China clouds aside, Skype's the limit for eBay acquisition

PUBLISHED : Tuesday, 13 September, 2005, 12:00am
UPDATED : Tuesday, 13 September, 2005, 12:00am

Yesterday's US$2.6 billion acquisition of internet telephone company Skype by online auctioneer Ebay looks expensive for a company that is expected to generate revenues of just US$60 million this year. But then Skype is growing at a phenomenal rate and promises to offer a good fit with Ebay's electronic-commerce services.

However, lest enthusiasts get carried away by the euphoria, reports that Skype's services are being blocked in Shenzhen are a salutary reminder that in China, regulatory risk poses a real threat to the business prospects of internet telephony companies.

The idea behind Skype is simple and elegant. Users download software that allows them to make calls to other users over the internet free. They can also call fixed-line or mobile phones for a small fee.

The service is catching on fast. Skype is just three years old but already claims 54 million users. At the moment, says its founder Niklas Zennstrom, the company is adding 150,000 users a day.

Like many of the fast-expanding companies of the dotcom boom, Skype is losing money. But its revenues are growing rapidly, from US$7 million last year to an estimated US$60 million this year - a quarter of that from Asia - and US$200 million next year.

Although Ebay chief executive Meg Whitman stressed Skype was attractive as a stand-alone business, what really induced her to shell out US$2.6 billion, or nearly 5 per cent of Ebay's market capitalisation, was Skype's potential to boost Ebay's businesses.

About five million e-mails pass every day between potential buyers and sellers on Ebay's websites. If only vendors and customers could talk directly to each other simply by clicking on a Skype icon, reasons Ms Whitman, transaction volumes could rise sharply.

On top of that, Ms Whitman believes sellers would happily pay between US$1 and US$2 a time for customers to contact them. That could open up new business areas for Ebay, like property sales, for which the lead generation payments over Skype could be worth US$3.5 billion annually, she says.

China plays a big role in these plans. Last year, Ebay paid US$150 million to acquire full control of Shanghai auctioneer Eachnet. Meanwhile, Skype claims more than three million users in China through a recently signed joint venture with internet portal Tom Online. Integrating the two services could lend Ebay a critical advantage in its tussle with chief competitor for leadership in a market forecast to be worth more than US$20 billion in 2007.

But there are big potential problems. Telecommunications are closely regulated in China, with state-backed giants China Telecom and China Netcom claiming a duopoly over internet to fixed-line telephone communications. Potential competitors are unwelcome. According to Chinese media reports, China Mobile last week began blocking access to Skype's service, which deeply undercut existing tariffs for long-distance calls.

CLSA telecommunications analyst Francis Cheung yesterday questioned the legality of China Telecom's move.

But legally or not, it seems that China's entrenched telephone operators are going to make sure that startup internet competitors get anything but a clear connection to the mainland.