Internet Outsider

SkypeFind + SkypePrime = Skype is Desperate

In a move that says more about the revenue potential of its core business than any numbers reported to date, Skype announced the launch of two new products that have little to do with the core service and are already widely available elsewhere: local product reviews and a monetize-yourself expert network directory. 

This strategy, of course, mimics the one that resulted in eBay buying Skype in the first place ("Core business decelerating?  Quick, acquire a fast-growing company in a completely unrelated business and then think of a way to explain it!").  Just because there is precedent for this strategy doesn't mean it's a good one.

The local restaurant/product/etc review business is a tough nut to crack, and companies with far more resources than Skype's have found it slow going.  Keen and other companies, meanwhile, have been at the telephone-expert opportunity for years, and they haven't hit the jackpot. 

If Skype didn't have another business to run, none of this would matter.  But it does.  And this Skype user, at least, can think of a hundred things that Skype could do to improve its basic service before it rushes off to compete with Google, Yahoo, Ingenio, and others in un-related businesses.  (Such as?  Such as this wicked-cool one-number-forever service offered by GrandCentral)

So then why would Skype do this?  Perhaps because, as its skeptics have long suggested, it is finding VOIP revenue hard to generate.  The last batch of numbers made it look as though things were fine, but today's announcements suggest that they aren't.

eBay Gets The Lame Award for Google Checkout Ban

Hard to know where to start on all the eBay news today.  Paypal president out, possibly for performance.  Rookie Skype president Rajiv Dutta parachuting in to save day (and who will run Skype, another critical eBay division, albeit one that eBay shouldn't have bought, now that Rajiv's headed back to CA?).  A detailed analyst report (Mark Mahaney) concluding that Google Checkout is actually a viable threat to PayPal.  And an unbelievably lame response on eBay's part to Google Checkout, which was to forbid sellers from using it.

Only one word is required to riff on the Google Checkout ban: pathetic.  "OOOOooo, scary, a new product that our customers might actually prefer.  Quick--outlaw it!"  Not the best way to win customer hearts and minds.  And along with the management changes, a graphic illustration that the fear quotient is running high.

G'Bye PayPal?

I'm not a big PayPal user, so I don't have a good sense of whether GBuy will prove a convenient alternative.  It does seem to me, however, that of all the online payment services that have tried to dent the PayPal monopoly--Yahoo and Citibank, among others--Google's has the best chance of success. 

The difference between the Google offering and the now-defunct Yahoo offering is the integration with AdWords.  Yahoo never had this, and, consequently, never offered a serious alternative to the eBay/PayPal commerce engine.  Given that Yahoo failed utterly in this business despite a commanding global position in a Google-less world, however, suggests that the success of GBuy should not be taken for granted. 

The best news here is for sellers, advertisers, and consumers.  The 2% payment fee, whether on PayPal, GBuy, or a standard credit card is, in most cases, egregious.  The more serious competition and alternatives, the better.

eBay to Buy FedEx and Verizon?

So eBay has finally begun integrating Skype into its U.S. business, thus demonstrating the "synergy" used to justify the $4 billion acquisition.  The revelatory 1+1=>2 application?  eBay sellers can now add a "SkypeMe" button to their auctions!  Next week, perhaps, eBay will announce that it is buying Verizon and FedEx so sellers can add "Call Me!" and "Mail Me!" buttons, too.

Make no mistake: I love Skype, and I think eBay's stock is worth more because of it.  I just wish Yahoo had bought the company instead of eBay--because a tight integration with Yahoo Mail and Messenger would actually have created some real synergy.  I also don't necessarily think eBay will screw Skype up.  But I wish eBay would stop hurting its cred by trumpeting "synergy" that would have been just as easy to implement had the company not shelled out $4 billion. 

More China Moralizing--When Will It End?

The wires are once again buzzing with implicit damning of Yahoo! for helping the Chinese government prosecute critics.  At the Wall Street Journal's "D" conference, Walt Mossberg apparently asked Terry Semel about it, and Terry, admirably, answered the question (from MarketWatch).

Semel acknowledged an incident in which a Chinese blogger was arrested after authorities there tracked him down with the help of Yahoo-supplied data.

"We continue to be pissed off and are sorry about it," he said, adding that the company cooperates "as little as possible based on the laws of each country" it operates in, and tries to "push the boundaries of the law where we can" to protect its users' privacy.

Terry also provided the rationale that almost anyone in charge of a multi-national corporation would eventually arrive at--a rationale that never ceases to be ridiculed as evil, weak, and greedy by people in charge of nothing:

"What's the alternative? To walk away?" Semel asked during a sometimes testy exchange with Wall Street Journal columnist Walter Mossberg... Semel noted that China isn't the only country that forces media companies to alter their content in some way, and that the issue goes beyond Yahoo and other Internet companies.   "I don't think any one company, or even one industry, can change a country.  "Change always takes a long time. Things are better today in China" than they were 20 years ago, when he first traveled there on business, Semel said.

A month or so ago, when Google was publicly damned (again) for the same apparent sin, I asked the same question Terry asked: What is the alternative?   I would be grateful if a reader can provide a cogent, thoughtful response to this question, one that goes beyond "Just say 'no.'"  Because, in this case, "Just say 'no'" is beyond idealistic--it's vapid. 

Surely the argument is not that companies that want to operate in China should disobey Chinese laws (given that this would result in their immediately being expelled from China).  So the argument must be that operating in China under current Chinese laws is immoral and, therefore, simply not an acceptable option.  I don't agree with this--the First Amendment is a U.S. invention, not a higher moral law, and China's leaders aren't the first in history to attack people who criticize them--but I'd be eager to hear a good argument about why it is, in fact, immoral.  And I'd also like to hear a response to Terry's (true) observation that life in China is a heck of a lot better than it used to be, that sometimes the best way to improve a system is to work with it, and that more information will always be better than less.

Microsoft to Buy eBay? Bold... But Futile

The NY Post reports that Microsoft and eBay have been having merger discussions, and that, ironically, the talks have cooled of late because lawyers are concerned about anti-trust issues.  Suffice it to say that if such a deal were blocked because of monopoly concerns, regulators would merely be demonstrating an astounding inability to grasp current market dynamics.

But more to the point--Is an eBay-MSN merger a good idea?  In a word, no.  It's a bold idea, certainly, one that illustrates Microsoft's seriousness about making MSN more than an also-ran.   But eBay doesn't need a portal draped on top of it, especially the third-ranked portal, and owning eBay won't save MSN.  The entity would have a fighting chance as a stand-alone company, but Microsoft seems determined to keep strangling its Internet division by keeping all its businesses all under the same roof.  As a result, post-merger, eBay's talent would rapidly depart for greener and less-humongous pastures.  And as Microsoft struggled to integrate, staff, and manage a huge new business it knows nothing about, Google and Amazon would get a dream opportunity to chip away at the eBay seller base.

The most complementary assets Microsoft would gain in such a merger would be PayPal and Skype.  Alas, unless the company intends to spin-off eBay's marketplace business, this seems an awfully expensive way to get them.

Concept Grades:

Boldness, Vision, Ambition, etc.: A-

Chance of Practical Success: C-

Yahoo-eBay Shotgun Wedding

Yes, fine, the Yahoo-eBay alliance is a "win win."  Amid all the delirious cheering, though, it seems worth noting that it's also a "Because we're getting our butts kicked." 

What I wonder:

1. Now that they are thick as thieves, could eBay be persuaded to flip Skype to Yahoo?  I haven't heard diddly about Yahoo Messenger for Voice, and Skype is still going gangbusters.  I don't care what eBay says--Skype would still be much better off merged with the Yahoo communications suite than the eBay commerce and payment platforms--and as a Yahoo mail and Skype customer, I'd like everything in a single package.
2. Could Jeff Bezos ever be convinced to put himself out to pasture and sell Amazon to eBay?  The two companies are pretty much in the same business now, and eBay would benefit greatly from Amazon's design, distribution, and merchandizing expertise.  With its limited cash flow, Amazon is severely constrained in the Google-inspired investment arms-race, and one wonders how long it can keep up. 

Disclosure:  I own both eBay and Yahoo.  And Amazon, for that matter.

eBay's New Pony: Skype

Sub-Head: Wall Street Misses Forest for Trees

A typical eBay quarter: solid numbers, sandbagged guidance, unavoidable deceleration leading to gradual multiple compression, marketplace and payment businesses that are changing the world.  And then there's that new business, Skype, the acquisition that made everyone think Whitman & Co. had finally gone nuts.

I still think the wrong company bought Skype--in my opinion, Yahoo! should have ponied up, and, because it didn't, now runs the risk of being as much a force in VOIP as it is in auctions.  This said, it's time to forget about lost opportunities and jerry-rigged "synergy" stories and focus on the fact that, as a stand-alone business, Skype is kicking ass.

Since September, average concurrent users have doubled, from 3 million to 6 million.  Average daily sign-ups have increased to 220,000 per day (closing in on 2 million a week--2 million a week!).  The company is rapidly rolling out new products, getting closer to the point where using it will become not only less expensive but more convenient (Skype is now my primary business phone number; a real back-end business voicemail system, I hope, won't be too many quarters away).  Revenue--yes, revenue--grew more than 40% sequentially, from $25 million to $35 million. 

Assuming a reasonable rate of deceleration (which isn't a given), Skype could do close to $200 million in revenue this year and $500 million next.  $500 million is meaningful, even in this league.  And assuming, say, $150 million of that revenue drops to the bottom line, eBay would have picked up the company for 15x-30x earnings--not a fire sale,  but still a bargain.  And remember that we're not talking about some niche market here.  We're talking about the global market for voice.  If Skype's Google- and eBay-like growth trajectory held, $150 million of profit would be only the beginning.   

So, while the Street obsesses about the horror of a minor interface goof (a switchover from auctions to stores, which apparently temporarily whacked revenue), and forgets that, thanks to the re-sandbagged guidance, expectations for the rest of the year are now so low that the company could fall over them, think about this: eBay is now ideally positioned to benefit from decades-long generational trends in not just two massive global markets (retailing and payments) but a third (voice).  Could they screw this up?  Of course.  But for about 30x free cash flow, this risk would seem to be priced in.

Reminder: I own a small chunk of eBay (which, despite my anti-trading philosophy, I am thinking of increasing), and this isn't investment advice.

Huge Net Capex: One-Time or Permanent?

The WSJ describes a key issue facing the big net companies, especially Google: massive (and increasing) capital spending.  Last week, for example, Google stated that 2006 CAPEX would "significantly exceed" 2005's mind-boggling $800 million, prompting analysts to toss out 2006 estimates in the $1.25 to $1.5 billion range.  Yahoo! spent $400 million last year, up from $250 million the year before.  Amazon's cranking up spending...

This gives rise to three key questions:

First, what on earth are they (or at least Google) spending that much money on?  I understand the need for "servers," but why has this need exploded so much in the last two years?  GDrive? GMail?  Neither of these ideas are revolutionary. Video is a CAPEX hog, but is the difference that vast?  Also, why does Google need $400 million more than Yahoo! and eBay do?  I shudder to recall this, but CAPEX is where companies occasionally stuff expenses they don't want to flush through their income statements right away (e.g., Worldcom and Homestore).  I have huge respect and confidence for Yahoo!'s financial team, and there is no conceivable reason for Google's team to play such games.  Without having more detail about exactly what the money is being spent on, however, the possibility of shifting capitalization policies can't be ruled out.

Second, is this simply an up-front investment necessary to build out global capabilities, in which case CAPEX will moderate in future years, or has running a global Internet operation become much more expensive?  If the answer is the former, today's CAPEX is largely irrelevant: The companies can afford it, and a future easing back on spending will drive free cash flow growth rates through the roof.  If the spending is permanent, however, these companies (again, Google especially) aren't going to generate anything like the free cash flow the market is currently expecting. 

Third, returning to a point raised in question one, why is Google spending more than twice as much as Yahoo! and more than Yahoo! and eBay combined?  Again, explanations about "storage" and "computational power" just don't ring true.  eBay and Yahoo! need storage and computational power, too, and, right now, Yahoo! handles more traffic than Google does.  The difference between the CAPEX levels, moreover, is so vast that it seems safe to assume that either Google is overspending (in which case, the question is "on what?") or Yahoo! and eBay are underspending (in which case, free cash flow is about to take a hit at both of those companies as well). 

When Google releases its 10K, we'll get more insight into where that $800 million went.  But this won't provide any into where this year's estimated $1.25 billion is going--or how much CAPEX as a percent of revenue will be required to run these companies for the next 10 years.

Freebay or Toast? The Contrarian Argument

There has been much articulate commentary lately arguing that unless eBay makes its listings free--and freely searchable by Google--it is toast (see Marc Pincus, Fred Wilson, John Battelle, Bill Burnham and others).  The presumed killers?  GoogleBase, Craigslist, the free web, et al. At first blush, this argument seems a slam dunk: free seems a hard price to beat.  As yet, anyway, I'm not convinced.

The first point that trips me up is that I have heard (and initially believed) this argument before, way back in the mid-to-late-1990s, when eBay had just gone public and the biggest concern among investors was that Yahoo! was going into the auction business--and that its listings, unlike eBay's, would be free.  As one of my colleagues put it, "free's not a bad price," especially when offered by a company as prominent and reputable as Yahoo!.  And Yahoo! made its announcement and its listings were free, and eBay's stock temporarily took it on the chin.  But then, lo and behold, although Yahoo! immediately amassed jillions of listings, eBay's seller and buyer communities stayed put (and its revenue and profit continued to soar).  A few years later, throwing in the towel on free, Yahoo! started charging fees.  That didn't work, either.  So now they're back to free.

In this and other cases, eBay was able to defend itself because of the network effect: without the buyers, it was hard to retain sellers, etc.  In Yahoo!'s case, moreover, it seemed that free listings actually made the experience worse for users: because sellers didn't have skin in the game, they would list pure junk just to see if it would sell, and buyers would have to sift through reams of crap listings to find the few that were worth anything.  And, as time progressed, it also seemed that eBay's intense focus on auctions (and, later, commerce) allowed it to introduce ancillary services that Yahoo! couldn't keep up with, etc., all of which made eBay's fees worth the price.   

I realize that today, the situation is slightly different: now that we have Google, the theory goes, we can search the entire non-eBay web, and soon eBay's listings will be a tiny fraction of the total readily available to a buyer (and, if eBay refuses to allow Google to index its listings, eBay may even be invisible--the "dark web" theory).  This, the Freebay folks argue, will negate the network effect, and sellers will no longer have any reason to use eBay.

For this to happen, though, two things must be (or become) true.  First, eBay's listings must, in fact, be a fraction of the total available on the web in any given category (I suspect that this is not the case, but I haven't tested the theory).  Second, and just as important, the non-eBay listings have to be just as high-quality, fresh, and trustworthy as eBay's, or buyers will be reluctant to depend on them. 

I realize that Craigslist has fanatical supporters who loathe eBay (even though eBay owns 25% of the company) and that there will always be a segment of the web population that considers it the deepest of insults to ever be asked to pay for something.  The web being what it is, these folks will always have free marketplaces or communities where they can trade with one another. 

After watching eBay's experience over the last (near) decade, however, I am skeptical that the majority of sellers who absolutely positively need to 1) sell the item, and 2) get the highest possible price for it, will try to save the 10% or so by uprooting and moving to a free site.  Especially if they have to buy Google keywords--or share revenue with Google--to show up in its search results.

This does not mean that eBay will grow 30% a year forever.  It also does not mean that eBay can keep jacking up prices: the near-revolt that followed the last increase demonstrated that this source of growth has come to an end.  It may mean, as some have suggested, that eBay has to start offering volume discounts, better all-web promotions, cheaper listings in exchange for higher-priced ancillary services, etc.  It may also mean that eBay will forever have to persuade sellers that, although free is a viable option, it's worth paying for eBay. 

In any case, I think the consensus that eBay either 1) goes free, or 2) is toast, may be a rush to judgment that will later prove wrong (or at least prove a vast over-statement).  I don't think the "paid model is dying," as Fred succinctly put it, just as I don't think free office suites will suddenly take over the world.  I think the two models will continue to co-exist, just as they have since the beginning. But I'm happy to be persuaded otherwise.