eBay has taken highly publicized writedowns lately because Skype hasn't grown quite as fast as the company had hoped. However, the division is profitable today to the tune of about 10% operating profit margins so far this year. The 240 million Skype users love the free computer-to-computer communications service. Some feel it's worth paying for extra services, like calling to or from regular phone lines, enough to make the whole operation profitable.
But the magic of Skype doesn't end there, said Swan. The trick is to combine the voice service with other eBay businesses in ways that add value to both ends of the equation. He wondered how Skype can help buyers and sellers on the marketplace come together and do more business.
Then there's the PayPal payment service, which has gained a few million new accounts when it took over as the preferred payment method for Skype services. And that combination can help you send money to Skype contacts across the world, too. The synergies work both ways.
Tide is high
But there's more to eBay than just Skype, of course. The toast-and-sweet-cream marketplace division isn't a static cash cow, but always under the microscope in the eBay labs. The main thing there, said Swan, is to make eBay easier to use, "whether it's the new home page, visual search, Best Match, Bid Assistant, Next Gen Checkout, or Next Gen My eBay, a series of innovations and enhancements to the site to make the experience for both our buyers and our sellers that much easier," he said.
"And as [CEO Meg Whitman] likes to say, we have made more innovation in the last six to nine months than we have in the prior six years, and we believe this will bode well for the experience that our buyers will have when they come to shop on eBay."
That would be an impressive innovation sprint, for sure. But they must have done it on the cheap, or else pushed most of that tinkering into the current and as-yet unreported quarter. The company's R&D budget for the first nine months of 2007 grew 24% over last year, which actually was the slowest R&D growth of the last five years.
In fairness, eBay is keeping up with the R&D spending increases of online rivals Yahoo!
One way or another
Like any other Internet-based business, eBay has a very light business model with low capital investment requirements. Growing sales means growing margins here, because the fixed costs are so low. "With a relatively low capital-intensive business, we generate strong cash flows off those high operating margins, which give us the financial flexibility to reinvest to grow and/or to repurchase our shares," Swan said.
Adding new business lines cuts into those margins, though. "PayPal and Skype will continue to grow faster than our Marketplace business, and that will work against us in terms of the operating margins of the company."
But don't expect management to hold those rapid risers back just to conserve margins. Both Skype and PayPal are profitable, after all, so fatter sales still mean more money in the bank. "We will continue to invest in [Skype] to improve the level of user engagement as we go into 2008 and 2009," Swan promised.
Rip her to shreds
So it's clear what eBay needs to do next: take the very successful auction business, extend its reach by judicious use of PayPal and Skype, and nab those customers who don't really think of eBay as a store today. Many major sellers treat the auction service like a straight-up storefront where you'd automatically win the auction when you meet the asking price.
In time, this company could be in head-to-head competition with old-school stores like Wal-Mart