VOIP: Google, eBay and Internet Telephony

05 October 2005

Rhys Williams, Jessica Jones

Google and eBay's decision to invest in VOIP services, resulting in a marked departure from their core activities, has surprised many industry analysts.

After the disappointments and false starts of recent years, a number of recent developments in the online communications market are presenting strong evidence not only of renewed confidence in a sector that has never fully recovered from the dot-bomb crash of 2000-2001, but also that convergence may be embraced by new technologists and e-commerce operators faster than more traditional communications companies.

On 24 August 2005, Google launched Google Talk, an instant messaging system that also allows customers to make voice calls over the internet. Two weeks later, eBay splashed out $2.6bn (£1.4bn) to buy Skype, the VOIP company, and if certain performance targets are met, the price will rise by an additional $1.5bn.

Which raises the question: is this the dawn of a new era of growth and expansion in e-commerce, or simply another disturbingly familiar false dawn? Or, put another way, what on earth are Google and eBay thinking?

This is a valid question to ask. A company that has demonstrated a prowess in permitting people to search its online database, now decides to launch a voice telephony service, which requires expertise in areas such as customer service in which it has no experience. Another company that has demonstrated a prowess in running an online auction business now decides to purchase an unprofitable telecoms company, again with no previous experience in the field.

While other companies continue to boost the global outsourcing market by focussing on their core activities, two of the largest e-commerce companies in the world have opted to adopt an entirely contrary strategy, by moving into new and uncertain markets quite distinct from their own core markets.

Google Talk

The Google Talk system combines internet telephony with an instant messaging network and builds on the Gmail e-mail service that was launched in March 2004.

Basically, it is a downloadable Windows application that enables users to talk or send instant messages to their friends for free. Calls are made through a computer using the latest voice technology; all Google's customers need is a computer with Windows 2000, Windows XP (Home & Pro), or Windows Server 2003, an internet connection, a microphone and a speaker. A minimum 56k dial up connection is required, but a broadband connection is recommended for obvious reasons.

At first glance, however, a combined instant messaging/net phone system might be seen as a strange service for Google to launch, not least because its rivals are substantially ahead in terms of both users and experience.


AOL is currently the world leader in instant messaging with over 41million customers signed up, and both Microsoft and Yahoo! have made relatively recent acquisitions (of Teleo and DialPad respectively) that indicate that they intend to extend their instant messaging services to include mobile telephony in the near future. In addition, the Microsoft and Yahoo! acquisitions will let users of their instant messaging services connect to the wider telephone network, overcoming a factor that had previously limited the services' value.

Skype is currently the market leader in internet phone calls with over 55million users worldwide. Internet voice calls to other Skype users are free, and the service can also be used to call landlines and mobiles for a charge. Subscribers can make savings of 80% on their phone bills over users of traditional carriers.

Of the traditional telcos, BT, whose landlines connect seven out of ten British households, has a mobile telephony service called Broadband Voice which costs a minimal monthly subscription fee. Local and national calls thereafter are free at evenings and weekends and cost 3p a minute at other times.


Google Talk will initially only enable PC-to-PC communication, while (as noted above) competitors such as Skype allow calls from PCs to land lines and mobile phones. In addition, users of Google Talk must also have a Gmail account and the service is currently only available through referrals from friends, although Google has committed to making it simpler to sign up in the future.

So how is Google Talk seeking to distinguish itself from its competitors? Crucial to its potential success is Google's aim to attract users to its instant messaging system through its offer of compatibility with the relatively closed networks of its rivals.

AOL, MSN and Yahoo try to restrict the ability of their customers to talk to users of competitors' networks or services, not least because they do not wish to open their networks and risk diluting or relinquishing their control over their customers.

This position may be about to change.

When instant messaging first started to grow in popularity a few years ago, there were two fledgling IM protocols making their way through the Internet Engineering Task Force (IETF) standardization process: SIMPLE, based on the SIP (Session Initiation Protocol) telephony protocol, and XMPP, based on XML. For a while, the relationship between SIMPLE and XMPP closely echoed that between BetaMax and VHS.

Corporate vendors such as Microsoft and IBM lined up behind SIP and SIMPLE, while XMPP gained traction with Jabber and implementations at companies such as Apple, HP, and France Telecom. XMPP last year received official IETF ratification, while SIMPLE is still working its way through development in the IETF.

Google's decision to base its Google Talk IM on XMPP is an important one. The company has said it is committed to enabling open communications, and selecting an open, XML-based protocol for its IM service is a step in that direction.

It may also act as a stimulus for other developers to enter the market.

Skype has responded by announcing it, too, will open its platform to others.

eBay and Skype

On a preliminary analysis, eBay and Skype may appear to have little in common, other than that both operate online. Several analysts have, therefore, questioned the benefits eBay will gain from its purchase of the VOIP services provider, although eBay itself has argued that, by adding Skype to its stable (along with PayPal), it will be able to increase the velocity of trade on its auction site by permitting buyers and sellers to speak to each other quickly and cheaply. Others have pointed out that it has also purchased a substantial number of customers, the vast majority of whom are based outside the USA, where eBay has most of its own customers, and where market growth is slowing. Both eBay and PayPal would no doubt love to increase their presence in markets in China, India and Russia.

In addition, most of the net's big portals, such as Google, AOL or MSN, make most of their revenue from third parties, in particular through advertising. In order to keep the advertisers coming back, it is essential to keep the ordinary customers coming back and, in order to attract and retain these customers, portals have to offer an increasingly large portfolio of services. And this is where the purchase of Skype opens up all kinds of possibilities for eBay.

At the moment most people use Skype for cheap telephone calls from their computer. By combining Skype with PayPal, it will be possible to link a PayPal wallet to each Skype account, making it much easier for subscribers to pay for Skype's fee-based services whilst simultaneously boosting the number of PayPal accounts and increasing payment volume.

Indeed, it can only be a matter of time before sellers on eBay are paying eBay to receive Skype telephone calls from potential purchasers in a similar way to how advertisers already pay Google for listings following relevant searches of Google's database.

Google will also continue to make money through placing advertisements targeted at the subject matter of an email on Gmail, which will enable it to launch Google Talk free of advertisements, making it even more attractive to early adopter customers.


eBay and Google, by combining e-commerce with VOIP, have revolutionised the entire telecom industry. If other internet portal players follow their lead, traditional telecom companies, who are already struggling to keep pace with a rapidly changing industry, will be facing significant new competitors.

In a report published on the 24 of August, the OECD said that the growing popularity of internet telephony was posing a threat to the revenues of fixed-line and mobile operators. According to the report, the number of fixed lines fell for the first time ever in 2003, and Skype subscribers were able to make savings of 80% on their telephone calls over users of traditional carriers. The report suggested that 50% of the world's telephone traffic could travel through the internet rather than traditional networks by 2006.

On balance, both the eBay and Google deals, although risky, appear to be extremely positive. Investors have found the confidence to invest in these companies; initial cross-selling opportunities are obvious and more will be identified over time; and both eBay and Google have established extremely strong brands and have already demonstrated an ability to succeed in the online marketplace. It will be fascinating to observe how they deal with the undoubted challenges ahead.

First published in Volume 7 Issue 9 of Ecommerce Law & Policy - September 2005.