EBay is a terrific, world-changing company. Along with Amazon.com, eBay revolutionized how people purchase goods. eBay and Amazon.com together defined eCommerce. So, while Amazon.com appears to be growing beyond it’s humble beginnings as the Internet’s bookstore and thriving (come back for more on Amazon), eBay can’t seem to grow beyond being the Internet’s garage sale.
EBay has made many wise acquisitions and investments throughout its history. But, when eBay really wants to make a splash and remind everyone that it too (along with Yahoo, Google, Amazon, Netscape) is one of the great dot-com companies, sometimes Meg Whitman reaches.
First, let’s give credit where credit is due. EBay’s acquisitions of Half.com, Shopping.com, StubHub, and StumbleUpon were terrific moves. Each was reasonably priced (Half.com at $318MM, Shopping at $635MM, StubHub at $307MM, and StumbleUpon at a mere $75MM) and, more importantly, enhanced eBay’s core offering. And, of course, eBay’s acquisition of a 25% stake in Craigslist was inspired. It’s probably the single biggest reason that Craigslist is still a private company today, because Craig Newmark knows that he wouldn’t be able to ignore eBay as a major shareholder if the company were public.
However, eBay tends to overpay for targets outside of its core. Take, for example, the two most high-profile acquisitions completed by eBay: Skype and PayPal. Niklas Zennstrom just publicly said what everyone has been thinking for year, that eBay overpaid for Skype. It was folly for eBay to believe that auction participants, or buyers and sellers, would want to talk to each other before conducting that transaction for a Pac-Man lunch box. No, the real motivation for the purchase of Skype was for eBay to “make a splash.”
I spoke with Product Managers at Google (on September 27, 2005) about eBay’s acquisition of Skype. They posed the question:
A number of analysts and observers are suggesting that Google should have acquired Skype instead. Do you think Google should have purchased Skype?
My answer to them was: No, it was the right move. Skype, at that time, had annual revenues of roughly $70M. So, eBay paid 37x revenue for Skype. With ARPU consistently at or under $1.80 per year (calculated from here), that high of a revenue multiple is beyond comprehension.
Turning now to PayPal. Obviously, this acquisition was not a colossal failure. It’s actually been an overall accretive purchase. Given that PayPal had revenues of $216MM at sale and was purchased for $1.6B, with an ARPU of roughly $15 per year, the deal looks pretty solid and fair. However, digging deeper than just the numbers, eBay overpaid because eBay was the one and only legitimate suitor for PayPal at the time. PayPal was the emerging preferred payment mechanism on eBay, and competitors such as Google hadn’t started think about entering that arena yet. (Google Checkout was introduced in June 2006.)
So, in essence, eBay was bidding against itself for PayPal. You would think that that the masters of the auction would know better.
The one common theme to both the Skype and PayPal acquisitions was that eBay bought a “hot” company, and they paid top dollar for it.
Now, eBay is on the verge of another mistake. According to Fortune, eBay is making a foray into social networking with eBay Neighborhoods. The powerseller, Evan Prytherch, quoted near the bottom of the article is right: what possible tie-in does social networking have with boosting sales on eBay. This smells an awful lot like the Web 2.0 version of eBay’s rationale for buying Skype: getting buyers and sellers talking to each other. At least this time eBay didn’t plunk down $2.6B.
Instead of creating yet another social networking site, wouldn’t it have been smarter to dedicate those resources to developing widgets for Facebook or the recently unveiled MySpace platform?
