Let's cut eBay
This week's news that eBay was going to be swallowing online communication upstart Skype may have left some investors scratching their heads. Then again, those are probably the same shareholders who were wondering where the company's other purchases fit into the scheme of things.
So let's snap on those surgical gloves, don the goggles, and take a closer look at eBay's brief, yet potent, buying history.
In June 2000, eBay acquired Half.com for $374 million in stock. Half.com had been launched just a few months earlier, but eBay was doing the right thing. It smelled a threat and had the clout to extinguish it before it raged out of control.
Half.com was a pretty original upstart that allowed visitors to sell their used CDs, books, movies, and video games on the site. The only catch was that they had to price their wares at least 50% below retail value. Given the product categories, one can argue that this was an even bigger threat to Motley Fool Stock Advisor recommendation Amazon.com
To understand why, consider that Half.com was letting its users list for free. It was a breeze to use, too -- just a matter of punching in the UPC, checking off on the product's condition, and setting a low price. Users would then be charged a 15% commission on any sales. In short, Half.com was a seller-friendly consignment service. That didn't sit well with eBay, which had always charged -- and still does charge -- fees for all listings rather than just on sales, to make sure that it got paid on even unsuccessful deals.
At the time eBay made its offer, Half.com claimed to have more than 4 million items available through its virtual consignment shop. That was about the same number of auctions that eBay had going on at any particular time. Half.com had an aggressive affiliate program in place to make sure that it would grow strong virally. But eBay was no dummy. It knew that it could buy its friends -- and its enemies.
Two years later, PayPal emerged as enough of a threat to eBay that "Little e" consumed it in a deal valued at $1.4 billion. PayPal was becoming the online payment of choice, and eBay had to do something about it. No, eBay didn't aspire to be a bank. However, it felt as though it would not be getting the most out of its users if they were to scurry off to PayPal.com to seal the deal after buyers and sellers had shaken hands on eBay. Yes, eBay had tried to make the payment system work on its own. It teamed up with Wells Fargo
Like Half.com, PayPal also had an ambitious affiliate marketing program in place. But PayPal's was even more effective than Half.com's, since it would provide new accounts with a $5 bonus as well as reward active accounts with $5 for any new account referrals. The end result was that everyone had a PayPal account. The same rationale that worked for eBay against rival auction sites being put out by Amazon and Yahoo!
Bidders went to eBay because that's where the sellers were, and vice versa. The same thing happened with PayPal as it became the legal tender of choice in cyberspace. So shortly after PayPal went public, eBay was there. It was ready to turn another foe into a financial contributor.
Two summers after PayPal -- and what is it with eBay going gonzo with the acquisitive plastic this time of year? -- eBay picked up a 25% stake in Craigslist. Once again, the buy was a result of eBay's predatory sense starting to tingle. Craigslist is a free site where users buy, sell, and swap everything from merchandise to rentals, or even pick up a date. Organized by city, it is a pure grassroots marketplace. When eBay secured its minority stake, Craigslist was attracting 5 million unique visitors a month and generating more than a billion monthly page views.
With a quarter of the value of eBay's successful marketplace transactions taking place in its eBay Motors division, how could the online auctioneer let Craigslist folks move their tired rides for free? Localized features like free job listings may have been a threat to a company like Monster Worldwide
Yes, there is plenty of clutter to be found on Craigslist. It would never be a pure replacement to eBay's proven interface. Then again, if bidders started finding what they were looking for on the free site -- and sellers found willing buyers -- the same dynamics that grew eBay into a titan could start nipping at its ankles.
Unlike its two earlier buyouts, eBay didn't walk away with complete control in a potential adversary. All it gets to do is ride shotgun with Craigslist. That's not necessarily bad. It will be able to learn more about Craigslist and gain competitive insight. Its absorbing role may even give it an education if it should ever decide to enter new realms, such as job listings or dating personals.
So why would eBay pay as much as $4.1 billion for a company that allows people to chat it up in cyberspace for free? Because Skype is a global sensation. Its software has been downloaded nearly 170 million times. And any two Skype-enabled users can engage in voice communication with their Internet connections.
All that said, Skype produced just $7 million in revenue last year. On the other hand, it raked in most of that amount when it was mostly a free service. Since then, to reach out to those who are not online with Skype, the company has unleashed a pay service to reach landlines and cell phones at a fraction of the conventional cost.
So what's the deal here? It's not as if eBay were AT&T
And it does. Skype got eBay's interest because it was generating buyout interest elsewhere and because all of the major portals were rolling out their own Skype-like audio features on their instant-messaging platforms. Exchanging goods? Exchanging words? It may seem like a stretch, but eBay couldn't afford to let the other Internet giants grow unchecked.
The path to prominence for eBay was dictated by having the masses at the ready. Buying Skype was about securing eyeballs -- and eardrums -- and making sure that even more online users stayed well within the reach of Meg Whitman's marketing whims.
I did it eBay
Just 39% of eBay's revenues this past quarter came from its flagship domestic-auction business. The company is diversifying in terms of geography and focus. That points to the reality that these are challenging times for the company. But they're also exciting times. Ever since we singled out eBay in the Motley Fool Stock Advisor newsletter three summers ago, the company's shares have risen by 122%. That's a refreshingly beefy return, compared with the 17% that the S&P 500 has mustered in that same time.
So, yes, as we poke around inside eBay, we see a company that has developed an insatiable, if not incredibly tactful, appetite. And you just never know what it's going to devour next.
Longtime Fool contributor Rick Munarriz is a satisfied eBay user -- with 151 positive-feedback recs to show for it. He does not own shares in any of the companies mentioned in this story. The Fool has a disclosure policy. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.