Investing

EBay is going to pay at least 2.6BN and as much as 4.1BN for Skype. Firstly this is an absolute master stroke by the creators of Skype and Kazaa before it. I expect they realized that they were creating a really HOT product that would be purchased for much more than it was worth as an ongoing business.

Now Whitman has either purchased Skype because of the technology or the user base (network). Clearly the network is valuable, many have written that the value of these user networks increase by the square of the members and any competing VOIP product started from scratch is lacking the network. My question is HOW IS THE NETWORK VALUABLE TO EBAY when the business will never generate much profit as a business because calls are free and Skype out is never going to generate the sorts of profits that a 4.1BN company indicates (200-400M profit a year).

Quote from the article:
"But we believe that when a company is out in front of the competition -- and you have an opportunity to acquire such a company -- it's a great thing to do," Whitman said in a phone interview from London.

She compared Skype to PayPal, the online payment company that eBay bought in 2002 for $1.5 billion. Before buying PayPal, eBay unsuccessfully tried to compete against it with Billpoint, its own payment company.

"We worked hard to build up Billpoint," Whitman said. "In the end, PayPal had the technology lead, they had already built the ecosystem. Skype is in the same position. It has a global footprint and is already a well-known brand."

It sounds like she believes there is value in the network. I doubt it because in the case of payment, it is core to the buying process. Every transaction requires a safe payment and that is effectively how exchanges have become so valuable (NYSE, NYMEX, COMEX etc) they provide a clearing house function. Actually talking to the seller does not seem like a must have requirement for effective e-commerce when the alternatives like email are widely used today. In the case of paypal people were completing transactions with paypal but i've never heard of anyone using any VOIP product to complete transactions.

Now if ebay purchase Skype for the technology I am still confused. All the instant messaging services offer VOIP and the root of the technology is in the CODEC which takes your voice, selects the important bits of the sound and then compresses it and sends it digitally to the receiver. There are many, many CODECS in existence and I can't believe that an effective CODEC could not have been developed or purchased for 1% of 2.6 Billion dollars.

So I see three possibilities
1. EBay purchased Skype for the network
2. EBay purchased Skype for the technology
3. EBay purchased Skype as an investment with some synergy to the core business but primarily as another business line

If the answer is 3, then the synergy value is only a very small part of the price paid as they could have just developed a "click here to talk to the seller" technology in house if this is where the value lay. So the remaining value of the purchase is an investment in another business line that is trending towards free.

All three of my options really concern me because either Whitman has purchased a network that is unlikely to benefit her current network, a technology for 100x replacement cost or an investment in a business she almost certainly doesn't understand (because her core competency is the ebay business which she has run BRILLIANTLY) and is trending towards free. If it is really being held as an investment she should have just returned the money to shareholders instead of thinking she has a better use for all that cash.

Bottom line: Whitman has done so well she deserves the benefit of the doubt for now, she really may have an insight I am lacking. If she has bought Skype and it proves to be a poor investment then Whitman will have proved to be one of those dangerous CEO's who can't leave well enough alone and shareholders should be looking to invest elsewhere. This smells like a desperate attempt to generate buzz at huge cost.