EBay's Skype Bubble Bursts

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Perhaps none of this would be an issue if Skype were fulfilling eBay's grand plan to meld the technology with its auction listings and PayPal payment service. "A couple of years ago they said there'd be synergies, and it's not happening," says Tom Taulli, an expert on mergers and acquisitions. Complicating matters, the market for making calls with a computer over a broadband Internet connection has gotten increasingly crowded since Skype blazed the trail. Free calling has become a standard feature of instant-messaging services from the likes of Yahoo! (YHOO) and Microsoft (MSFT) as well as an array of startups.

Some analysts suggest eBay may need to dramatically alter Skype's business model, perhaps focusing on advertising rather than user fees. One problem is that Skype's seemingly rapid user growth—registered users nearly doubled in the second quarter—is somewhat deceptive.

Chances are that less than 20% of Skype's 220 million registered users, as of the second quarter, are actively using the site, estimates Stephan Beckert, research director at consultant TeleGeography. In contrast, in early 2006 about 30% of Skype's roughly 95 million registered users were actively using the service. That would mean the active-user base grew only from 28.4 million to 44 million from early 2006 to mid-2007 even as the total number of registered users more than doubled.

Little Cash in PC-to-Phone Calls

Another worry is that Skype has yet to figure out a way to get more of its users, most of whom make computer-to-computer calls for free, to pay for premium services. In fact, Skype appears to be struggling with one of its main revenue sources: per-minute fees for calls to traditional phone numbers. "One of the things that alarms a lot of people" is that SkypeOut minutes were flat in the second quarter compared with the first three months of 2007—and down vs. the fourth quarter of 2006, says Beckert. On average, he estimates, Skype's users pay just 12¢ to 13¢ per month. Despite its legal troubles, Vonage (VG) generates $28.38 a month from subscribers to its Internet-based phone service.

That eBay is slashing its valuation of Skype now comes as a timely reminder of the still unique perils of trying to place a price tag on an Internet business. It has been almost exactly a year since Google (GOOG) paid an eye-popping $1.65 billion for YouTube, a video-sharing site with explosive popularity and little revenue. And these days there are reports that Microsoft may acquire a small piece of Facebook in a deal that would value the online social network at $10 billion (BusinessWeek, 9/25/07). Facebook, like Skype before it, has grown to more than 40 million users in an Internet minute but has little to show for it in the way of revenue. As eBay has learned the hard way, it's easy to overpay for all that excitement.

Kharif is a reporter for BusinessWeek.com in Portland, Ore.