eBay's $5.8b Skype move strikes fear into telcos

SAN FRANCISCO - In a move likely to strike fear into the hearts of standard telco providers, online auction site eBay has bought internet phone-calling company Skype for up to US$4.1 billion ($5.85 billion).

Owning Skype - which is yet to make a profit - will allow eBay to add free internet telephone calls to its online auctions.

eBay is renowned for its internet marketplace linking over 150 million buyers and sellers, who exchange about 5 million emails a day.

It hopes that offering free Skype calls will smooth the way for more deals and let the company charge merchants for calls that lead to sales.

Skype already leads the booming voice-over-internet (Voip) market, which is seen as a threat to traditional phone companies and is being aggressively targeted by online powerhouses such as Time Warner's AOL unit, Yahoo and Google.

Last month, Microsoft moved to build its presence in the internet telephony market with the purchase of Teleo, while Yahoo bought Dialpad earlier this year.

But eBay chief executive Meg Whitman said Skype had a considerable head start. "We think Skype has an enormous lead - 150,000 new users a day - and technology that is generations ahead of where the new entrants are."

Skype expects revenue of US$60 million this year and more than US$200 million in 2006, but has yet to turn a profit.

In two years, Skype has attracted 54 million members to its free and low-cost internet-based voice service and is on track to roughly double in size within a year.

eBay was looking to create a new e-commerce model, joining buyers and sellers on eBay, with its PayPal online payment system, and the ability to complete transactions via web phone calls using Skype software, analysts said.

But David Ricci, a portfolio manager with William Blair & Co, said the deal could prove to be a "stretch" for eBay since it appears to fall outside of its core business.

Nearly half of Skype's users live in Europe, a quarter are in Asia, and an eighth are in North America, providing eBay with a large audience as it seeks to expand outside its core North American market.

The deal provides a major payout for Skype founders Niklas Zennstrom and Janus Friis.

- REUTERS