Yahoo! to Kill Skype? Andy Thinks So.

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Reader Bob Estrada links to Andy Abramson's excellent analysis of Yahoo! voice offering, which concludes that it may be Skype that is soon checkmated, not everyone else.  Key to the argument is pricing power (Yahoo!, AOL, et al can undercut Skype), pre-existing messenger user bases, and full immersion of voice capability in Yahoo!'s community-oriented content.

Andy's the expert here and has seen a detailed briefing on Yahoo!'s offering (which I have not).  His analysis is thoughtful, careful, and persuasive.  His arguments again make me think that of the big five--Yahoo!, AOL, MSN, Google, and eBay--eBay was the worst-possible Skype partner from a strategic perspective.

This said, many of the arguments applied to previous products and services in which Yahoo! (and others) seemed poised to dominate and then found gaining market share frustratingly difficult.  Two examples: auctions and search. 

In auctions, back in the late 90s, Yahoo! had a huge cost and community advantage over eBay: (Yahoo!'s auctions were free, and eBay offered nothing else).  The assumption, therefore, was that Yahoo!'s roll-out of the auction capability would quickly erode eBay's early market lead.  Secondly, when Yahoo! finally clued into the fact that Google was eating its lunch on the search side, the response seemed a simple matter of upgrading algorithms and adding Overture.  And, in both cases, now look where we are.

In my opinion the biggest potential advantage Yahoo! has in voice is that voice is probably best viewed as an add-on capability to messenger--an application that should be directly linked to one's address book, email, and IM capabilities.  As a Yahoo! user, I've been waiting around for the voice capability instead of getting established on Skype, and I suspect others have as well.

This said, many others have not, and Skype's biggest advantage is its current rate of new-user growth, its existing user base, the network effect, and the fact that its brand has already become a verb.  The more folks who build Skype buddy lists and the more mindshare Skype grabs, the harder it is going to be for Yahoo! (or anyone else) to dislodge the company, even if users would benefit from having all their communications capabilities built into the same platform.  Skype's cost, furthermore, is already so low, that offering a cheaper service won't likely be a powerful competitive advantage (and, if it turns out to be, eBay can cut prices, too).

All of which is to say that the next few months will be critical.

Comments

[Steve D]

I think almost everybody misunderstands Ebay's intention and business model they plan for Skype. Ebay openly predicts that within 3-5 years all phone calls will be free. Yahoo's plan to undercut Skype rates is clear evidence that it's already happening and the conversion to free calls might take even less than the predicted 3-5 years. When buying Skype, Ebay knew this was coming. I bet they did not buy Skype just to collect phone fees for those 3-5 years. In my mind, this clearly proves that Ebay has a totally different plan.

And what can that plan be? Ebay itself gave only vague indications what they plan to do with Skype. One plan is to use Skype to remove friction in trading complex and/or expensive goods on Ebay marketplace. Imagine you want to bid for a pricey item and you start a video call to the seller and he rotates the item in front of his webcam and shows its condition, let alone proves that he has the item indeed. This functionality, natively integrated into Ebay, will no doubt make buyers more comfortable in buying through Ebay and this will drive trade volume and reduction in fraud.

They also mentioned entering new markets. One can only speculate what markets they meant, but one potentiality truly stands out - interactive yellow pages - pay-per-call - whatever you call it. They want to become a player in local trade.

There are great numbers of local businesses which don't have a website and rely exclusively on walk-in sales and yellow pages/local newspaper ads. Even those who have a website, still have to drive traffic to it and instead might prefer just driving phone call traffic to driving traffic to a website (moreover, the website is another cost item to them on top of traffic).

Yellow pages is a very high margin business and judging by the thickness of yellow pages books, quite many buy ads - the ads display mostly phone numbers and relevant description. And it seems local businesses keep buying ads in yellow pages - it's been a practice for many years - and this shows that there is ROI for them. Combine yellow pages with fastness of internet search, feedback/review system, and maps/driving directions, and it seems the resulting service will be way more superior to plain yellow pages book. Embed the above functionality right into Skype client (as a separate tab) and it's right away introduced to all those millions of savvy users - users who already have USB phones/headsets and who are comfortable to use internet calling.

It seems obvious that growth in pay-per-click will come at the expense of yellow pages and that's a multi-billion dollar business. The functionality for consumers can and will be made vastly superior to paper books and this will drive consumer adoption. The do-it-yourself ability to control ROI for advertisers by means of auction instead of dealing with arbitrary pricing and advance payments to phone companies will drive advertiser adoption.

None of the big 5 (Yahoo, Google, MSN, AOL, Ebay) have much to show when it comes to local business. But unlike others, Ebay is laser focused on enabling trade and if the goal to is to become enabler of local trade, Ebay seems the best company among the big 5 to succeed. Like I said above, very many locals don't even bother with a website and the smaller the business is - the more likely it's to be the case. Walk-in sales, phone calls, and word of mouth are their only distribution channels and that's where Skype comes into play. Feedback system will tend to supersede word of mouth channel.

The business model for Skype in not in making money on plain calling - this will dry off within next 3-5 years. The business model for Skype is to supersede Yellow Pages as a advertising platform for those millions of local mom and pop businesses. From this perspective, it's quite irrelevant that Yahoo is planning to undercut Skype on phone fees - they will not enjoy that advantage for any meaningful period of time - all fees are tending to zero anyway. And because the cannibalize-proof business model of Skype is tied to trade, Ebay seems the best match because they are laser focused on enabling trade.

[Network]

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