Analysts suggest Skype's price tag may be too high

Posted on 12 Sep 2005 at 17:52

Following the news that eBay is to buy Internet voice startup Skype for $2.6bn, analysts have warned that the auction giant may have shelled out more than it should.

'I can see some of the rationale, but I have difficulty justifying the price,' said Maribel Lopez, VP, devices, media and marketing at Forrester Research.

'I think they overpaid,' said John Delaney, Principal Analyst at Ovum Consumer Group.

Both took similar lines of reasoning for their outlook.

Lopez picked out Skype's interface, its community of international users and the 'potentially sizeable revenues' of Skype's paid-for services as all good reasons for an interest in acquiring Skype.

'They are the three pros, but for the cons, they have no sustainable differentiation - anyone can put together something very similar,' said Lopez.

Yahoo! Messenger and many other applications allow you to make voice calls over the Internet, so it's difficult to distinguish Skype from the competition, she said. And the competition is fierce: the market for free Internet calls between messaging users is already well developed, but the market in cheap long-distance calls has been around long before the Internet was used to make them - and this is Skype's paid-for revenue stream.

Delaney agreed, saying that eBay could quite easily have developed its own voice service. 'I think there are three main reasons why eBay would buy Skype,' he said. 'For its patented VoIP technology platform, for its brand, and for its userbase. The last two are the most important. What they are doing is buying the brand and the userbase. The thing is, I'm not personally convinced that it's worth $2.6bn.'

With some 57mn registered users, Skype does indeed boast impressive figures. And even though they will help plug some of the geographical gaps in eBay, it's not quite as straightforward as that. 'Just because you acquire a community, it doesn't mean you get to keep them,' said Lopez, as eBay will have to work hard on managing it to keep it loyal.

Delaney sees eBay's move potentially as part of an ongoing struggle by the major Internet brands to become an umbrella for all consumer Internet services. 'The big brands are positioning themselves - they're all elbowing into each others's territory,' he said. 'They all share one common denominator in that they are all powerful brands, but in niche services. What they all want to be is a generalised consumer Internet portal.'

He said that each is fighting from a different front. Google, while boasting a vast userbase, has very little information on them: you don't need to register for a search. The best position, he said, is to have a userbase of registered users using an email service, to which they will always return to check their mail. Hence Google's launch of Gmail with a previously unheard of 1GB of free storage.

Along with its success, it also proved how difficult it is to get consumers to pay for such services - rivals immediately upped their free storage capacities to compete. 'It's very difficult to build a viable consumer Internet business that relies on user revenues,' said Delaney, because ultimately success relies on supplying revenue-generating ads to as big a userbase you can build.

Skype, which promises no ads, pulled in $7 million for 2004, expects $60 million for 2005 and its guidance for 2006 is riding at $200 million.

Yet in a market into which the biggest names on the Net are bundling all their energies - even Microsoft recently bought VoIP specialist Teleo - Skype could face an uphill struggle to maintain its momentum. And when that inevitably impacts on Skype's userbase, it will sorely miss the advertising revenues.