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In the mid-2000s, the VoIP (Voice over Internet Protocol) industry saw some big moves. First, in 2005, Yahoo acquired Dialpad, a company that fit right in with its existing Yahoo Messenger platform, allowing users to voice chat seamlessly. It wasn’t a shocking deal—Yahoo had been doing online communication for years, and this was just the next step. Then, in 2005, Google jumped in, launching its own homegrown VoIP service, Google Talk, which also made sense—after all, Google was already a giant in the digital space, and adding voice services seemed like a natural fit.
But then there was eBay, dropping a bombshell: they were buying Skype for a jaw-dropping $2.6 billion. The market didn’t see this one coming. A merger between e-commerce and a communication service? It raised eyebrows, to say the least. And things didn’t get any clearer when eBay rolled out a 78-slide presentation trying to justify the acquisition—if anything, it made people even more skeptical. Analysts were left scratching their heads, wondering why a company with only a few million dollars in revenue was valued at such a high price.
Fast forward a couple of years, and it became clear that the deal wasn’t working out. The idea of using Skype for buyer-seller calls on eBay never caught on, and users didn’t want to switch from emails to computer-to-computer calls. So, what exactly was eBay’s plan with Skype? Why did they spend billions on a company that, at the time, didn’t seem to fit into their business model?
The Rationale Behind the Acquisition
To understand why eBay acquired Skype, we need to look at three key factors: eBay’s platform, its previous acquisitions, and its main objectives.
eBay’s growth strategy revolved around three goals: Acquisition (attracting new users), Activation (turning new users into active buyers or sellers), and Activity (increasing transaction volume from each user). By 2005, eBay had two key business lines: its marketplace (aimed at creating a global marketplace) and PayPal (focused on becoming the global standard for online payments). PayPal was already a success story, contributing around $1 billion in net revenue and making up nearly 38% of eBay’s total revenue, thanks to its role in simplifying transactions and boosting user trust.
eBay's acquisition strategy prior to Skype had been relatively successful, especially with PayPal, which eBay acquired in 2002 for $1.5 billion. The integration of PayPal into the eBay platform was seamless, offering a trusted payment solution that streamlined transactions for buyers and sellers. By 2005, PayPal contributed 38% of eBay's total revenue, approximately $1 billion, driving significant growth and user engagement. PayPal reduced transaction friction, improved buyer-seller trust, and expanded eBay’s global reach, solidifying its position as a leader in online payments.
Additionally, eBay had implemented other key acquisitions like Half.com in 2000, which successfully complemented its marketplace. Half.com, a fixed-price platform for media products like books, movies, and music, was incorporated into eBay’s core business, enhancing its e-commerce model. In 2004, eBay tapped into the online real estate rental market through its acquisition of Rent.com, which diversified eBay's portfolio and provided users with access to rental property listings.
These acquisitions demonstrate eBay's strategic approach to enhancing its core operations and expanding its range of services. They focused on streamlining processes, enhancing user experience, and expanding into new markets—all of which bolstered eBay’s position in the online marketplace sector.
The success of PayPal in particular demonstrated how a well-aligned acquisition could bring significant synergies and increase both user engagement and revenues. But to maintain growth and stay competitive, eBay needed to continue fueling its 3A model through new integrations. This is where Skype entered the picture.
eBay saw Skype as a potential third business line to further grow its user base and enhance transaction processes. Skype, with its rapidly expanding user base, was expected to improve buyer-seller communication, especially for higher-value transactions. The goal was to facilitate direct communication through voice calls, building trust and driving even more transactions on eBay’s platform.
The Vision eBay Had About Skype
"The Power of 3"—this was the central pitch when eBay presented its ambitious 78-slide deck to the public during the announcement of the Skype acquisition. The message was clear: “Communication is key in e-commerce.” And it’s hard to disagree with that. eBay highlighted that the online transaction process often involves multiple communication points, from pre-purchase questions to tracking the status of an order. They introduced Bob, the buyer, and Steve, the seller, and illustrated how Bob might need to reach out to Steve at several stages of the transaction. Up until then, this communication would mostly happen through email and instant messaging. But eBay posed a question: What if Bob prefers to call Steve directly from his computer and talk things through?
eBay acknowledged that different people have different preferences for communication. And when it comes to something as important as preventing fraud, a phone call could add a layer of security for Bob, making sure he’s dealing with a legitimate seller.
At the time, eBay was heavily invested in removing friction from its marketplace. Friction—whether caused by inefficient communication, lack of trust, or security issues—was a pain point that could significantly hurt business. For example, reducing friction in payments through PayPal had already proven to be a game changer for eBay. The integration of PayPal removed key obstacles in the transaction process—like complex payment methods and concerns over fraud—thereby driving higher transaction volumes and increasing user activity. eBay hoped that Skype would have a similar impact by improving communication and trust, helping mitigate the risk of fraud.
eBay already had several tools in place to minimize transaction friction and build trust: feedback allowed buyers and sellers to gauge reputability, product listings could include pictures to add credibility, PayPal safeguarded payments, and eBay labels ensured secure shipping. The integration of Skype was the next step in this mission. Voice communication, eBay argued, could make transactions more personal, particularly in high-risk situations where the stakes are higher.
The vision wasn’t just about removing friction; it was also about targeting specific product categories where Skype’s impact could be the most profound. Categories like motors, collectibles, and business and industrial items—characterized by their higher price tags and complex transactions—made up a significant chunk of eBay’s business, around 40% of eBay’s Gross Merchandise Value (GMV). These were high-involvement purchases that often required extensive communication between buyers and sellers. Skype was expected to improve buyer confidence and increase sales in these areas.
Another potential benefit eBay saw was the opportunity to introduce pay-per-call monetization. In high-value categories like motors and industrial equipment, eBay hoped to charge for premium call services that would connect buyers and sellers directly through Skype. This pay-per-call model could open up new revenue streams, especially in more complex, high-stakes transactions. Additionally, Skype’s global reach—with millions of users worldwide—provided eBay with exposure to a vast international market, aligning with its broader goal of expanding its presence globally.
The One Question eBay Missed
At first glance, everything about eBay’s rationale for acquiring Skype seemed logical. It aligned with their goals of enhancing communication, improving trust, and ultimately driving more transactions on their marketplace. But there was one critical question that eBay either overlooked or chose to speculate on: Would eBay’s users actually adopt VoIP?
To make this decision, eBay needed to evaluate two things: first, the projected global adoption of VoIP technology, which was relatively new at the time; and second, whether their own user base would embrace this change. Their assumption was simple: if global VoIP adoption would rise, eBay users would naturally follow the trend. But was this assumption correct? Let’s break it down.
In their presentation, eBay projected that VoIP usage would skyrocket, estimating 1,495 billion annual minutes of use by 2009. In reality, the world exceeded even eBay’s optimistic forecast, hitting 1,914 billion minutes of VoIP usage by 2009. So yes, eBay was right—VoIP adoption was surging globally, driven by the growing popularity of broadband and internet-based communication services. However, the key question wasn’t about global trends—it was about how eBay users, specifically those in the context of e-commerce, would respond to this shift. VoIP was becoming popular for personal and business communication, but that didn’t mean it would fit seamlessly into the world of online auctions and sales.
Let’s look at how eBay users were actually spending their time online back then. According to eBay’s own presentation, users spent 16 minutes searching, 127 minutes on the eBay marketplace, 80 minutes emailing, 195 minutes on instant messaging (IM), and only 45 minutes talking on the phone. While communication was a significant activity (with 44% of total user time spent communicating), the data showed that users overwhelmingly preferred text-based communication. They spent 195 minutes on instant messaging (IM) and 80 minutes on email, while only 45 minutes were spent on phone calls. This clear preference for asynchronous, text-based communication should have raised a red flag for eBay. Shifting user habits to adopt real-time VoIP calls in an e-commerce setting would have been a significant challenge.
So, while eBay was correct in its belief that enhancing communication was crucial, it missed a vital detail: users preferred text-based communication. The question that eBay should have asked was, "Why would our users suddenly shift to VoIP?" If they preferred instant messaging and email, what would convince them to adopt real-time voice communication?
Instead of answering this question, eBay’s presentation simply stated that the “share of VoIP calls would increase significantly over time,” without showing any projected numbers or reasoning to back up that claim. There was no clear plan for how eBay would shift user preferences toward VoIP. The one crucial question that should have been asked—the question of whether eBay users even wanted to use VoIP—was left unanswered.
The Takeaway
In hindsight, these two slides from eBay’s presentation tell us a lot about the decision-making process. While the projections for VoIP’s growth were accurate, the user behavior on eBay's platform pointed to a different reality. eBay users didn’t need or want voice communication to complete their transactions. This case study highlights how crucial it is to ask the right questions when making strategic decisions. Everything else in eBay’s analysis seemed spot-on, but by not asking the one question that mattered most, they made a decision that ultimately didn’t pay off.
Had eBay asked the right question—whether their users were ready to adopt VoIP for e-commerce transactions—their decision might have looked very different. Instead of focusing on broad industry trends, they could have dug deeper into user behavior and preferences. This case serves as a reminder for CEOs and decision-makers that understanding your user base is key. No matter how promising a technology looks in the market, if it doesn’t align with what your users need or want, the results may fall short. In eBay’s case, one unasked question turned a $2.6 billion acquisition into a cautionary tale.
