You know the feeling you get when you take a date to an expensive restaurant, only to have the waiter bring out cold food, and then your date walks out on you after saying you paid too much for dinner? (What's that? You don't?)
That's probably how eBay (Nasdaq: EBAY ) feels now, after having disclosed the details about its disappointing purchase of Skype.
Adding insult to injury, Skype founder and former CEO Niklas Zennstrom admits that eBay overpaid for the online telephone company, which is beginning to see its once-spectacular growth taper off. The online retailer recently announced that it would write off $1.4 billion of the original $2.6 billion it paid for the company two years ago. To put that in perspective: $1.4 billion is more than eBay's net income for all of 2006, and it represents roughly 10% of eBay's total assets. Ouch.
Seemed like the thing to do at the time
Speaking at the ETRE technology conference in Hungary on Tuesday, Zennstrom admitted that projected growth of the company was indeed "a bit front-loaded." He added, "We overshot in terms of monetization." Zennstrom left Skype recently to pursue other interests, including his startup video site and Joost, a challenger to Google's (Nasdaq: GOOG ) YouTube.
Translation: eBay got suckered into paying way too much for a company with management that jumped ship at the first sign of trouble. So much for "'till death do us part."
Why was eBay buying an online phone company in the first place? Some think the online flea-market was attempting to upgrade communication between buyers and sellers, giving users an opportunity to converse and ask questions before finishing transactions. This may have worked, but it seriously backfired on eBay.
Don't say I didn't tell you so ...
As if oblivious to the failed integration, Internet communication start-up JAJAH announced last week it has created an "ingenious" product that allows users to call each other before closing eBay deals. JAJAH's website explains: "In auctions, buyers and sellers must communicate to close a deal. With JAJAH buttons, everyone who wants to buy or sell online now has the freedom to talk -- all you need is a phone."
What JAJAH seems to be missing, as proved by the failed Skype integration, is that many eBay users don't want to talk to one another when conducting transactions.
As eBay has matured over the years, it has become more of an online supermarket than a person-to-person auction site. According to eBay's most recent 10-K filing, in 2006 more than 15% of listings on eBay came from user-managed "stores," with an average store listing 615 items.
Can you imagine the headache of being an eBay store owner and getting phone calls from hundreds of would-be buyers wanting to know if your Louis Vuitton bag is real? Part of the eBay allure is the efficiency of impersonal relationships, which allows sellers to gain leverage over traditional storefronts by not having to talk with customers.
If it ain't broke ...
eBay is undoubtedly the market leader, if not the only real player, in U.S. online auction houses. It's had a stranglehold on its market since day one. Why change what has already become so successful? By adding features such as the ability for buyers and sellers to call one another, eBay risks tarnishing its ingeniously created niche product.