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April 20, 2006

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Neal Lachman

Henry,

I agree with you on practically all fronts you mention in this post. Also, there is some major advantage coming up for ebay as it integrates the service into its own community usage and communication structure (buyers could call sellers), and more of such synergies.

The standalone skype business remains to be seen, however. I have Skype too, as a matter of fact with you on it. While you use Skype now as your primary business communication tool, I almost never use it. Along with me, there are a gazzillion of users who have downloaded skype, and pur just a handful of people on it, and never intends to use it on a continual or frequent basis. It is the same as with MS Netmeeting, great tool, and comes in handy if I want to give my system engineer remote access to my laptop or desktop when I am abroad or away. But I NEVER ever use it for any other purpose. Skype is -if I may say so- 50% Hype.

Henry Blodget

Agreed: The product (Skype) has a long way to go--in terms of quality, consistency, features (real business voicemail and general corporate numbers, for example), and integration with existing voice systems. In my opinion, however, the most important evidence of the company's health is the concurrent user number, which has doubled in 6 months. Yes, plenty of people leave it on all the time (me). But plenty more are apparently using it, or the revenue wouldn't be growing as fast as it is.

Is long-term success in this business a slam-dunk? Of course not. But the early metrics are good, and Skype has a hell of a lead.

Neal Lachman

True, revenue is growing, but that may be basically or largely from people switching for the first time to Skype. This, in effect is then a trial period, which thus does not guarantee future growth. Of course, the new batch of new users will maybe again create some revenue (and growth) but the userbase is not endless.

I think this whole PC-to-PC calling is overrated, and if people are not going to get an easy-to-use and plug and play off-PC solution, the growthcurve for Skype will show a downward trend, soon. Competitive offerings and new entrants in the industry left aside, Skype has to improve its business model and its service offering in order to become and then remain a force to be reckoned with.

If the Skype service is just going to add some bells and whistles to its current offering, I don't see them being much different or much better than MS Netmeeting or any other instant messaging (AIM/MSN/YAHOO, ETC) or online collaboration application.

Alexander

I don't like ebay's risk/reward ratio. Here is why

-ebay’s chart is increasingly showing signs of weakening sentiment
-momentum in its sector (goog, yhoo,..) is ebbing away
-I'm aware of the powerful network effects of ebay's business model. But I think many people underestimate ebay's low switching costs
-ebay’s stock still reflect high expectations (still 20% revenue growth over the next 5 years with stable margins) (I use reverse discounted cash flow to assess growth and margins expectations); there is substantial downside risk if growth/margins continues to weaken
-Goog will most likely continue to deflate, putting
pressure on ebay & yhoo…
-ebay is seeing increased competition from goog, amzn, yhoo, msft. They all are increasinly competing with each other
-Skype is starting to see increased competition from
Telco carriers and new emerging ISPs. In fact, carriers are starting to develop multiple services (including voice) over their IP networks....IMO, some years from now, people will be wondering how in the world ebay could pay so much for skype
-I don't like ebay's charts at all. The same holds for yhoo, goog
-I don’t exclude the possibility that ebay will go
back to 30…or even lower. It's my opinion we are already in down trend. Most of the time, a trend is your friend

Robert

Neal,
with all due respect, Skype/Ebay is risk vs reward. that's what
investing is all about. you know better than I.

Alexander Muylle

IMHo, there is much more downside risk than upside potential.

ekc

I would like to know what Henry or any of the knowledgeable people reading this site have to say about techdirt's opinion of skype's financials. I am very new to reading financial statements and would like to see a discussion of the topic to help further my own opinion because, at this point, I have no idea either way.

I also posted a similar comment to this on techdirt

Henry Blodget

With all due respect to Om (Techdirt links to his analysis), I don't understand the conclusion. Om suggests that Skype will have to increase daily revenue by 50% to hit its internal target of $200 million in revenue this year. Revenue grew 42% sequentially last quarter--which means it should exceed the "50%" hurdle early in Q3. Using a reasonable quarterly extrapolation of the growth rate (i.e., deceleration to 30% sequential in Q3 and Q4), I get to about $225 million, comfortably ahead of the $200 target. So I don't understand why Om concludes that the company isn't on track to do that.

Carlo Longino

Om's math makes sense, and is actually even more revealing -- showing that Skype's revenue growth is actually only about half of what eBay says it is. Check out my response to your comment and the update to my post on Techdirt.

Henry Blodget

I don't understand why it "makes sense" to simply annualize a Q1 growth rate for a company growing this fast (which seems to be Om's implication: They aren't at a $200 million run-rate yet, so therefore they aren't going to make it). This said, Carlo (and Om) correctly point out that Skype's $25 million in revenue for Q4 only included 75 days of the quarter, a point I missed. So the true q/q sequential growth rate was probably in the neighborhood of 30%. Extrapolating this growth rate (with modest deceleration) still gets you to $200 million, not the $225 million I estimated above.

Steve D

eBay and Yahoo should do a merger of equals. If they are smart and do not go into power struggle, but do what makes very perfect sense, they will become a much stronger as a combined company.

Why Yahoo should do it?
- Yahoo should focus more attention and resources on search and content. Yahoo should re-brand itself as Yahoo ‘The Search Company’. The logo should change to add ‘The Search Company’ just below ‘Yahoo!’. Yahoo should clean up the front page and make search more prominent
- By consolidating and leaving other areas like ecommerce and communication to the laser focused eBay and Skype, Yahoo can become laser focused on search to win market share back from Google.
- Further diversify advertising revenues to transaction fees.
- Gain access to PayPal, which is the missing link for Yahoo to implement pay-per-sale scenarios.
- Gain access to eBay’s knowledge of consumer behavior data (what’s selling at which prices, etc, etc) to integrate that into search marketing.
- Being able to switch more of eBay spending on advertising from Google and MSN to it’s own platform


Why eBay should do it?
- Gain access to #2 search leader in terms of technology and market share to become one-stop provider of tools to help sellers. Sellers find buyers either through a search or through eBay listing – both are powerful ways to find buyers and currently each company has only one part of the equation.
- Seamlessly integrate eBay Stores and ProStores to bid for search keywords.
- Gain access to Yahoo’s mapping technology. A lot of information is better when presented as a map – for example for Rent.com or eBay Local.
- Gain access to Yahoo Email and Calendar to complete feature set of Skype offering
- Integrate Yahoo Messenger with Skype to further solidify the combines network effect. Yahoo Messenger is very strong in US and internationally it’s second to MSN Messenger, while Skype users are mostly international. Combining Skype and Yahoo messenger will help Skype in US and help Yahoo Messenger internationally.
- Make Yahoo Shopping as distribution channel for eBay Express. eBay sellers will be very happy to get additional exposure – just list once on eBay and your listing will show up on eBay itself + eBay Express + Yahoo Shopping. It’s also possible to strike partnership with let’s say MSN Shopping for them to distribute eBay Express listings for a cut of transaction fees.
- Gain Yahoo Auctions in Japan


Yahoo must do something to better compete with Google on the one hand and with Microsoft on the other hand. They need more focus and innovation. In the combined company, Skype will take care of communication in a laser focused way. Ebay will take care of marketplaces and ecommerce in a laser focused way. Yahoo management will have fewer worries about how to grow and innovate in those areas – they will have clearer mind to think of search and content.

Henry Blodget

I think there is a lot to be said for that idea, especially if Google really does begin to gain traction in eBay's business.

Neal Lachman

http://www.msnbc.msn.com/id/12419257/

EBay said in talks with Yahoo, Microsoft
Auction giant reportedly looking for allies against Google

Steve D

I think it's pretty big news that eBay is in talks and considering Yahoo, MSN, or Google as a provider of ads. eBay is the last untapped property on the planet which does not display ads in a meaningful way. In exchange for distributing ads, eBay wants to get the selected partner to start integrating and promoting PayPal and Skype - which in itself is very positive news for eBay, but more significantly, imagine if eBay implemented this scheme:

If Ebay started to display pay-per-click ads on every auction (like Yahoo did), that would upset a lot of sellers because they pay listing and final value fees and want to control content and layout of their auctions. However, Ebay could introduce this optional feature - if a seller decides to include pay-per-click ads into his auction, Ebay would split 50%-50% of all proceeds with that seller up to the amount of fees a seller owns to Ebay - thus preventing abuse of submitting auctions just for the sake of generating clicks. Furthermore, clicks from IP address from which an action was submitted, would not count and all counter fraud measures could be implemented.

In my opinion, this would be a very substantial revenue source for Ebay by itself and as an extra benefit, encourage sellers to post even more auctions in hope listing fees will be subsidized by pay-per-click.

Is it time to load on eBay stock (already very attractively valued after 15% panic sell off) in anticipation of earnings accelerating due to profits made through ads on the one hand and maybe wider usage of PayPal and Skype on the other hand?

It seems regardless if current gossips are true or not, eBay is leaving tons of money by not devising some clever plan to implement ads and share some profit with eBay sellers. If current talks don't yield anything, the next ones will, because they finally made up their mind to seriously explore this opportunity.

Neal Lachman


Steve D,

Nice scenario and good thinking. I have another scenario.

While Ebay, Skype, Google and so on are flying high in the internet business today there are very big dangers ahead for them.

Over the last month or so I have received information from challengers of many of today's Internet players. The investments they require are huge, larger than 99% of the VCs can cope with. That's why they approach my firm.

It is simply amazing how much money there is to be made with the challengers of the establishment. I have the intention to invest in almost all of these challengers, simply because I believe that the current business models are NOT rock solid. The current Internet businesses are working fine because there are no inventive challengers today except the established competition, which is a chicken and egg story.

Steve D

just want to post a few more thoughts on eBay/Yahoo merger I am running through in my mind:

I view both companies as in the business of helping sellers. There are many things manufactured and sold on this planet and both Yahoo and more obviously eBay are building and running platforms to help sellers - Yahoo through search and brand building and eBay through marketplace listings. All three ways (search, brand building, and listings) are just different ways to help sellers. Currently, each company has in its arsenal one way to help sellers, but none of them has all three ways. To me, it's plain obvious that as a combined company, YahooBay will have extremely scalable offering being able to help from occasional guy trying to sell his used iPod to small business and all the way to Fortune 500 companies.

With the above said, just a few more thoughts:
1. Business Model - sellers find buyers either through a search or through marketplace listings – both are powerful ways to find buyers and currently each company has only one part of the equation. The business model of the combined company is helping sellers to acquire buyers through search, marketplaces, and brand building by building and running the platform. The platform itself is juiced up with content (both user and studio created) and social networking.
2. R&D - With Google raising the bar in capital and R&D investments, it’s becoming increasingly expensive to maintain competitive position and innovate. By merging, the combined company will be able to spend more on R&D.
3. Laser Focus - Yahoo Search, eBay Marketplaces, PayPal, and Skype – each doing the best they can in a laser focused way. Yahoo currently is big conglomerate of tools and services one mile broad and one inch deep. They are not a leader in any of the specific categories, though combined their properties bring the highest traffic. By becoming laser focused on search and underlying content, they will be able to do a better job. Let eBay take care of marketplaces, PayPal of payments, and Skype of communication.
4. Brand – Yahoo should re-brand itself as ‘The Search Company” and put ‘The Search Company’ just below ‘Yahoo’ on its logo. Yahoo should be all about making it simple and convenient to find things – either through 1) ad-hoc general purpose search query or through 2) a pre-organized special purpose tool like Y!News, Y!Finance, Y!Sports, Y!Maps, Y!Travel, Y!YellowPages, Y!Jobs, Y!Music, Y!Muvies, etc, etc, while ecommerce and communication should be given to eBay and Skype, who are laser focused on those areas.
5. Synergies – eBay and Yahoo are excellent standalone businesses. But they also have so many ways to take advantage of synergies to improve competitive position. Opportunities are really big here. I can break down this item into more than 20 bullet points.
6. Ego and power struggle – it’s not a big secret that top management of almost all big companies has ego and ambitions bigger than life. I just hope eBay and Yahoo put aside their imperfections of human nature and do what makes sense to better compete against Google
7. Ads on eBay and Shopping.com - eBay is the last untapped major property on the planet which does not display ads in a meaningful way. If Ebay started to display pay-per-click ads on every auction (like Yahoo did), that would upset a lot of sellers because they pay listing and final value fees and want to control content and layout of their auctions. However, Ebay could introduce this optional feature or devise some other clever scheme to share pay-per-click revenues with sellers- if a seller decides to include pay-per-click ads into his auction, Ebay would split 50%-50% of all proceeds with that seller up to the amount of fees a seller owns to Ebay - thus preventing abuse of submitting auctions just for the sake of generating clicks. Furthermore, clicks from IP address from which an action was submitted, would not count and all counter fraud measures could be implemented. This would be a very substantial revenue source for Ebay and Yahoo by itself and as an extra benefit, encourage sellers to post even more listings in hope listing fees will be subsidized by pay-per-click. The sheer size of eBay’s untapped and highly shopping specific traffic makes this extremely lucrative opportunity.

The above views also apply to Google/Ebay combination, but that's very unlikely that Google will buy eBay.

Neal Lachman

Steve D,

Once upon a time an internet company bought a media company, and it was hailed as the first of a new flood of industry-changing and synergetic mergers and acquisitions. That was AOL/TW.

Often, things that seems to make sense are not what everybody thinks.

Consolidation in internet industry is not yet going to happen. M&As are also not going to happen, because this doesn't fit in the executive's bottom-lines. There is too much to be had on their own, why then should they even think to merge or (be) acquire(d)?

A secret among exectuives is that they will never try to change a winning team, or "try to fix something if it ain't broken".

I have the feeling that these giants will one day wake up, only to see that some new but well-funded competitor is quickly gaining traction. I think new challengers will be the next big thing in the internet industry, and they will be more profitable, with a larger market cap within a decade than the ones we know now. The internet industry is now in its teenage years, it is not fully grown, and although these teenagers think they know all that can be known, you and I know that it is often overconfidence and simple ignorance.


Steve D

Quite interesting:

ON World predicts that by 2011 Skype will have 25 per cent of the world's VoIP users and $1.2bn in voice services revenues.

The report was based on interviews with electronics retailers and 100 "key technology influencers" in several consumer markets.

http://www.vnunet.com/vnunet/news/2156701/wi-voip-ipod-attract-100m-users

PJ Brady

Just to add to the debate around Skype. It is true there are several alternative methods of talking using the internet. But that is the problem with every single business model of the VOIP companies. Lets say skype is the dominant and in 2007 the market will have a potential user base of 150,000,000. Skype already has 60,000,000 of that potential realised. For a competing VOIP to win market share it must have large revenue or significant IPO type or venture capital funding. However, it's near neighbours in the much hyped VOIP space will also have IPO and VC funding. Simple as this, it is financially, and user base growth point of view impossible to get anywhere near Skypes user base over the next two years. The most popular website on the planet Google offered Gtalk on its search engine and in its Gmail and it is still not even anywhere near. So we can immediately and dismiss there being any chance of a "new" operator in town.
Does anyone have any background on how Vonage is doing? I just looked up their website and in my usual manner I have decided to dismiss them as serious competition (that felt good ;)). Vonage looks like a monthly plan that you are tied into. That is not a serious threat to skype. In my reasoning it all boils down to consumer psychology. People do not like to have a sense of being locked into monthly payment plans. They much prefer to get a free download and top up whenever they feel like. No one in Ireland is talking about Vonage. But we're all "talking" on Skype.

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