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Subject:  actual estimates of impact of Skype acquisition Date:  9/21/2005  12:03 PM
Author:  boogie2004 Number:  22941 of 25885

Hi all,

I have found the discussion of the potential uses of Skype on Ebay fascinating. I thought I might try to apply some numbers to the Skype acquisition and then let the fool community pick my numbers apart. Keep in mind I make a number of assumptions that seem reasonable to me, but that you may disagree with. If you do, please let me know.

Value break down:
Increasing conversion rates: $1B
Fee for sellers accepting calls: $0.8B
Skype users becoming Ebay and Paypal customers: $1.6B
Skype as a telecom (including Ebay converts): ? ($4B seems fair to cheap to me)

Detailed discussion:
1) For ebay's business.

One supposed benefit is in increasing conversion rates. By looking around the Internet I found one credible source estimates conversion rates are 40% (i.e. 40% of listing end up as sales). So, out of 450mm listings quarterly 180mm-ish close at an average GMV of $60 or so and an average revenue to Ebay of $6. What would be the impact if Skype shifted conversion ratios by 1%? That would be 4.5mm transactions quarterly at an average revenue of $6/transaction, or an additional $27mm quarterly revenue and $104mm annual revenue. Net income margin is something like 21%, so this would add an incremental $22mm in net income. To justify this acquisition at a P/E of 30x (and with no other added benefits), we would need to see a 6% shift in conversion ratios. This seems high (i.e. an additional 15% of transactions close). However, it doesn't seem crazy on expensive transactions (cars, etc). I think we could easily get to this benefit adding $1B in value.

Another supposed benefit is in charging sellers a small fee for accepting phone calls from potential buyers. Getting back to the number of transactions, if sellers took an average of 0.5 calls (help me out here as to what an appropriate average should be) at $0.05 each, then this would be additional annual $45mm revenue yearly (at the 450mm listings rate). Subtract out taxes (this all drops to the bottom line) and you get $27mm extra net income. At 30x this adds $810mm value to Ebay.

Third is the cross-fertilization of the user base. I think many more ebay users will start using skype than vice versa. However, making Paypal the payment method will help the conversion ratio of Skype users to Ebay users. Let's say only 1mm users (out of 50mm current) of Skype become Ebay users and 25mm become Paypal users. How much value does that add? That would add .7% to Ebay users and 33% to Paypal users. Using the admittedly simple break down of segment operating income, and discounting that by 50% (due to not being the ideal Ebay or Paypal user) I get additional annual operating income of $3.5mm due to additional Ebay users and $86mm due to Paypal users. Taking out taxes and multiplying at a 30x multiple yields: $1.6B in value.

2) Value of Skype as a standalone business

This comes down to two questions, it seems to me. One is how the industry evolves and two is how free calling is monetized. The industry could be a winner-take-all situation, where Skype is the leader. I think this is unlikely... a more likely situation is that different competing standards develop interoperability agreements. In the winner-take-all situation, if Skype wins, then the franchise is of enormous value. Let's assign that a probability of zero (otherwise, it overwhelms everything else). In the interoperability situation, it matters how Skype monetizes traffic and how many users to gets. Let's say that it captures 75% of Ebay's users and then triples that number of users before reaching a steady state with its competitors. That would yield 500mm users

With 500mm users, there are a few potential models. What about simple keyword-esque advertising (every time you place a call from your computer, your Skype monitor system shows a banner ad that is relevent to you)? If the average user places 5 calls a day, and can be monetized at $0.01/call then you are looking at revenues of $9.1B/year. At an operating margin of 30% and net margin of 18% (very conservative, I think - check out Google's margins for comparison), that would yield $1.64B/year in net income.

What about pay-per-call links for local plumbers, etc? How would this work? A skype phone book on the dashboard of your skype system where you enter zip code and type of service desired, and then dial. If service providers paid an average of $0.25/inbound call (which would have a high sales conversion probability given the lead generation), and Skype users placed an average of 1 call per week, this would generate revenue of $6.5B/year. At 20% net income, this generates $1.3B net income per year.

Obviously, these Skype numbers don't exist yet. It is more an argument about potential. To yield $4B worth of value (at 15x ultimate P/E multiple), you need this evolution to have a higher than 9% chance of happening. I think that is a worthwhile bet.

One other issue people might have with my numbers is that they believe google, microsoft, yahoo and aol all have good competitive products that are probably more likely to win. Perhaps... however, lots of people have multiple IM products (me, for instance) and it seems like a person will use whichever phone product allows you to link. Skype has a headstart, and now a huge marketing boost.

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