Internet Outsider

As Skype Fiddles, Competitors Crank Up

As Skype continues its dreamy foray into social networking, local search, expert services, and web surfing (Stumble Upon), other online communications companies are cranking up to focus on...online communications.  According to BusinessWeek, for example, Skype-partner Intel has just helped pump $20 million into Skype-competitor Jajah--which, unlike Skype, offers the convenience of making calls using regular telephones.

Skype's lead in PC-based VOIP is safe for now--no less a competitor than Yahoo launched a competing service a while back and has been met with a collective yawn--but the company's seeming desire to focus on anything but telephony is making it vulnerable. Taking down the traditional telco industry will yield a massive pot of gold for whoever ends up doing it. There are still plenty of problems to solve before this happens, however, and none of them involve local search. (Hat tip to Jason Jones).

Source Calls Skype Post "Dumb"; Says Co "Turning Profitable"

Got a frustrated note from a source who had several interesting things to say about Skype...in response to yesterday's post (in which I questioned two new product announcements and the company's future). 

The most interesting point?  Skype is "turning profitable."  The source is in a position to know, but if anyone else can confirm this, I'd be grateful.

The source also had this to say about Skype Find, the new service that allows you to post and access local restaurant/product reviews: 

Maybe reviews haven't got so popular cause no one has done it right.  As far as I'm concerned I don't care about someone in the midwest's opinion.  I care about what my friends and personal relatives have for best places to shop and eat.   So now that skype provides this I can get rid of all the crap content and trust my friends.

I'm still skeptical of the new products, especially of the monetize-yourself expert marketplace (SkypePrime), but I'll keep an open mind. 

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.

Vonage Underwriter-Analysts Pee on Stock, Further Insulting IPO Buyers

The Vonage IPO continues to be a black comedy.  A month after the deal was shoved into the hands of customers and others at $17, it is trading at $8.25.  And now, in an action that demonstrates the drawbacks of the "new era" of Wall Street research, in which analysts have no role in the IPO process, two of the underwriter analysts have dissed the stock.  One is troubled by the company's execution.  The other is worried about competition, heavy spending, and IPO lawsuits.

Now, let's look at this from the perspective of an IPO buyer.  Your trusted Citigroup or UBS financial advisor calls up and says, "We've got this great new IPO you should buy--a cool Internet phone company that's growing like mad."

You: "Sounds great.  What do your experts think of it?"

Advisor: "Well, our analysts aren't allowed to tell us what they think anymore, because that would be a conflict of interest, but our bankers are experts, too, and they LOVE it!"

You: "Awesome, sign me up!"

Now, thirty days later, you've lost half your money.  And you learn that, in fact, the analysts at the firm that sold you the stock wouldn't touch it at $8.25 a share, much less the $17 that you had to cough up for it.  You learn that, with the exception of the IPO lawsuit issue, their concerns have nothing to do with anything that has happened in the last 30 days.  Rather, the analysts are concerned about issues that were exactly the same when you bought the stock.

Question: Wouldn't you have liked to have known that these analysts thought the stock wasn't worth $8.25 before you paid $17 for it?  Or, if that was impossible (as it was under the old system, as well--although not in the more-sensible European system, in which the analyst writes a report before the IPO is priced), wouldn't you have liked to have been confident that the analyst had signed off on the deal before it was sold to you?  Don't you feel a bit shafted that you were sold a stock at $17 that the only real expert at the firm thinks is not even worth $8.25?

The old system had drawbacks, too, of course.  But as far as the IPO process goes, the new one is far from perfect.

   

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. 

Vonage IPO: Next Up...Lawsuits?

Vonage continues to impress. 

• It fails to sell itself before pursuing an IPO. 
• It fails to drum up enough institutional interest in its IPO. 
• It offers to let its customers in on its IPO--and then sticks them with overpriced shares. 
• It insists on upsizing its IPO and maintaining the $17 price, hosing everyone unlucky enough to get stock.
• It says its CFO will go on CNBC to address customers who have lost more on the IPO than they've ever paid in Vonage bills. 
• It realizes that this might violate quiet period rules and cancels the CFO's appearance. 
• It reportedly suggests it will pacify "alienated" customers by paying for their IPO purchases--thus alienating non-customers whose underwater stock won't be paid for.

Depending on how this bizarre customer-IPO-insurance plan is effected, it seems possible that Vonage will bail out alienated customers with money just raised from non-customers, thus adding injury to insult.  (Where in the "Use of Proceeds" section of the IPO prospectus does it say, "A portion of the proceeds may be used to insure customers against IPO losses"?).  Given the company's phenomenal cash burn rate, such payouts will reduce the time Vonage can remain in business without another financing, thus either hastening its demise or hastening IPO-buyer dilution. 

And what happens if/when the SEC forces the entire IPO to be rescinded, something that seems possible at this point?  How much cash will Vonage have left in the bank?  (Approx. $175 million)   How long will this last?  (Approx. another four months at the Q1 burn rate).   Will an IPO remain an escape option?  (Who knows?)  If not, what will?

Meanwhile, the stock continues to tank. 

UPDATE:

The WSJ reports that Vonage now says it is going to go after customers who refuse to pony up for their IPO shares.  This is fair--the customers should pay--but it won't help customer relations.  How exactly will Vonage force its customers to pay up?  By threatening to cut off their Vonage service?  By, more likely, suing them?  (And thus prompting any customer who hasn't yet cancelled because of their IPO losses to cancel because of the lawsuit).  And, meanwhile, how will the sued customers respond?  By paying up?   By, more likely, collectively suing Vonage for blowing the IPO?  It gets better (worse) all the time...

Vonage IPO: A New Way To Piss Off Your Customers

I don't mean to jump on the sick-horse-kicking bandwagon, but it appears Vonage has invented a new kind of leverage.  The company reserved about 14% of its IPO shares for its customers.  In other circumstances, this might be seen as a perk: Buy the service, get hot stock.  In this case, however, at least in the early going, it's proving to be an efficient way to engender widespread customer frustration. 

At this writing, Vonage customers who took the company up on its offer have lost 15% of their money.  Some of them, presumably, are now selling their stock to non-customers who were savvy or fortunate enough to wait until the stock started trading.  Even if the stock recovers from here, Vonage customers will no doubt remember that they could have done better.  And if the stock continues tanking...well, then, even Vonage customers who love the VOIP service will feel nothing but bile toward the company.

To put this in perspective: A Vonage customer who bought 100 shares of stock at $17 ($1,700) is now down about $200--the equivalent of about 8 months of Vonage bills.  Looked at differently, customers dumb enough to take Vonage up on its apparently generous offer will now pay twice as much for the VOIP service for the next 8 months as customers who just said "no, thanks."  One doubts that this will foment the delirious customer evangelism and loyalty that some companies enjoy.

Given the difficulty Vonage had generating institutional demand for its IPO (witness the tanking stock), a cynic might suggest that the apparently customer-friendly IPO gesture was actually just a savvy capital-raising move: "Our customers don't know jack about IPO valuations--so let's sell 'em stock!"  Or, perhaps, Vonage is just so confident in the future of its company and stock price that it is sure its currently chagrined customer-IPO-buyers will be grateful later.

In any case, if the stock stays in the tank, it will be interesting to see how many customers quit Vonage's service because they have lost money in Vonage's stock. 

UPDATE

An anecdotal report from the AP along these lines:

Anthony Sgroi of Bergen County, N.J., has had Vonage service for a year and half, and asked for 1,000 IPO shares. He received 300. Other Vonage customers on an online forum reported similar allocations, indicating strong interest from the group.

It wasn't the company's long-term prospects that attracted Sgroi to the deal, however.

"I'm not a big stock market guy ... when I got the option to buy the IPO, I figured it was a chance to make some quick cash," Sgroi said. "I was planning to sell within a week or so anyway."

He sold the stock Wednesday morning at a loss. Now, he plans to cancel his Vonage account and switch to the local cable company's competing service, which he said would save him $10 a month.

"I'll try to recoup some of my losses that way," Sgroi said.

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.

Vonage Not Far Enough Ahead

The Vonage S-1 finally provided a detailed look at the VOIP leader's financials, which aren't pretty.  Given that the company is spending more on marketing than it is generating in revenue, one would hope that at least it would be miles ahead of its dinosaur cable co competition.  Alas, it isn't.

According to a table published today in the WSJ, Vonage had 1.2 million subs at the end of 2005, versus 1.1 for Time Warner, 700,000 for Cablevision, and a smattering for other competitors.  That Vonage is still No. 1 is good.  That it's only No. 1 by the skin of its teeth isn't, especially given that marketing budget.

Time and again in Internet land, nimble upstarts have grabbed the early lead in a product category and, despite the eventual bellowing of incumbent elephants, have managed to hang onto it (Amazon, PayPal, eBay, Google, Yahoo!, AOL, etc.)  The difference between each of these cases and Vonage, however, was the size of the lead.  After Barnes & Noble finally got around to opening an online store in 1997 (which was widely expected to put Amazon out of business), Amazon continued to grow far more rapidly in the book market and gain even share.  Same for all the rest.  The early experience of cable companies suggests that there is significant synergy between cable TV, broadband Internet, and VOIP, with customers preferring to purchase VOIP as an add-on service instead of a stand-alone product.

Bottom line, although Vonage certainly grabbed the early mindshare in cable/VOIP, this mindshare did not translate into market share.  If a company as lumbering as Time Warner can flick a switch and catch right up, this doesn't bode well for Vonage's competitive position long-term.  All is not lost: With its subscriber base and experience in a hot market, Vonage will probably make a nice acquisition, but its days as a stand-alone market leader are probably numbered.

Interestingly, the one VOIP player that does seemed to have translated mindshare into marketshare is Skype.  Each day that goes by without a credible competitive product from Yahoo, Microsoft, and AOL--the only companies that have a legitimate shot at derailing Skype--the less likely such a derailment becomes.

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...