INNOBLOG

This morning Ebay announced its intention to acquire Skype for about $2.6 billion. Not bad for a service that was only launched in August 2003! According to the companies, since its launch, the Skype software has been downloaded over 163 million times. We have an interesting article comparing Skype and Vonage from the perspective of disruptive innovation in the most recent edition of Strategy and Innovation. Strategy & Innovation's website There is no question that Skype is disruptive. The question is - "What happens to a disruptive company after it is acquired?"

There are certainly examples of disruptive companies being acquired and succeeding. The Washington Post bought Kaplan Testing and has seen that continue to grow rapidly. But there are also examples of disruptive companies being acquired and never heard from again. What will happen with Ebay and Skype?

As they do with most big acquisitions, Wall Street is pressuring Ebay to identify the synergies between the two companies. Ebay has responded by claiming that voice communication will eliminate some of the "friction" in online transactions and will accelerate the growth of transactions consummated through Ebay. This makes some sense and could turn out to be true. And Ebay's presentation on the acquisition stresses that Skype makes sense as a stand-alone business. This is encouraging. However, should Wall Street start demanding cost savings out of the merger, look out.

One of the most important things about disruptive innovations, particularly low-end disruptions, is that the business model that evolves around the innovation tends to be a lower cost business model. This is why it is so difficult for incumbents to replicate what a disruptor is doing - they simply can't afford to do it within their existing business model. Digital equipment built an entire cost structure around selling complicated minicomputers; selling PCs with the same cost structure wasn't possible.

Given Skype's products and the early stage of the company, it is likely that Skype's cost structure is substantially lower than that of Ebay. In addition, it is safe to assume that Ebay has very different internal processes and priorities than Skype. All of which means that Ebay has to be very careful about the way they integrate Skype. Searching for cost savings in the integration doesn't make sense. Skype is not a sustaining innovation for Ebay and and trying to integrate the two companies as if it were could end up knocking Skype off their fast growth trajectory. Combining Ebay's resources with Skype's business model is a receipe for success. Combining Skype's resources with Ebay's processes and priorities is likely to be a receipe for disaster.

Strategy & Innovation subscribers: You'll receive a detailed analysis of the eBay / Skype deal in Tuesday's Innovators' Insight!