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Last Updated: Friday, 9 September 2005, 11:30 GMT 12:30 UK
EBay in Skype talks, reports say
eBay logo at its headquarters
Analysts have questioned why eBay needs to buy Skype
Online auction site eBay is rumoured to be in talks to buy Skype Technologies, an internet phone firm that is helping revolutionise the telecoms industry.

Reports claim that eBay may pay between $2bn (1.1bn) and $3bn for Skype.

Skype's software lets computer users talk to each other for free, and allows them make cut-price calls to phones.

The potential for this sort of service is such that firms including Microsoft, Google, Yahoo and AOL are battling to offer their own versions.

Google recently launched its Talk service, while Microsoft purchased leading player Teleo for an undisclosed sum.

Skype has already been linked to a number of other suitors, including Rupert Murdoch's News Corp and internet search engine Google.

Growth market?

Technology used by Skype, and rivals such as Vonage, converts phone conversations into packets of data and transmits them down the same wires used to surf the internet.

With a Voice over Internet Protocol service (VoIP) computer users can talk to each other via a headset, or microphone and speakers, and even make calls to landlines and mobile phones at low rates.

Some systems allow users to plug their traditional phones into a desktop box that allows them to make VoIP calls.

Two computers, on an image of a globe, talking to each other
I don't see a lot of point to eBay buying Skype
Martin Pyykkonen, an analyst at Hoefer Arnett

Analysts are optimistic about the system's future, especially as an increasing number of consumers are becoming more computer savvy.

According to Lehman Brothers and comScore Media Metrix, VoIP telephony revenues are set to nearly double to almost $8bn over the next few years.

International Data Group estimates that up to 11% of UK broadband users will have a VoIP service by 2007.

Skype reckons that more than 2 million people are using its software at any given moment, adding that the free program has been downloaded more than 151 million times since it was introduced in 2003.

The company does not release earnings figures.

Vonage, the largest internet phone company, has close to 1 million subscribers who pay $25 a month to use its service.

'Big move away'

Despite the optimism surrounding VoIP services, analysts were less happy about the fact that eBay may be bidding for Skype.

"I don't see a lot of point to eBay buying Skype," said Martin Pyykkonen, an analyst at Hoefer Arnett.

"If eBay were to make this sort of move it would basically be admitting that 'our core market is decelerating.'"

EBay's shares dropped almost 4% to $38.93 on Thursday as the rumours about its bid swirled.

The company has been buying up firms - including payment system PayPal - in an effort to increase the number of services it offers consumers and keep profit growth.

Media reports speculate that as well as looking to tap into the growing internet phone market, eBay is also attracted by the idea of letting its buyers and sellers talk to each other via their computers.

"This would be a big move away from the auction business for eBay," said Jeff Kagan, an independent telecoms analyst. "It could be a sign of a change in strategy for the company as the telecoms industry begins to explode again."

Skype has options other than being bought out, and has hired Morgan Stanley to look at all its possibilities including a stock market floatation.

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