eBays Acquisition of Skype: Will the Gamble Work?

Critically analyze eBays gro th through its !arious acquisitions" #$amine the key issues an% gro th challenges face% by an online company in the highly competiti!e &nternet economy" Critically analyze eBays gro th through its !arious acquisitions eBay as foun%e% in '(()* primarily as an on+line marketplace for collectibles* operating e$clusi!ely in ,SA" Since then eBay has gro n significantly* mainly through acquisitions" Since '((-* eBay &nc" has complete% more than ./ acquisitions" ' As of 0'/(* acquisitions account for about 123 of the companys re!enue" 4 Strategy eBays strategy has been to buil% long term sharehol%er !alue by acquiring an% integrating companies that: ith

support its core businesses 5 hich is primarily on+line commerce an% payments6 through e$pansion into ne geographies or ne technologies* or help it to mo!e into relate% pro%uct or business areas* or allo it to !enture into ne lines of business the target company shoul% pro!i%e synergies ith e$isting eBay ob7ecti!es opportunity shoul% ha!e potential to fulfill clear an% achie!able integration goals

Criteria for selection of potential targets for acquisitions inclu%e:

eBay %oes not seem to ha!e any specific preference for %eal size" 8he company has been consi%erably cash rich in the recent time" At the en% of 0' 4//(* eBay ha% 9."' billion in cash an% cash equi!alents on balance sheet* ith 9::-") million in operating cash flo an% 9)22": million in free cash flo " 8his gi!es the company consi%erable financial fle$ibility to pursue attracti!e opportunities" ,n%er ;eg Whitman 5#$ C#<6 eBays strategy ha% been to continue to strengthen eBay=s core auction business hile at the same time to %i!ersify eBay=s business mo%el as a he%ge against competition in the online auctions an% e+commerce market" &t is this strategy that le% to the company acquiring a number of large an% small companies 5either holly or partially6" >ationale behin% acquisitions ' 4

8o implement the strategy of becoming the for C4C an% B4C players" &ncrease customer base

orl% i%e on+line auction house of choice

Ser!ice ne geographic areas to increase a%!ertising re!enues Cross+market the ser!ice to businesses that use% its B4C e$change ?i!ersify the re!enue streams through forays into %ifferent geographic markets

from eBays report 0' 4//( Accor%ing to a ?ealogic sur!ey of April 4//(* since its inception in '(()* eBay has been in!ol!e% in :( ;"@A" %eals ith a combine% !alue of more than 9'4": billionA "nytimes"com

eBays Acquisition of Skype: Will the Gamble Work? Geographical sprea% the ,S markets oul% pro!i%e some element of insulation against any melt%o n in

&ncreasing competition from ma7or internet players like Google an% ;icrosoft"

eBays strategy to e$pan% faster as inspire% by the facts that* '6 there is huge potential in the market* 46 the business mo%el is simple* an% .6 there is significant threat of ne entrants" eBay ere ell a are of the fact that hile the online auction in%ustry has a lot of potential* the in%ustry coul% attract competition !ery easily" 8he barrier to entry in the market as lo an% more an% more companies ere realising the po er of selling on the internet" eBay %eci%e% to mo!e an% %e!elop their %ominance in the market before the competitors got an opportunity to establish themsel!es" Breempti!e ;o!es A %ifferent kin% of threat to eBay as not a %irect competitor but a ser!ice hich coul% act as a substitute to auctioning e"g"Calf"com" 8his company ha% %esigne% a site hich allo s people to sell use% books* music* mo!ies an% games at a fi$e% price 5re%uce% price6" eBay %ealt ith that threat by buying the company an% then e$perimente% ith a%%ing their o n fi$e%+price option to their auction listings" Calf"com* acquire% by the company in 4///* has turne% out to be one of the better acquisitions for eBay" Calf"com is a fa!orite amongst stu%ents* game enthusiasts* film buffs* an% others ho are seeking to buy use% me%ia pro%ucts at re%uce% cost" Because these types of pro%ucts are commo%ity price% an% often ha!e a long shelf life before being purchase%* the alternate sales mo%el that Calf"com represents is both appropriate to its market an% %oes not compete %irectly ith eBay=s core auction offerings" Gol% ;e%al BayBal has been the single most lucrati!e acquisition ma%e by eBay till %ate" Bicke% up in 4//4 for 9'") Billion* BayBal as a natural match for eBay" 8he !ast ma7ority of eBay transactions in!ol!ing online payments at the time use% BayBal* an% this state of affairs continues till to%ay" BayBal has also gro n to become the premier payment system for ecommerce across the &nternet" An increasing number of etailers an% e!en brick+an%+mortar stores accept BayBal payments to%ay" Success 8ransfer eBay=s success in the ,S le% to the mushrooming of a !ariety of online auction sites across the globe" A pattern that began to emerge as that one site ten%e% to take the lea% in market share in each country" Dor a company like eBay* ith global %esigns* this site became an attracti!e target for takeo!er" #!ery time a local lea%er as acquire%* eBay o!erlai% its o n bran%* as ell as its ,S operating mo%el on the company" 8his raise% the operating stan%ar% of the acquire% company to a hole ne le!el" 8his as also partly achie!e% by le!eraging the po er of BayBal" Co %o they %o it? eBay has al ays un%erstoo% benefits of mergers an% acquisitions in the e$pansion of their online auction platform" eBay has acquire% many companies such as Calf"com* &nternet Auction* iBazaar* an% Comes?irect"com* through all+stock acquisitions" eBay has use% their publicly tra%e% stock to acquire these companies"

eBays Acquisition of Skype: Will the Gamble Work? eBay has operate% Calf"com as a subsi%iary* through "Calf"com" Co e!er* &nternet Auctions an% iBazaar ha!e been integrate% into eBay &nternational" Comes%irect"com has been integrate% into the auction platform un%er a ne pro%uct category + real estate" All these acquisitions ha!e a%%e% %i!ersification !alue to the total enterprise" Acquisitions ith no specific purpose Eot all acquisitions of eBay ha!e ser!e% the lai% %o n goals or ob7ecti!es of the company" Acquisitions of companies like F,F<G an% Stumble,pon fall in that category" 5eBays most e$pensi!e acquisition till %ate H Skype H also probably falls in this category H more on that later6" F,F<G allo s users to pro%uce an% share personal me%ia inclu%ing !i%eo* photos an% music* hile Stumble,pon is a bro ser toolbar that lets you rate sites ith a Ithumbs upJ or Ithumbs %o nJ" &t ill be a stretch to imagine ho any of this functionality coul% a%% any !alue to eBays primary business" 5&n 4//(* eBay offloa%e% Stumble,pon* for an un%isclose% sum* after acquiring it for 92)million April 4//26" Classifie% Kistings market eBay has ma%e a %eliberate an% stu%ie% attempt to gro its classifie% listings market by le!eraging the po er of its auctions market" eBay=s classifie% sites + Li7i7i* Gumtree* ;arktplaats* Ko0,o an% mobile"%e + a!erage% -' million !isitors per month %uring the secon% quarter of 4//- an% e$perience% a '4/3 increase in !isitors hen measure% against the same perio% a year ago." 8he o!er helming ma7ority of those !isitors ere locate% in countries other than the ,"S" eBay also hol%s a minority stake in the classifie% listings company Craiglist 1" &ts speculate% that eBay spent 4)/m9 to buy a minority stake in Craiglist merely to be able to control is sufficiently to allo the ri!al company Li7i7i* hich eBay ha% in!este% in earlier* to push out Craiglist" eBay of+course ne!er succee%e% in its plan to squeeze out Craiglist into obli!ion" &n any e!ent* this is mere speculation" ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ Ley issues an% gro th challenges face% by an online company in the highly competiti!e &nternet economy &n the '((/s* Google* Amazon* eBay* Mahoo an% other internet bran%s* that are currently ell kno n* ere relati!ely small businesses" Se!eral %ifferent ecommerce business mo%els no coe$ist an% !igorously compete on the eb" 8he ma7or mo%els on the eb to%ay are: '" <n+line retail* le% by Amazon"com" Complementing pure retail is the on+line auction mo%el here eBay is currently reckone% as the lea%er" eBay is also increasingly in!ol!e% in fi$e% price selling on+line" 8ra%itional Nphysical retailers like Wal+;art also ha!e an increasing presence on+line" 4" NSearch mo%el* le% by Google ith other ma7or participants inclu%ing ;icrosoft* Mahoo an% A<K" All these businesses pro!i%e on+line paths* preferential access* an% a%!ertising to thousan%s of retail businesses"
. 1

#Bay=s =Classifie%= StrategyA "forbes"com 8he t o companies ha!e a rocky relationship" 8hey ha!e initiate% la suits at each other* alleging illegal competition* tra%emark infringement an% breaches of fi%uciary %uty"

eBays Acquisition of Skype: Will the Gamble Work? ." NBlatform >etail here large companies like Amazon"com an% eBay pro!i%e ecommerce ser!ices to other companies" 8hese inclu%e* among other ser!ices* on+line payment ser!ices pro!i%e% by companies like BayBal* MahooO Wallet an% Google Checkout" 1" Eet orking ser!ices pro!i%e% by companies like Dacebook* ;ySpace* Kinke%in* an% se!eral others" 8o un%erstan% hat gro th challenges are face% by on+line companies to%ay* its is best to e$amine the key areas here competition e$ists an% here an% ho the companies in!ol!e% are strategising to stay ahea% of the competitionA retain or increase market share in their respecti!e areas of strengthA an% a%opt %ifferent business mo%els in an attempt to create a%%itional re!enue streams" &ncreasing opportunities 5e$tension into relate% lines of business6 8he internet an% the e$pertise of large on+line retailers like Amazon"com has helpe% millions of small businesses to get on+line ith minimum upfront e$pense an% technical kno +ho " Although by offering inno!ati!e ser!ices 5like NBrint on ?eman% an% N?isc on ?eman%6* Amazon has create% tremen%ous opportunities for small businesses* it has also ma%e the on+line presence a !ery lucrati!e one for many companies" 8his opportunity itself is a source of competition in the on+line business* hich is probably hat has prompte% a company like eBay to change its business mo%el from auction fees an% commissions to a mi$ture of auction an% fi$e% price sales" Con!ergence of business mo%els 5&nter%epen%ency?6 eBay an% Google are best kno n for auctions an% search* respecti!ely" 8hough in the past there has been little o!erlap in terms of pro%ucts* customers* or business mo%els* these t o companies ha!e* of late* %e!elope% %epen%encies on each other" eBay is one of Googles largest customers hile Google is one of eBays largest sources of user traffic" &mbalance of Bo er Still* Google is less %epen%ant on eBay than eBay is on Google* an% Google is in a stronger position to threaten eBays core businesses" 8his has create% an imbalance of po er on the internet" 58his is probably hy ;icrosoft ante% so keenly to acquire Mahoo so it coul% pose a significant threat to Google6" Competition resulting from options to buyers an% sellers &f e e$amine on+line retail through the eyes of a seller* one option a!ailable to the seller is to sell his goo%s through eBay or Amazon" Another option oul% be to create an on+line store 5 eb site6 an% use Google A%s to %ri!e traffic to that store" 8his latter option is currently more attracti!e to sellers as it pro!i%es a more cost efficient channel" #ntry Barriers &n Eo! 4//2* Google announce% the release of <penSocial* a set of soft are buil%ing blocks for a%%ing features to social net orking eb sites" A number of social net orking sites such as* Bebo* Drien%ster* Kinke%&n* ;ySpace an% Eing support Google=s <penSocial architecture" &nci%entally* these are all ri!als of Dacebook"

eBays Acquisition of Skype: Will the Gamble Work? 8he reason for this mo!e is clear" Google ants to insulate itself against being %isrupte% by a startup or another ri!al" Dacebook represents another entry point to the &nternet beyon% search" Google ants to forestall any encroachment on its a%!ertising business an% preser!e its mo%el" Google* on the other han%* ill fin% it %ifficult to enter the on+line retail P auction business" eBays core businesses of auctions an% payments ha!e the inherent a%!antage of strong net ork effects" &n a%%ition to this barrier to entry* other barriers for Google coul% inclu%e the large %atabase of cre%it car% information an% net ork of participating payment eb sites that eBay alrea%y en7oys" Clou% Computing 8his is a ne an% emerging area on hich the battle for supremacy on the internet is being fought an% is likely to intensify in the coming years" ;icrosofts absolute supremacy in the %esktop soft are business* mainly through its ;S <ffice suite* is being threatene% by Google through its o n Gmail* ?ocs an% Sprea%sheet pro%ucts that are %esigne% to function e$clusi!ely on+line" 58hese on+line offerings from Google bear all the markings of a classic %isrupti!e technology6" ;icrosoft in turn is retaliating by a%apting all of its pro%ucts for eb base% %eli!ery" ;icrosoft is no %oubt capable of creating its o n eb base% sprea%sheet* though there it create a conflict ith its o n e$isting business an% profit mo%el" &n!estment in 8echnology eBay* for e$ample* has three options to ork ith search engines: continue relying on all a!ailable search engines* or ork e$clusi!ely ith one search engine* or buil% their o n search engine &f eBay ere to %eci%e to buil% their o n 5NFoyager as an internal search engine built by eBay in 4//'6* they oul% fin% that the in!estment require% to %e!elop* maintain* an% inno!ate an internal site search engine is or%ers of magnitu%e less than full+blo n search that Google an% Mahoo pro!i%e" A%%itionally* gi!en the fact Mahoo an% ;icrosoft ha!e been losing market share in NSearch continuously since the companies %eci%e% to use their o n search technology* it begs the question hat chance eBay has to buil% significant market share in this %omain" <n+line a%!ertising market Google is focuse% on being the primary ay consumers access the &nternet" 8his means Google competes ith online applications* me%ia companies* social net orking an% any category of soft are that can be an entry point to the &nternet" 8he common threa% bet een most of Google=s efforts is a%!ertising* hich accounts for nearly all of the company=s re!enue" Google=s e$pan%ing collection of ser!ices offers more an% more opportunities to sell a%s" ill

eBays Acquisition of Skype: Will the Gamble Work? &n Quly 4//-* research firm &?C* pre%icte% that ,"S" &nternet a% re!enue ill increase from 94)") billion in 4//2 to 9)'"' billion in 4/'4 an% that re!enue for &nternet !i%eo a%!ertising ill 7ump from 9"/) billion in 4//2 to 9."- billion in 4/'4") 8hese figures manage% to create intense acti!ity at ;icrosoft* Google an% Mahoo" ;icrosoft trie% to buy first all* an% then part of* Mahoo" Mahoo re7ecte% the offers an% mo!e% ahea% ith its plan to form an a%+sharing agreement ith Google" Google in turn acquire% ma7or online a% net ork pro!i%er ?ouble+Click to maintain its role as the %ominant player in the constantly e!ol!ing search uni!erse" Shifting Koyalties Google ha% to in!est one billion %ollars in A<K in or%er to sta!e off ;icrosoft from stealing them a ay as a customer" Amazon ha% use% Google to pro!i%e search results for their users* in an arrangement that as create% in 4//.* making the partnership one of the larger %istributors of Googles A%Wor%s a%!ertising" When the %eal e$pire% in 4//:* Amazon s itche% from using Google as the search engine for their eb properties to ;icrosoft 5;icrosoft=s search tool* Win%o sKi!e became the engine po ering Amazon"com=s search engine A("com an% na!igationP%ata aggregation ser!ice Ale$a"com6" 8he relationships bet een Amazon an% Google began to change in 4//) hen Google intro%uce% its Google Base listings system an% the %e!elopment of secure online payment system" Amazon then ha% to mo!e to protect itself from Google=s apparent encroachment into the business of online sales" &n a series of internal memos on the nature of &nternet Ser!ices* ;icrosoft chairman Bill Gates* an% Chief 8echnical <fficer >ay <zzie* stresse% the urgency of competition ith Google to ;icrosoft=s staff" I""" We must reflect upon hat=s going on aroun% us* an% reflect upon our strengths* eaknesses an% in%ustry lea%ership responsibilities* an% respon%" As much as e!er* it=s clear that if e fail to %o so* our business as e kno it is at risk" We must respon% quickly an% %ecisi!ely"J 5>ay <zzie memo* <ct 4-P/)6:

Dast Dor ar%: 8ech Giants Scramble Dor Bigger Biece of Gro ing <nline A% ;arketA "kno le%ge" harton"upenn"e%u : N;icrosoft going after Google?A "articlezones"com

eBays Acquisition of Skype: Will the Gamble Work?

Some analysts opine% that the Skype acquisition as not orth the in!estment as its technology as not har% to replicate an% the entry barrier for competitors as e$tremely lo " ?o you think that the acquisition of Skype at a high price makes strategic sense to eBay? Qustify" ?oes the acquisition of Skype at a high price makes strategic sense to eBay? Eo* it %oesnt" An% here is hy" When eBay bought Skype in 4//) for about 94": billion* the general consensus as that eBay ill utilise the fun%amental %isrupti!e potential of Skype=s free &nternet+base% telephony solution primarily to allo eBay users to use Skype instea% of email to communicate" Another anticipate% benefit as for eBay to use Skype to mo!e into ne businesses like lea% generation" 8hings %i%nt e$actly pan out the ay eBay ha% hope% they oul%" Dor one thing* the price tag of 94": billion as itself too high" &ts speculate% that if eBay ha% ma%e the mo!e a year earlier* they coul% ha!e acquire% Skype for a much lo er price" #!en Skype foun%er an% C#< Eiklas Rennstrom a%mitte% that eBay might ha!e Io!ershot in terms of monetizationJ for his company" 5&ts a ell accepte% principle that companies seeking to acquire %isrupti!e businesses shoul% mo!e in before the market recognises the %isrupti!e potential" <nce the potential is i%ely ackno le%ge%* acquisition price can go up !ery rapi%ly6" What ent rong? 8hree assumptions that eBay ha% ma%e about success after acquisition of Skype %i%nt come true: Skype %i% not create as compelling a stan%alone business mo%el as eBay ha% hope%" 5Skype itself is un%ergoing a gro th slo %o n" Skype=s re!enue rose )'3 in the quarter en%ing Sept/- !s" more than t ice that pace a year earlier 26" Skype is also loosing its price a%!antage" 5Bhone companies such as Ferizon Communications an% cable companies inclu%ing 8ime Warner charge flat fees for unlimite% calling hen it=s purchase% along ith other ser!ices* such as high+spee% &nternet access6" eBay=s users are largely satisfie% ith the ability to communicate !ia email" eBay has been unable to mo!e into lea% generation" Skype as suppose% to help eBay to create connections bet een consumers an% local ser!ice pro!i%ers like plumbers an% han%ymen" Co e!er other ser!ice pro!i%ers like NAngie=s Kist an% NSer!ice;agic began to be more acti!e in this space hile eBay coul% not make much hea% ay here"

<ne a%%itional possible factor for eBays lack of success ith Skype coul% be that eBay %i%n=t put the right management team in place to e$ploit the full !alue of Skype"

At eBay* &s Skype 8here to Stay?

"business eek"com* Sept" 4//-

eBays Acquisition of Skype: Will the Gamble Work?

Wrong strategy &ts possible that ;eg Whitman as inten%ing to go in for a NConcentric ?i!ersification 5 hen the ne business is strategically relate% to the e$isting business6* hile in practice eBay actually en%e% ith NConglomerate ?i!ersification 5 hen there is no common threa% of strategic fit bet een the ne an% ol% lines of business6 ith the acquisition of Skype" 8his coul% ha!e happene% %ue to a lack of sufficient N%ue %iligence before the acquisition" 5NConglomerate ?i!ersification strategy is usually har% to e$ecute because the e$ecuti!es cannot le!erage their e$isting skills an% nee% to gain ne skills in a ne market6" Wrong fit eBay an% BayBal are together a case of perfect combination because* hile each business as ma%e stronger by the presence of the other* together they manage% to create a hole ne opportunity calle% Nmerchant ser!ices" 8hat le!el of synergy %oes not e$ist bet een eBay an% Skype" Skype being a F<&B company is playing purely in the communications fiel%" ,nless eBay as trying to become a communications company like Mahoo or Google* acquiring Skype %i% not create any a%%itional opportunities for eBay" Why %i% they %o it? eBays gro th as beginning to mature an% there as possible pressure from Wall Street to sho gro th again" ;eg Whitman looke% at Skype acquisition as a %i!ersification strategy through hich a fe more years of gro th coul% be e$tracte%" 5When the hyper gro th of a company begins to slo %o n %ue to maturing market segment* the management feels the nee% to infuse gro th any ay" &f they cant achie!e organic gro th* they look for an acquisition to help continue the gro th6" Another reason for this apparent illogical mo!e by eBay has been attribute% to the phenomenon calle% Ninstitutional imperati!e" Accor%ing to Warren Buffet* I&nstitutional &mperati!eJ is the need for the managers to act and do like their peers no matter how irrational it may seem. What no ? After riting %o n the !alue of Skype by 9'"1 billion* #Bay announce% on April ')th* 4//( that it is spinning out Skype !ia an &B< sometimes in 4/'/-" Qohn Byrne* a senior analyst at 8echnology Business >esearch &nc"* sai% IS" eBay* hich has been %rifting from its tra%itional flea market+style auction platform to more of a set+price retailer* has been in the mi%st of an i%entity crisis" An% unloa%ing Skype coul% be a sign that the company is getting its act together againJ("

"nytimes"com "computer orl%"com

eBays Acquisition of Skype: Will the Gamble Work?

>eferences '" >a7 Sheel!antA "itstrategyblog"com "computer orl%"com

4" #Bay gets o!er i%entity crisis ith Skype &B<A ." NSkype <ut? Scott ?" AnthonyA 1" NGoing* GoingS#!ery here*

"business eek"com "business eek"com "i%ea+group"com

)" eBay* &nc": 8he <nline Auction &n%ustryA :" #Bay Buys Stake in CraigslistA 2" -" "articlezones"com "internetoutsi%er"com " s7"co

(" NGoogle: &n Search of &tselfA

"kno le%ge" harton"upenn"e%u