EBay has this little button on their site that exhorts customers “Buy it Now.” Well, that’s just what they did with Skype, paying over $3 billion for the Internet telephony service. On October 1st, they wrote down that investment by nearly 50%, and conceded that they over-paid.
Well, yes. But the reason they over-paid, in retrospect, wasn’t that they over-estimated its growth potential; Skype has continued to add customers at a rate consistent with its valuation. What eBay over-estimated was their potential to integrate Skype into their auction system, and by doing so turn it into a platform for monetization — either by upsell, or by ad sales.
They couldn’t figure out either one. Google monetizes by selling relevant ads based on search behavior. Now if Skype was run by Alberto Gonzales’s Justice Department, they could develop a technology that listens into our phone calls, pulls out the relevant terms, and then delivers appropriate ads. Which means that if you’re talking to your friend and you mention how hungry you are, a Pizza Hut message would appear on your computer. Cool, but privacy kryptonite.
Nor could Skype upsell “premium” products, which is the way that free internet services make their loot. Basic Hotmail may be free, but if you want to store more than a handful of messages, they’ll charge you for it. Currently, there aren’t many premium services that telephony offers — beyond the standard fare of voicemail, call forwarding and the like. The territory is wide open for innovation, but Skype didn’t deliver on any of it.
So what happened was that Skype made a spectacularly rapid journey from technological marvel to boring commodity. It lacked the innovative edge and branding sparkle to lift itself out of the rut of providing a boring service that consumers take for granted. We’ll pay for innovation and psychic rewards that validate our coolness — ask Steve Jobs and Howard Schultz — but not for demotic functionality.
Ebay’s problem wasn’t that they over-paid. It was that Skype under-delivered.