Can you spell "bubble?"

Submitted by acohill on Tue, 09/13/2005 - 07:40

The news outlets are all carrying the story of eBay paying $4 billion for Skype.

I do think Voice over IP telephony is going to replace analog phone service, and that the transition will happen faster than many think, but Skype is hardly workth $4 billion USD.

Here is the problem: The technology Skype has is nothing special. There are not only competing commercial products, but there are plenty of Open Source VoIP projects as well, like Gizmo. And Gizmo shows every sign of being a big hit.

So what will eBay get for it's money? Skype has some twenty or thirty million "users" of its free version, and a much smaller number of paying users. I put the word "users" in quotes because trying to count who actually uses free software is mostly a wild guess. The most popular way to do it is to count the number of downloads, which does not mean much. Many people download free software and never use it even once, or fire it up once or twice and then forget about it.

So eBay does not get a large base of established users, and even the smaller group of users that have paid to use Skype's ability to connect to the existing phone network is suspect--making one paid phone call makes you a "Skype" customer but does not translate automatically into a recurring revenue stream.

VoIP is the killer app for broadband, just as email was the killer app for dial up Internet service. Many people who otherwise would not bother upgrading their dial up connection will do so to save money on phone service. In many cases, the savings pay for the increased cost of the broadband connection.

So there is much interest in trying to capture the VoIP market. The Skype guys are really smart; they followed the now classic formula for establishing a new market and then selling high, before they a) run into competition, or b) actually have to provide a reasonable level of service.

The problem eBay has is that it's very easy to switch from one piece of VoIP software to the other. The second, and much bigger problem, is that there is no established standard for "Internet phone numbers." The free version of Skype works only with other Skype users, and you have to know their Skype number in advance. Ditto for other free VoIP services. And voice telephony is only useful if the people you want to call use the same software that you do.

If Open Source projects like Gizmo succeed in establishing a standard "phone number," eBay is out $4 billion. And Gizmo, or something like it, has a good shot at doing so. Once that happens, plain old telephone service (POTS) is free, and eBay is out of luck.

We're entering into a VoIP bubble. We'll see more big, outlandish deals for VoIP software. And most of them will amount to nothing.