EBay answers the IP Voice Call

Voice over IP technology takes the analog waves of voice sounds, digitizes them into the ones and zeroes needed to transmit on data networks, sends them over the Internet, and then turns them back into sounds. And that’s all you need to know about IP voice, right?

Wrong, as of September 13, when online auction power eBay announced it was not only willing to pay $2.6 billion in cash and stock for Skype Technologies, a Luxembourg-based IP voice service, but would kick in another $1.5 billion if the company met performance targets by 2009.

A bet that size on the future of IP by the largest single merchant site on the Internet—one that also owns the number one shopping comparison site (Shopping.com), s gaggle of Internet classifieds sites overseas, and a 25% stake in Craigslist—is bound to catch the interest of the direct marketing industry, especially those players interested in search marketing. After all, eBay hosts approximately 1.9 billion searches per month. And a recent report by Nielsen//NetRatings found that the online auctioneer leads the pack in Internet ad impressions delivered by sponsored links, placing almost 400 million for the third week in August, or 3% of the total for that period.

According to eBay CEO Meg Whitman, one way Skype might be integrated into its core business could be to add the ability of buyers and sellers to communicate in real time rather than via e-mail. This could help close complex deals in categories such as new cars, travel, personal and business services, real estate, industrial and office equipment and big-ticket collectibles, with corresponding revenue gains for eBay. Future elaborations could include enabling video so that buyers can get a better look at the products they’re bidding on.

But Whitman told analysts in a phone conference after announcing the deal that the deal may also eventually permit eBay to offer a “pay-per-call” service to merchants on its site. Users could click on a Skype button placed on the merchant’s page to get connected via the Internet to a sales rep, with the merchant paying eBay and Skype a fee for the service.

Bryan Weiner, president and chief operating officer of search marketing firm 360i, has a unique perspective on the subject; he’s a former president of Net2Phone, a leading carrier in the IP voice business. Weiner believes that after the Skype acquisition is complete, eBay will turn first to getting its community of buyers and sellers used to talking to one another live. This will be particularly helpful in eBay’s overseas sales, since a large portion of Skype’s installed base of 50 million users is located in Europe and Asia.

“My sense is that what they’re initially looking to do is to facilitate more transactions by leveraging Skype,” he says. “If a secondary pay-per-call model comes aboard, that won’t surprise me. But just as Google tries to get adoption of its technologies to facilitate more interaction among the user base, I think eBay will not want to mess up the model by charging too soon for connecting buyers and sellers. They’re going to want to get their users trained to use Skype for making phone calls that smooth the way for more transactions.”

Rumors of a possible acquisition of Skype had appeared in press reports as far back as June; but they involved Microsoft, Yahoo! or Rupert Murdoch’s News Corp., not eBay. In hindsight, the deal might be seen as similar to eBay’s 2002 purchase of the PayPal online payment service that so many of its users were already using to settle their transactions. In fact, PayPal will probably be enlisted to help beef up Skype’s paid services. While 52 million users have downloaded the software for free PC-to-PC calling, another 2 million users pay connection charges to call to or from landline phones. Skype could collect those fees easily over the Internet by linking every account to a PayPal “wallet”.

Marc Barach, chief marketing officer of pay-per-call pioneer Ingenio, points to one overlooked aspect of the deal: namely, that the Skype purchase will give eBay access to a large registered customer base in areas where it has traditionally been weak, such as China and Germany. Most of eBay’s users are in the United States, and observers have been worrying that the company is reaching the saturation point within these shores. Only about a quarter of Skype’s registered users are American.

He also mentions that the addition of IP calling to eBay’s sales mechanism might help with the company’s “gray market” troubles, in which a buyer and seller take their transaction offline in order to close the deal without incurring a fee to eBay.

In the long term, however, it will probably be a pay-per-call revenue model that justifies the eBay-Skype deal. Goldman Sachs analyst Anthony Noto said in a research report that the cost of acquiring a customer through eBay was about $2, compared to at least $8 and as high as $12 for paid search. Right now, he wrote, eBay is creating value for sellers that outweighs the listing fees they pay or the transaction fee when they make a deal. “Pay-per-call sponsored listings on top of a search results page would allow eBay to capture the value it is creating in excess of the listing fee,” he wrote.

Pay-per-call won’t be an easy step for a Skype-equipped eBay, as Barach points out. Skype gives them connectivity, but they’ll have to build a mechanism for queuing and taking bids from advertisers. Most pay-per-call ads today have a very local focus, connecting searchers with small businesses in their area. If eBay wants to tap into that business, it will also have to build a geographic identifier component into its platform—something the company does not already have as an Internet-only business.

“We see this as very, very positive to see a company like eBay ratify the [pay-per-call] business model with so much cash” Barach says. “We put them in the context of Verizon, which recently announced their imminent entrance into pay-per-call. We realize that we’re onto something, and we’re working very hard to leverage our lead in this space.”

Ingenio won’t be able to relax any time soon. That IP voice context can eventually grow to include Yahoo!, which bought IP voice provider Dialpad in June; Google, which introduced its IP voice/ instant messaging service Google Talk; and Microsoft, which acquired IP voice software maker Teleo in August. And this week, America Online announced that its instant messaging clients will be able to use a new pay service for making IP voice calls.

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