubt Internetworking eBay’s core business process and stakeholders will increase eBay’s online transactions and enable eBay to broaden its offering to very high-end and complex products/markets.
Of the 500 or so companies in the convergence space, a majority are limiting the value add of their innovative initiatives to the traditional incumbent and enterprise target market. The good news is I see number of companies going from inception to successful exit strategy in the convergence space in less than 2 years (post 2002-2003). Most of these companies have a couple of things in common. They all provide solutions that extend far beyond cost optimization and genuinely enable efficiencies in some aspect of the business process.
I know the kinetics are sometimes hard for innovators to stop what their doing and engage in some fundamental discussion periodically revisit their NPD initiatives. The tendency for us is to keep our head down, focus, and channel our energies further on the execution. The good news is organizations can change their target market, business model, and strategy without having to abandon their core competency…while maintaining the inertia.
Regards,
Kameran Ahari
Napa Consulting Group
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