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Will eBay be Your Phone Company?

Maybe. Even somewhat likely.

In response to my assertion Friday that eBay is grossly overpaying for the acquisition, commenters on that post are saying that the asset value of Skype’s huge network of users will eventually produce phone-company like income for the auction company.  Fred Wilson blogs “…I would be willing to bet that Skype will (and would have if it had stayed independent) generate significant cash flow in the coming years… It’s a jewel of a business.”

Skype has started to sell revenue-generating services like SkypeOut and SkypeIn. Skype has announced and unannounced deals which will result in the service appearing preloaded and baked-in on a number of different devices, some of them mobile, over the next year.  Metcalfe’s law rightly attributes great value to the Skype network, virtual though it is; and Skype the company has ruthlessly and efficiently kept that value to themselves by declining to be interoperable with other services. Given the lack of interoperability, a new user has little choice – there are many more people to talk to on Skype than anywhere else.  Why sign up with anyone else?

Fred does go onto say that, despite the fact that Skype might be worth $2.6 billion, “…the eBay deal was kind of nutty.” I think it’s very nutty so our disagreement is in degrees of nuttiness.

But I do think that eBay may be your next phone company.  Or Google.  Or Yahoo. Or MSN. Microsoft Windows Server System may, someday, include, an IP PBX.  I just don’t think that any of them will make any money directly by being a phone company. They are being forced into offering voice service by an arms race with each other.  Great for us talkers, not so great for providers.

If you want to know the future of voice communication, look at the history of email.  Once upon a time email was offered on closed networks.  MCI Mail even charged by the “MCI ounce” – a thousand characters.  AT&T bought Western Union EasyLink so that Ma Bell could become the post office of commercial email.  Trouble is that email doesn’t require a post office.  It travels over the Internet between sending and receiving server directly. Enterprises own their own sending and receiving servers.  Individuals share the sending and receiving servers of their ISPs or of Yahoo, MSN, or Google (you can usually tell whose server someone is using by their email address, of course). We think of email as being free because there is no incremental cost per message.

IP Voice communication (VoIP) doesn’t require network intermediaries any more than email does. That’s why Skype could afford to provide free Skype-to-Skype calling. With a tiny bit of distributed directory help, the caller’s machine can talk directly to the callee’s machine.  There is money to be made in switching calls between VoIP to POTS (Plain Old Telephone Service) because that switching requires a lot of server power and business relationships (that’s part of what my old company, ITXC, did). SkypeOut and Vonage both charge their users in one way or another for these calls which are leaving their networks.

The only way to get from Skype to another VoIP network today is through POTS because Skype is not interoperable with these other networks. So Skype has a revenue opportunity even for VoIP calls when those calls are going “offnet” – to some other provider.  That will change.  CompuServe email didn’t used to be interoperable with MCI Mail didn’t use to be interoperable with EasyLink either.

This is what I think will happen:

eBay will open Skype up to interoperability with other VoIP providers much sooner than Skype would have as a standalone company.  Why?  Because eBay the auctioneer is going to make a big deal out of voice as part of its auctions and they won’t want to put obstacles in the way of nonSkype users participating in the auctions.

The nonSkype VoIP services will be able to grow based on marketing, distribution and features since their users will now be able to interconnect “free” with Skypers.  VoIP phones with WiFi or Ethernet connections will cost about $10 at the drug store and be given away with subscriptions to many services and in Cracker Jack boxes.

More people will use both Skype and other VoIP services more quickly than most analysts think. I still stick with my prediction that substantially all calls will be VoIP by 2010.

As we are already seeing, the operators of these services will be the same companies which offer voice mail today: cablecos and telcos acting as ISPs, Microsoft, Yahoo, Google, AOL etc.  For competitive reasons, one of them will be able to charge incrementally for VoIP to VoIP calls. Nor will they be able to charge for voice mail any more than they charge for email. The income that they get from off-network calls will decline rapidly as we all start to use VoIP-enabled phones and other devices.

Having the big boys in the business is important because, right now, the regional bells (RBOCs) are winning the lobbying battle to use the FCC as an incumbent protection agency.  AT&T and Worldcom used to be a lobbying counterweight to the RBOCs – but now they’re gone as a lobbying force. Assuming Silicon Valley does a better job lobbying than it has before, it can counter the biggest threat to US growth of VoIP – protective regulation.

So eBay may well become your phone company.  Good news is you probably won’t even have to pay them for the privilege. But this service won’t be a significant revenue opportunity for them. It will be a cost of doing business.

I think eBay could have got there at much less cost.  But they did leap to the front of the line by acquiring Skype so we’ll see.

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