EBay paying up to US$4 billion for Skype

SAN FRANCISCO/LONDON - EBay Inc. has agreed to buy internet phone-calling phenomenon Skype for up to US$4.1 billion, tapping a hot source of growth and putting it into rising competition with rivals from Google to local phone company.

EBay said it will pay US$1.3 billion in cash and US$1.3 billion in stock for explosively growing Skype, which will allow eBay to add free Web telephone calls to its online auctions. It will make a further payout of up to US$1.5 billion if certain financial targets are met.

The deal will cut eBay's earnings by about a penny per share until the end of 2006 before beginning to boost eBay's profitability, Chief Financial Officer Rajiv Dutta said. Its shares rose 45 cents, or 1.17 per cent, to US$39.07 on Nasdaq.

EBay is renowned for its internet marketplace linking more than 150 million buyers and sellers, who currently exchange about 5 million emails per day. It hopes that offering free Skype calls within eBay will smooth the way for more deals to go through, 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 Inc.'s AOL unit Yahoo Inc. and Google Inc.

Microsoft Corp, for instance, last month moved to build its presence in the internet telephony market with the purchase of Teleo, while Yahoo bought Dialpad earlier in 2005.

But eBay Chief Executive Meg Whitman said that 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," she said. "And when people are using your brand name as a verb, that is incredibly powerful."

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 is looking to create a new triad of e-commerce, 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.

"The motivation for other players is more obvious than it is for eBay," he said, pointing to internet media companies such as Yahoo, Google and AOL moving into the internet phone market.

A NEW DIRECTION FOR EBAY

Luxembourg-based Skype offers a free service when users make computer-to-computer calls to other Skype users. Charges apply when Skype users make calls to, or receives calls from, regular phone numbers.

EBay said its merchants would be able to use Skype software to allow buyers with last-minute sales questions to "click to talk" to a merchant's customer service agent.

"Once we integrate communications into e-commerce, we think that Skype is going to remove considerable friction" from the buying and selling process, Dutta told Reuters by telephone.

Legg Mason telecommunications analyst Blair Levin, formerly the chief of staff to Clinton-era Federal Communications Chairman Reed Hundt, said Skype faces competitive challenges of its own as it moves closer to traditional phone services.

Skype could eventually fall under US regulation governing emergency services that could drive up the costs of adding new subscribers. Also, phone companies are moving fast to add video, data and wireless services to their voice offerings. Skype will have to invest to keep pace, Levin noted.

"While Skye certainly has benefited from first-mover advantage, the competitive dynamic for the kind of service it offers is increasing," Levin said in a note to investors.

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 of its core North American market.

The deal provides a major payout for Skype founders Niklas Zennstrom and Janus Friis, who also created the controversial file-trading network Kazaa that allows music fans to share music for free. The co-founders plan to stay at Skype.

- REUTERS