Tracking eBay's New Bid

The folks at eBay will undoubtedly be pleased to hear about the recent experiences of Austrian art dealer Alexander Zacke, who has sold antiques on the site since 1998. Zacke is one of the few eBay sellers who have combined their auctions with the free Internet telephone service Skype, which eBay bought last summer for $2.6 billion. In February, Zacke listed his Skype user name on an auction of 120 pieces of rare Chinese art, and invited potential bidders to call and talk to a Mandarin-speaking art expert. Suddenly, his remote, impersonal digital store carried the promise of a warm human voice. Those who spoke to the expert on average bid higher than those who did not, and the entire collection sold for $150,000, close to Zacke's eBay record for Asian art. "It's the sort of service that won't necessarily help you sell simple $10 items, but can really help with high-end, complicated sales," he says.

This week, the San Jose, Calif.-based eBay will see whether its multibillion-dollar bet on the Internet telephone firm will pay off just as handsomely. At its annual "eBay Live" convention, the company will announce plans to integrate Skype into its U.S. marketplace for the first time. Sellers can choose to include Skype buttons in their auctions for a few carefully chosen product categories, such as cars, real estate and diamond solitaire rings. CEO Meg Whitman hopes that this time-honored sales technique--good old-fashioned conversation--will generate more trust between buyers and sellers, and increase the number of sales--and eBay's commissions.

The stakes for eBay's integration of Skype are enormous. Over the last few years, the e-commerce giant has been furiously remaking itself to survive in an increasingly competitive, maturing industry. When NEWSWEEK put eBay on its cover four years ago, the company was purely an auction firm, growing fat from commissions on the sale of the doodads and gewgaws that sellers found in their attics. Its primary rival at the time was Amazon.com, and the rise of e-commerce fueled its growth rate and stock price. But as more people got comfortable buying all things online, eBay's expansion leveled off. Then came Google. The search leader is now one of the biggest blips on eBay's radar: it offers small businesses a way to advertise alongside search results and to lure Web surfers to their own sites. The threat from Google is so formidable that last month, eBay allied itself with Yahoo, striking a deal that allows Yahoo to place search ads on eBay.

Whitman, 49, has responded to eBay's new challenges by aggressively diversifying the company. She bought not just Skype but payment firm PayPal in 2002 and online retailer Shopping.com last year, and last month introduced eBay Express, which lets customers purchase new books, clothes and consumer electronics for fixed prices. Wall Street has viewed all these changes skeptically: eBay stock has fallen 31 percent over the last two years, and 23 percent since it bought Skype last summer. "The market has very low expectations for Skype. It was disappointed by eBay's acquisition," says Citigroup analyst Mark Mahaney.

Leading up to the sale, Skype looked like an incredibly appetizing meal for several com-panies. Headquartered in Luxembourg, the online telephone firm has added 100 million users in four years. By some accounts, it's the fastest-growing company in the history of the Web. When founders Niklas Zennstrom and Janus Friis offered their start-up for sale last year, Whitman reportedly outbid Google, Microsoft and Rupert Murdoch's News Corp. to get it. Her secret weapon: eBay founder Pierre Omidyar, who joined the negotiations at Whitman's request. In what must have seemed at the time like ill-advised candor, Omidyar and Whitman recommended to the Skype founders that their company was too full of promise to sell. "It wasn't a psychological ploy," Omidyar now says. "I was there to forge an honest, founder-to-founder relationship."

The Skype founders didn't listen to that advice, and now eBay must prove that buying Skype was worth it. The online telco will earn $200 million in revenues this year, eBay says, mostly from the small fees it charges users who make and receive calls to and from non-Skype users on regular telephone lines. That's a fraction of eBay's projected $5.7 billion in revenue for 2006. Whitman says the real opportunity lies in the potential synergies between Skype, eBay and PayPal. For example, in the next few years, Skype users will be able to send money via PayPal to their Skype buddies; all eBay auction categories will have Skype buttons, ideally greasing sales, and Skype on eBay will attract service businesses, such as dog walkers and plumbers, which rely on telephone calls to finalize deals.