EBay acquiring Skype – a bad business decision
Posted in Best Of, Finance on March 5th, 2006 by Sacha PeterHalf a year ago, EBay announced they were buying out Skype (a voice-over-IP (VOIP) company) for 2.6 billion and change.
This was a very poor business decision because Ebay is now getting out of its core competency (online auctions) and into a space that is significantly more competitive. I can’t see any real synergies between their auction business and VOIP.
EBay’s advantage has always been that they were the first movers – in a marketplace, liquidity is everything. For those that don’t know, having high liquidity means the ability to buy and sell in sufficiently large quantities at a fair market value. The nature of EBay’s marketplace requires liquidity – nobody wants to put items for sale on an auction site where there aren’t any bidders. Likewise, bidders aren’t going to waste their time on an auction site that doesn’t have enough supply they want. So over a short period of time, EBay has pretty much sucked up all the liquidity in the marketplace. Both Yahoo and Amazon tried getting into the auction marketplace, but failed due to the lack of liquidity in their marketplaces. This gives Ebay a virtual monopoly on the auction space they control.
The only companies that can successfully compete in this niche offer auctions on niche products themselves. For example, Ritchie Bros. Auctioneers specializes in industrial equipment. But when it comes to everyday commodity items, Ebay is king.
Buying Skype does nothing to further EBay’s liquidity advantage. In addition, Skype is not shielded from competition like Ebay’s market is. Ebay is trying to expand into a market space that is completely out of their core competency and I doubt they will realize much of their 2.6 billion investment, if ever. EBay’s strategic plan is to enable buyers and sellers to talk to each other over the internet instead of email, but charge users for doing so! Personally, even if I had the choice of calling up a buyer or seller for free, I’d do it through email. It’s a lot less obtrusive. Even if you wanted to talk over voice, there are plenty of other alternatives out there, including Google’s offering, Google Talk.
EBay has been so successful that they have practically sucked all of the revenue stream they could capture out of the online auction market. Their management has been trying to find ways to expand to other spaces, but they are going to face significant resistance as they march outwards, similar to Microsoft’s experiences outside the Windows operating system. The business decision to acquire Skype will be a losing one.
Yeah, I woldn’t say I learned a whole lot from my MBA, but one thing we did was study lots of case histories of companies who’ve gone down the same road as Ebay.
For example, Campbell’s has had a profitable soup business for decades and for decades they’ve been trying unsuccessfully to expand their businessinto other areas. There’s something to be said for just sticking to what you’re good at and making your shareholders rich.
Not to say that expansion into new lines of business is always a bad idea (Ebay’s purchase of Paypal was smart, aside from the fact that they waited far too long to do it), but there are lots of companies (like Ebay) which have a core competency that can’t be readily expanded much further than it already has been.
“There’s something to be said for just sticking to what you’re good at and making your shareholders rich.”
EXACTLY.
Most companies make the mistake of assuming that whatever stroke of genius they had when they originally grew their businesses into something would extrapolate into other domains. I don’t consider it bad to try a pilot project, but to spend a third of your shareholder’s equity or two and a half year’s income on a wholly different business stream is a questionable decision.
The guys at Skype though made a brilliant business decision.
BTW, on a side note, I think EBay has a LOT to worry about from Google. I think Google is going to wipe EBay clean over the next 10 years in that they’re going to figure a way around the liquidity trap.
The other business out there that exhibit these business dynamics are regulated stock exchanges.