IT Strategy

eBay’s failed Business Strategy with Skype Acquisition

October 18, 2007 by Raj Sheelvant

eBay’s third quarter 2007 financial results are in and its official they took $900 million write down in the value of Skype. Looks like eBay did not ’shop victoriously’. So, what went wrong with Skype acquisition? First of all, is Skype a strategic fit for eBay’s business model?

I attended an event in April 2007 by W.P.Carey MBA School which honored Meg Whitman with Executive of the Year award. Meg Whitman recounted an interesting story on how eBay acquired Skype. She and her top executives were chatting around their cubicles after 5 pm one day, and couple of MBA new hires (or interns – I don’t remember) just wandered around. They talked briefly about the probable synergy between Skype and eBay. Executive team got intrigued and scheduled a presentation the following day. Ms. Whitman said that it was the presentation by the new hires that motivated eBay’s executive team to acquire Skype. Well, I wish I could see the details of that presentation. I think, all that presentation did was – sell the hype on Skype. eBay and PayPal are one of the most remarkable combinations because they made each business stronger on their own, and then created a whole new opportunity called merchant services. That level of synergy does not exist between eBay and Skype. Skype looks like eBay in its viral effect of how it had grown its user base initially. That’s where the similarity ends. Skype a VOIP company is a pure communication play. Was eBay trying to become an internet communication company more like Yahoo or Google? I think as eBay’s growth started to mature, and because of rising pressure from Wall Street to become a growth company again, probably Meg Whitman looked at Skype acquisition as a diversification strategy. Add a fast growing company to the maturing portfolio mix of eBay and PayPal, figure out how to monetize it later and you have few more years of growth. Thus you can get rid of Wall Street analysts pestering to grow. There are 2 kinds of Diversification Strategies:

Concentric Diversification: When the new business is strategically related to the existing business.

Conglomerate Diversification: When there is no common thread of strategic fit between the new and old lines of business.

If you read Meg Whitman’s interview at Financial Times dated June 18^th, 2006 you will see that she was going for a Concentric Diversification. In the interview, synergistic relations between eBay and Skype was painted with such broad brush – it makes me believe that not enough due diligence was done before acquisition. In the end I think it was a Conglomerate Diversification Strategy masquerading as Concentric Diversification Strategy. Conglomerate Diversification Strategy is always tough to execute because the executives cannot leverage existing skills and need to gain new skills in a new market. That is the primary reason for the failure of Skype acquisition.

Updated April 3, 2009:

EBay finally conceded their failed Concentric Diversification Strategy.  Now they are openly pursuing Conglomerate Strategy.  See my analysis blog titled Skype’s Growth Strategy.

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