Behind Skype's IPO hype is a glimpse of some of the pressure on CEO John Donahoe to turnaround eBay's ( EBAY) slumping core business. eBay announced plans Tuesday to spin Skype off in a public offering next year, a move seen by analysts as a way to put a price on the business. The founders of the Luxembourg-based Internet calling shop have reportedly explored financing to buy Skype back. Skype never made sense as a supplement to eBay's ecommerce business. And the $3.1 billion eBay paid for it, including performance payments, continues to look like a zany mistake. The largely free social networking service generates annual revenue per user of $1.49. But Skype is the least of eBay's worries. Donahoe is focused on the collapse of the Internet auction business model and the growing threat from Internet retailers, namely Amazon ( AMZN). Impulsive online shoppers have increasingly shunned the lengthy auction process in favor of the instant gratification of an Amazon purchase. And with the growth of Amazon's third-party service, which links independent sellers with shoppers, eBay customers are fleeing in big numbers. According to recent report on February traffic, Majestic Research says slightly more than half of eBay's customers also visited Amazon. That is up from 45% in February 2008. eBay has tried to adapt by offering more "buy it now" options and catalogs or lists of products also available from the seller or related to the item of interest. But the erosion continues.
"We believe weak consumer demand, seller frustration, and the availability of attractive alternatives will prevent a near-term recovery in marketplace fundamentals, William Blair analyst Jack Murphy wrote in a note Wednesday. eBay would like to auction off Skype to the highest bidder in an IPO, but that won't necessarily fix its broken auction business.