Skype, which allows free PC-to-PC phone calls, is a classic example of a hypergrowth company. In a matter of just two years, the company's service has been downloaded more than 200 million times in 225 countries, and has amassed more than 66 million registered users. About 175,000 new users register every day.
This may partly explain why Motley Fool Stock Advisor pick eBay (NASDAQ:EBAY) spent $2.5 billion to buy the company (the price tag could be $4.1 billion if certain growth targets are achieved). Skype's subscriber growth seems reminiscent of eBay's early days. More than ever, eBay wants to keep propelling growth -- which is no easy feat.
To this end, eBay has taken steps toward making Skype mainstream. Its first effort is a deal with RadioShack (NYSE:RSH), which will offer Skype Starter Kits throughout its extensive chain of 3,500 stores across the U.S. The Skype Starter Kit is priced at $4.99 (so long as you buy before Dec. 24, 2005). It includes Skype software (which you can also download for free from skype.com), a Skype-enabled headset, and 30 minutes of SkypeOut minutes (this means you can call a regular landline or cell phone).
Basically, the combination of eBay and Skype looks to be a marketing machine -- aimed at making Skype both accessible and growing its customer base to the "critical mass" point at which its fixed-cost investments start to yield profitable margins. Thus, it's a good bet to expect other distribution deals.
History can often illuminate the thinking behind many corporate decisions, and throughout its life, eBay has been active with M&A. But for the most part, the company has purchased companies that have some direct link with its underlying business. An example is PayPal, which was already integrated within eBay at the time of the acquisition.
As for Skype, it is certainly a stretch to see the synergies between auctions and PC-to-PC calling. Isn't the beauty of online auctions to cut out the negotiation? Doesn't the online approach reduce friction? Isn't that the point of eBay?
That aside, the fact remains that eBay is now in the telecom business. Unfortunately, that space is getting pretty crowded, with new competitors like Yahoo! (NASDAQ:YHOO), Google (NASDAQ:GOOG), Sony (NYSE:SNE), Microsoft (NASDAQ:MSFT), and AOL. These companies are no slouches when it comes to aggressive marketing, and they didn't have to spend billions to get into the business, either.
While it's smart for eBay to strike distribution deals with companies like RadioShack, the company needs to go further. It seems that these companies and others have a pretty tough road ahead when it comes to VoIP. There's already a relatively cutthroat pricing environment amid competitors -- assuming they even charge for their services -- and no meaningful point of differentiation. And they're not even profitable yet. In my opinion, shareholders need to wait until eBay can demonstrate how Skype fits with its larger agenda.
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Fool contributor Tom Taulli does not own shares mentioned in this article.
