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Ebay: 'We Were Wrong'

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EBay has finally admitted it. It doesn't have a grand plan to fit its online calling service, Skype, into its e-commerce business. That's OK though, because Skype is starting to look a lot like what eBay used to be.

When eBay purchased Skype for $2.6 billion in 2005, it baffled many who didn't understand how the online commerce company could benefit from distributing the Skype software that allows its users to connect directly to one another over the Internet. EBay's pitch: Skype would help eBay users buy and sell goods.

"We were wrong," eBay Chief Executive John Donahoe told analysts and investors Wednesday at its San Jose, Calif., campus. "We thought it would reduce friction in commerce and payments.”

EBay, however, wasn't shy about talking about the prospects of a business it's been wrong about all these years. That's because the online calling start-up is starting to look a lot like the eBay of a decade ago: a fast-growing business that threatens to turn the communications industry inside out, much like eBay's online auctions did with retail more than a decade ago.

Josh Silverman--an eBay veteran who became the head of Skype in February 2008--said Skype is adding new users at a rate of 350,000 a day. It's on track to do more than 100 billion calling minutes in 2009 alone.

Telegeography estimates Skype accounted for 8% of the world's international calling. That translated into $550 million in revenue last year. And, adjusting for currency fluctuations, Skype's rate of growth is actually accelerating, Silverman says.

What's next? Silverman sees software as the key to the future of the communications business, as people turn their computers, handsets and flat-panel televisions into video-friendly communications hubs. His plan to seize that opportunity: make Skype's business more viral, push Skype's software into more devices, such as mobile phones, and make it easier for Skype's users to buy premium calling services. The goal: to hit more than $1 billion revenues in 2011.

EBay could use a good growth story right now. Last October, the company said it would lay off 1,000 workers--10% of its workforce--and so far this year, eBay shares are down more than 15% and more than 65% over the past five years. Shares of e-commerce rival Amazon, meanwhile, have soared despite the downturn, rising more than 30% this year and 50% over the past five years. Shares of eBay closed up 53 cents, or about 5%, to $11.63 in Wednesday trading.

To reignite its growth story, eBay is rebuilding its technology foundations, emphasizing sales of goods at a fixed price as its online auctions business declines and doubling the size of its PayPal online payments business over the next two years.

In short, eBay's new job isn't making Skype look more like the rest of eBay, but finding a way to make eBay look a little more like Skype again.

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