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!
Ebay and Skype - Should we believe the hype?
Chris CarterPosted by Chris Carter in Comments (8)
Discussion
Posted: Tuesday, September 13th, 2005 - 9:27 am EDT
Is integration needed? I saw the acquisition as part of Ebay's ongoing efforts to dominate the P2P market -- in line with the acquisitions of Craigslist and Paypal. The more they own the P2P network, the more protected and less susceptible to disruptive innovations they are, in my opinion.
Posted: Tuesday, September 13th, 2005 - 10:41 am EDT
That's a good question. I'm essentially arguing that it isn't needed, and that trying to integrate the two could be a negative for Skype. Ebay's processes and values are probably not well suited for a business like Skype, and integrating the two could result in Ebay's processes and values being hoisted upon Skype.
Unfortunately, Wall St. seems to demand that any acquisition result in some sort of integration and cost saving synergies. Right now, the Street is giving Ebay the benefit of the doubt. But if things start to slow for Ebay, the Street will begin demanding those cost saving synergies... and that could spell disaster for Skype
Posted: Friday, September 16th, 2005 - 12:23 pm EDT
It's a great point. My own take, which will be explored in more detail next Tuesday in an Innovators' Insight that gives a detailed analysis on the acquisition, is that eBay better not too tightly integrate Skype, because if it does it is not going to realize the full disruptive potential of the opportunity. The freedom eBay gave PayPal to continue to follow its disruptive path gives hope that this will in fact be the case.
If you are an Innovators' Insight subscriber, you'll get the full analysis on Tuesday!
Posted: Friday, September 16th, 2005 - 4:11 am EDT
Awesome point Scott -- the freedom Paypal was given is pretty much proof of what needs to be done. Judging at the way they've dealt with other acquisitions -- Craigslist and Half.com -- it seems like they'll be willing to let the disruptive potential grow. Maybe Meg Whitman's been reading the Innovators' books! :)
Posted: Saturday, October 1st, 2005 - 3:26 am EDT
I think Ebay managers have it quite clear that they can't completely merge Skype into their organization, and if I am not wrong they are even some comments from people familiar with the matter stating that they plan to keep running skype independently.
My question is another one, *why Ebay opted for an acquisition instead of trying to develop its own voip service, maybe creating a new business unit* (after all it certainly had the resources and the processes, it was therefore a matter of using the right values)? I can see benefits and drawbacks in both of the paths, but I am not sure which one was the more suitable one...
Posted: Saturday, October 1st, 2005 - 3:46 am EDT
I question whether Ebay had the necessary resources and processes to enter the VOIP service market. Skype is like a telecom company, and I dont think Ebay is anything like that.
Posted: Saturday, October 1st, 2005 - 9:40 am EDT
I agree with kid mercury that Ebay probably lacked the resouces and processes to enter Skype's market. As is so often the case with disruptive innovations, by the time the incumbent recognizes the potential of the the disruptive innovation, the new entrant has built expertise and a market presence that is hard to duplicate. In the case of Ebay and Skype, the installed base of Skype users was subtantial. My guess is that the 54 million registered users was a critical factor in Ebay deciding to acquire Skype rather than building from scratch.
One can certainly argue that the price Ebay paid was too high, and that they shouldn't have entered the VOIP market. But once they decided to enter the market, I'm not sure that they would have been able to replicate 54 million users at any cost.
Posted: Wednesday, October 12th, 2005 - 4:24 am EDT
"I agree with kid mercury that Ebay probably lacked the resouces and processes to enter Skype's market. "
But Ebay did not need to enter Skype's market, VoIP is a disruptive innovation for incumbent telcos and other voice providers, not for online auctions. Maybe you can justify the move saying the Ebay is already looking for further opportunities to grow while their core business is still booming (which is a proactive way to deal with the future, a healthy exercise) but then again I think developing its own service or at least buying a smaller voip provider and improving it would be a much smarter attitude.
"My guess is that the 54 million registered users was a critical factor in Ebay deciding to acquire Skype rather than building from scratch. "
Well, I do not know the actual numbers, but LOTS of those 54 millin skype customers were also Ebay customers. If they developed a sound and reliable voip service integrated to their auction service they could start already with a massive client base.
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