Skype’s Growth Strategy
April 3, 2009 by Raj Sheelvant
Financial Times article titled “Skype’s iPhone app part of broader strategy,” indicates EBay’s push to internet phone services. New iPhone application will extend already popular VOIP communication to iPhone. Scott Durchslag, Skype’s chief operating officer, says in the article that Skype aimed to become the world’s leading communications Software Company.
EBay now has three units that contribute to its revenue growth. Online auction unit (EBay), online payment unit (Pay Pal) and mobile internet services (Skype). There is some synergy between Pay Pal unit and EBay and Skype because it simplifies payment process. But the scope of Pay Pal is lot larger than its current needs. It is a very successful online payment company that can survive on its own. It’s akin to GE Capital which had some synergy with other parts of GE. But GE Capital grew independent of other units and became larger contributor to GE’s top line growth in the past decade (on a side note, GE Capital was the reason for the drastic loss of GE’s share prices due to recent credit crunch). So, EBay is planning on a larger role for PayPal (read the FT article “Donahoe pledges different Ebay” where the EBay’s CEO John Donahoe confirms greater role in the future).
All 3 units of EBay can exist independent of one another. Therefore, it can be safely concluded that EBay is planning on following ‘Conglomerate Diversification’ Strategy. There are 2 types of Diversifications Strategy in the context of growth strategy.
1) Concentric Diversification: Firm adds products related to current line of business to take advantage of synergy.
2) Conglomerate Diversification: Firms adds products unrelated to current line of business.
Why would EBay pursue Conglomerate Strategy? There are 2 reasons why a firm would pursue conglomerate strategy
1) Opportunity for current line of business is limited.
2) Increase the firm’s growth rate.
It’s well known that growth rate for online auction’s has slowed dramatically for EBay due to global recession. It’s obvious that EBay is looking for other avenues of growth. John Donahoe’s comment confirms that. Since they cannot expand horizontally or vertically to adjacent market, I think EBay is betting on Internet communication devices.
Although Skype’s foray into growing market of MIDs (Mobile Internet Devices) is an exciting development to the existing shareholders. Because of increased growth due to Skype, the stock price of EBay will go up in the short run. But this new market not devoid of competitors, in fact competition is cut throat. The competitors in communication industry have an advantage over Skype because they are well established and more focused. EBay also has to worry about the disadvantage of a conglomerate diversification strategy which always increases administrative problems associated with operating unrelated businesses. Without some form of strategic fit, the combined performance of the individual units will probably not exceed the performance of the units operating independently. Decision-making may become slower due to longer review periods and complicated reporting systems. There are some inherent risks with the EBay’s conglomerate strategy.
Also, read my older blog eBay’s fails Business Strategy with Skype Acquisition.
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