Skype me on MySpace, not eBay

October 16, 2007: 11:16 PM ET

One company's trash is another company's treasure. Just weeks after eBay (EBAY) essentially admitted it overpaid for its $3.1 billion acquisition of Skype, another major company has found a better use for the Internet telephone service.

MySpace (NWS) will announce on Wednesday that it will lets its members call each other for free by adding Skype to online chat. MySpace and Skype will share revenue for paid services like calling to landlines or voice mailboxes, but specific details were not disclosed. "This is a great fit. It's an obvious fit," says Kyle Brinkman, MySpace VP of product development. "Instant messaging is a fundamental way our users communicate. Integrating Skype's voice technology will extend the core experience of MySpace users."

As part of its new alliance, MySpace says it will build Skype right into its social network. Starting in November, members will be allowed to click on a link and make Skype calls to other members. They'll also be able to link their Skype buddy list to their MySpace profile. Likewise, Skype will prominently display a MySpace window into its application and let its users add their MySpace buddies.

eBay bought Skype in 2005 and has since struggled to find a way to make money off its free users. Skype is free when one Skype user calls another from a computer. It charges people by the minute when they dial to a landline or a mobile number. But the service fell short of expected revenue targets, and eBay took a $1.4 billion write-off on the calling service two weeks ago. eBay is expected to address the impairment charge and how it betters plans to grow Skype's business during its third quarter earnings call Wednesday.

eBay has also struggled to integrate Skype into its auction site. eBay's top sellers complained that offering Skype during an auction listing meant it'd force them to be a 24-hour customer service to potential buyers. Wall Street wasn't sold on the concept either. "When eBay announced it was interested in Skype, it just didn't make sense," says Scott Kessler, an analyst with Standard & Poor. "A good rule of thumb for acquisitions is that if you can't make sense of it in a very short order, than chances are you'll have trouble with it."

While MySpace will need to figure out a better way to turn Skype's largely free user base into paying customers, the Internet phone service may ultimately be a better fit with the social networking crowd. Both parties hope to leverage each other's networks to build up user base in geographies they've had trouble growing. Skype has 220 million registered users and is popular overseas, but the calling service has trouble recruiting customers back home. MySpace, with 110 million active members, has the reverse problem with growing its base outside of the U.S.

The top social networking site launched MySpaceIM, its online chat service, in May 2006 and has grown to 8 million active users with minimal marketing. MySpace's IM user base still trails far behind the top three online messaging services - AOL (AOL), Microsoft (MSFT) and Yahoo (YHOO). The three top chat services already offer voice calls.

Adding a Skype button is not new to social networking. Both Bebo and Facebook let users download the Internet calling service to include on member pages. Other VoIP clients like Jaxtr and Jangl are also available. MySpace says it's been in talks with Skype for at least two years about introducing Internet phone calls to its social network. "This is a really tight relationship with Skype that no one else has," Brinkman says. "This will be a much better experience for our users."

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About This Author
Michal Lev-Ram
Michal Lev-Ram
Writer, Fortune

Based in Silicon Valley, Michal Lev-Ram covers enterprise and mobile technologies for FORTUNE. Prior to joining FORTUNE, she wrote for CNNMoney, Fast Company, Popular Science and other business and technology publications. She was also a staff writer at Business 2.0 and holds a B.A. in journalism from San Francisco State University.

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