Internet Outsider

Phone Co Toll Demand Seems Reasonable

My initial reaction upon hearing that Verizon, et al, want to charge Google, Yahoo!, et al, for carrying broadband content over their networks was that this was yet another pathetic attempt by whining, dying monopolies to make themselves relevant in a new world.  After reading the details, however, it seems that the content providers are the ones being unreasonable.

According to the WSJ, Verizon, et al, want to charge content providers extra to guarantee rapid delivery of broadband content (music, movies, VOIP, etc.).  They'll still deliver it if the content providers don't pay, they just won't guarantee that it will get there fast. 

Yes, such an arrangement would leave plenty of room for sleaze (make the "regular" delivery so slow that content companies have no choice by to pay up), but, on its face, it seems perfectly reasonable.  Want your customers to get your stuff quicker?  Then pay us more.  In a physical-mail analogy, this seems similar to FedEx or the US Postal Service charging more to deliver a 300-pound box overnight than a letter.

This said, I may be missing something about how the phone companies already charge. Do Google, Yahoo! already pay per unit of traffic?  Are the phone companies already charging more for the 300 pound box?  If they are, and if they're just whining to the regulatory folks for help getting more, then I'll have to go back to my initial reaction. 

All help appreciated...

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.

The Skype Test: Three Months and Counting

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So Yahoo! is finally going to roll out Skype-like PC-to-phone and phone-to-PC services for its messenger product.  This will likely be the first credible challenge to Skype's soft-phone dominance, from a company that (in my opinion) would have been a better home for Skype than eBay.

What this means:

In three months, we will know whether Skype's brand, first-mover advantage, and user base will allow it to do what eBay, Google, and others have done before it: swat away much larger competitors like flies.  In three months, if Yahoo! has not grabbed a significant chunk of this business, we will have a good indication of whether it will EVER grab a significant chunk of it--or whether, in the interest of saving a few (hundred billion) pennies, Yahoo!, MSN, Google, et al already passed on the one opportunity that would have vaulted them to the top of the PC-to-phone charts.

If there is one pattern we've seen over and over again since the dawn of Internet time, it is that the first big brand to capture hearts and minds in a given space has a major competitive advantage, regardless of who its competitors are and regardless of what they do.  This doesn't mean the first mover won't blow it--Netscape, Yahoo! in search, AOL in access, Napster in music all blew it--but it does suggest that it's their game to lose.

Mossberg Does Skype; Ebay Looks Smart

WSJ's gadget titan Walt Mossberg reviews Skype 2.0 and predicts it is ready to blast into the mainstream.  Along these lines, I spoke with an experienced Internet CEO yesterday who runs two small companies, both of which are Skype-only, neither of which has a single land-line phone.

Skype is doing what it needs to do to keep VOIP synonymous with Skype (a strategy whose wisdom is nicely illustrated by the power of the equations "Google = search," "Kleenex = tissue" etc), and as long as it can keep doing so, eBay looks smart.  What most observers missed about the Skype acquisition, in fact, was that the price eBay paid was irrelevant. 

The outcome for Skype is likely to be binary: home run or bagel.  In the bagel scenario, eBay will lose 100% (or 5% its market cap).  Although not inconsequential, companies have made riskier bets (Time Warner, for example). 

In the home run scenario, meanwhile, eBay will make at least 10X.  (I don't want to rush to hyperbole here, but this is not a small market opportunity we're dealing with, and the idea that the leading global VOIP player could someday be worth 1/5th of Google's current value, 1/3rd of Verizon's current value, or 1/2 of Yahoo!'s current value is not far-fetched.)  Quibbling about whether eBay should have paid $1 billion, $2 billion, or $4 billion, therefore, is a waste of time.

Disclosure: As of today, I own some eBay stock.  I didn't buy it.  It got "distributed" to me.  It turns out that one of the funds I greedily shoveled money into in early 2000 (thirty seconds before the bubble burst) managed to invest in Skype, and the fund just distributed the Skype gains.  Hats off to the fund firm!  And hats off to me for, in aggregate, losing slightly less than 90% of my invested capital.