eBay/Skype: Royal Wedding or Royal Mistake?

eBay’s ability to extract value from their Skype acquisition hinges on the following:

(a) eBay’s successful integration of Skype’s VOIP into the eBay suite of eCommerce services: eBay, Paypal, Shopping.com., Classifieds (Kijiji/Craigslist/Marketplatz/Mobile.de/Rent.com/etc.);

(b) The market evolving toward proprietary VOIP networks;

(c) VOIP being the lead purchase in the communications suite.

Point (a) is pretty straightforward. The synergy makes sense on paper (or whiteboard) and it is a matter of making it work in practice. Implementation on this account is largely within eBay’s control. In a nutshell:

Paypal + Skype:

1. Paypal is used to pay for Skype = more Paypal users = Paypal grows dominance as payment mechanism, creating barriers to entry by Google and Microsoft.
2. Skype taps into Paypal vendors for a pay-per-call (PPC) add-on with associated SkypeOut revenues.

eBay + Skype:

1. eBay taps into the Skype user base, comprised of bargain-hunting, technically savvy, early adopters (nice correlation). eBay adds PPC to improve communication, increase sell-through, enable international sales and raise barriers to entry by competing auction solutions.
2. Skype taps into the eBay user base of bargain-hunting, technically savvy early adopters (buyers and sellers) and introduces them to VOIP with PPC.

Shopping.com + Skype:

1. Shopping.com benefits from better communication, helping to grow the percentage of users who buy, versus just research and buy locally. Improved communication = improved comfort = improved sell-through rate.
2. Skype taps into yet another base of technically savvy bargain-hunters.

Classified Ads (Craigslist, Kijiji, Marketplatz, Mobile.de, Rent.com, etc.) + Skype:

1. Classified users can get additional information and schedule to meet/transact, it can all be anonymous too.
2. Skype enables eBay to monetize the large number otherwise free transactions by providing PPC services. And of course taps into yet more technically savvy bargain hunters.

Point (b) is a little more challenging. Will Skype continue to win the hearts and minds of users, resulting in a proprietary network/client combination? Or will something like the SIP protocol and Gizmo project or Asterisk or other such clients/PBXs using an open and interoperable network win the market?

If the telephone network is any indication, it started as a collection of proprietary networks, evolved into national networks and then the national networks worked among themselves to interoperate. Skype leapfrogs much of this with an instantly International network, but does it have the legs to remain the dominant proprietary network. Will, for example, IP phones circumvent the need for Skype? Will Skype license its solution to mobile phone companies to leapfrog POTS (plain old telephone service). This story is not yet written, and there are successful examples for both proprietary and open networks. The open TCP/IP protocol beat out Netware’s proprietary IPX/SPX despite a solid early lead. On the other hand the IM clients are all still proprietary networks.

If eBay can pull off point (a) that would be goo, but they need success on point (b) as well, in order to recoup the investment in Skype. If they also pull off point (c), described below, then the acquisition of Skype will go down in history as a great deal by a visionary company.

Point (c) is straightforward. I firmly believe that there will be a communications suite. People will use one platform for all real-time communication. That one platform should provide voice, file sharing, chat/IM and potentially even slide/whiteboard presentation capabilities. The $64,000 question is whether users will want their voice solution to handle IM or whether they will want their IM solution to handle voice. Which feature drives the user’s product selection?

Why will these features be offered in a combined platform? Because they go together like chocolate and peanut butter. Because you want to communicate with people, and communication involves all of these capabilities. I’m on the phone with someone, I want to send them a link, copy a quote, send emoticons (conference calls especially). Or I might be IMing and we get to a point that requires more verbal interaction, so we shift to voice. Also, keep in mind that Microsoft taught the world about the power of bundling with its come from behind to own the market effort with Microsoft Office.

If users want a voice platform that handles IM, Skype could dominate this field. If they want IM that provides voice, then AOL, Yahoo, Microsoft and others are in the lead position. If you ask the average person on the street, which of the two functions is most important, they will say voice. This bodes well for eBay/Skype. If they pull this off, it will be huge!

My recommendation is simple: eBay needs to buy Cerulean Studios. Their Trillion product is a meta-client for IM that operates across AIM, ICQ, MSN, Yahoo Messenger, and IRC. eBay needs to add this to Skype, in essence saying, get our VOIP solution and you can interact with any IM folks as well. Embrace and extend. Cannibalize IM with a meta-client and make everyone play on your home field: voice.

Wildcard Alert: Microsoft could also bundle all of this into their next operating system. That, of course, has the potential to reshape a market’s dynamics just as it did with the IE/Netscape market.

In short, it looks to me like it could be a great bet for eBay, given the current market conditions and resulting prospects. But those prospects could change with customers wanting voice added to IM, instead of vice-versa or with a killer Windows communication client.

The Internet vs. Newspapers

I always find it interesting when a combination of seemingly independent news stories starts to unveil interesting patterns or trends. Here are a couple of interesting recent news items:

1. The San Diego Union Tribune (newspaper) in the face of free online competition makes classified ads free.
   
   
2. Rupert Murdoch’s News Corp. buys yet another Internet property that is decidedly non-newspaper related bringing total acquisitions this year to $1.5 billion.
   
   
3. Google is aggregating and reselling print advertising in an effort to provide a complete online offline advertising solution for small to medium sized businesses (SMB).
   

So a small San Diego newspaper is walking away from what has traditionally represented 40% of the revenue for newspapers. News Corp. is buying into non-newspaper Internet properties. And Google is looking to be a one-stop advertising solution for SMBs.

This tells me that free classified ads are a tsunami washing away everything in its path. Craigslist handles the local offline transactions, while eBay dominates the geography independent online transactions (fee-based of course). Who needs newspaper classified ads? Nobody. That’s the point.

Rupert Murdoch is no slouch. He saw the fecal matter colliding with the fan and figured, “hey if you can’t beat ‘em join ‘em.” He’s spending big bucks—$1.5 billion so far—to become a big player in the Internet. Ironically, these acquisitions are well outside the News Corp.’s traditional newspaper business.

As if undermining the profit opportunity in classified ads wasn’t enough, news is also free on the Internet. Just look at Topix, newspaper websites and blogs…all free. So if newspapers can’t make money on news or classified ads, what can they charge for? Local advertising?

Along comes Google, who’s clear goal is to become the one-stop shop for SMB advertising, both online and offline. Once Google, and others, take this advertising effort local, the newspapers are going to be in a real world of hurt.

Together these news stories begin to form a map of the trends in the intersection of the traditional newspaper and the Internet that does not bode well for printed newspapers.

Web OS: The Battle for Dominance

My prior post addressed the brewing battle of the two dominant computing platforms: the Web OS vs. Desktop OS. The value of the platform is the ability to aggregate developers/applications and end-users and then make these two groups use your platform (traditionally the operating system) to access the each other. For example, if you’re an end-user and you want the largest selection of applications, you run Windows. If you are a developer, and you want access to the largest collection of end-users, you write your application to Windows.

This dynamic then feeds upon itself according to the Law of Increasing Returns (AKA the Virtuous Cycle). More developers = more applications = more users = more developers…

Traditionally, the operating system has been the chokepoint between developers and end-users. By owning this chokepoint, IBM in mainframes and Microsoft in PCs, have been able to extract tremendous value and leverage. Both companies exploited this leverage to dominate their respective markets.

We have also seen a number of competitors attempt to compete with Microsoft as platforms. Novell, Sun/Java and Netscape have attempted to define a platform alternative. All three have attempted to woo developers and end-users in an effort to assemble their own platform. All three have failed for one reason or another, not the least of which was Microsoft’s ruthless competition.

Let’s look at what it takes to assemble a platform:

1. End-users.

If you are going to knockout Microsoft, you must have either more users, or a trajectory that, if maintained, provides the promise of more users. At the very least, you need to provide access to a roughly equivalent number of users.

2. A Superior Solution for Developers

This is comprised of a number of things.

1. Tools: You must provide excellent tools, so that developers can work in an environment they like, and one in which they can assemble cutting-edge applications
2. Opportunity to Pioneer: You must enable developers to build unique and interesting applications, something they couldn’t build on the competing platform.
3. Opportunity to Profit: Developers—with the exception of open source—want to make money. If the costs to build, test, package, promote, sell and support their product is too high (as with mainframe software) they will look for a less costly business opportunity.

[Note: Clearly, the operating system isn’t the only platform. A good example of a non-OS platform is Oracle’s database. It followed the formula described above, by building both an end-user base and a developer base. This then started the virtuous cycle that has fueled the company’s growth.]

The big question is whether the web now provides the characteristics necessary to become the dominant platform. The answer is yes. The web has the user base. The web provides developers with the opportunity to pioneer, especially in the areas of community, social networking, collaboration, etc. There is also the opportunity to profit on the web because your web application has access to a tremendous web user-base, while virtually eliminating traditional costs associated with publishing, distribution, marketing and support. Any kid with a computer and a broadband connection can now launch a web application.

The ability to both pioneer and profit are demonstrated by web start-ups like Yahoo, eBay and Google that have become multi-billion dollar companies.

The current web application development tools are server-centric. And building server-centric applications on the web has been sufficient, until now. Now the game is shifting. Now applications, in an effort to battle head-to-head with desktop applications, must be more graphically appealing, more responsive and more powerful. In short the user experience needs to mimic the user experience of desktop applications.

For this reason, web development tools (languages, IDEs, frameworks) need to: (a) provide more desktop-like functionality (e.g. drag-and-drop); (b) facilitate client-side processing. This is happening. In some respects, it appears to be a race. Microsoft is racing to leverage web resources, while the web developers are racing to leverage client-side resources.

Handicapping this race is interesting. Microsoft has the edge in user-base, but the web is closing fast. This is a new and unique challenge for Microsoft. Microsoft’s tools and developer programs still lead, but there are some very good tools emerging on the web side. Where the web has the edge is in the opportunity to pioneer and the opportunity to profit.

People are building very cool web applications that you could never envision on the desktop. Applications like Flikr, Del.icio.us, Facebook, various mashups, this stuff is really new, unique and interesting. The killer advantage of the web is its low cost structure and the ability to build something cool and watch it spread, simply by word-of-mouth. This results in a tremendous opportunity to profit.

Web development tools are evolving. They are beginning to enable developers to leverage client-side processing more easily. This will result in even better and cooler applications. As a result, the web will evolve as a platform that more directly competes with Windows.

The question is whether one company will emerge as the owner of this platform. By virtue of the web’s distributed nature, it looks like we won’t have a single chokepoint on the web platform. Instead we’ll have alpha-dog companies, like Google, who will lead and influence the evolution of the platform, but there won’t be a single owner of the platform.

The Web OS vs. The Desktop OS

As Microsoft has demonstrated, and IBM before them, owning the platform standard is computing’s equivalent of boxing’s undisputed heavy-weight title. Owning the platform means that you own that critical juncture between developers and users. Users must use your platform to operate their applications and developers must program to your platform in order to access the users.

IBM owned the platform back when the platform was the mainframe. The mainframe, as a platform, had both pros and cons. When the mainframe was king, computers were large, expensive and complex. Maintaining them centrally offloaded the pain and expense from individuals, while sharing the benefits across a large group of users.

As the costs and physical dimensions dropped, computing became personal. The real driver of personal computing was economics. Anyone could afford a PC and so the barrier to entry by users and developers dropped precipitously. This, in turn, led to unprecedented innovation. It also meant that while the mainframe remained an important platform, the desktop operating system merely became a more important platform.

The Internet has resulted in a sea change once again. The Internet lowers barriers to entry yet again for both users and developers. Users can promiscuously try any number of applications on the Internet, often for free. Developers can build and release applications without the typical production, advertising and distribution costs.

Now, the two predominant types of applications are desktop applications and web applications. Both have their pros and cons. I look at some of the pros and cons from a user’s perspective. (Note: There are also pros and cons from a business’ and a developer’s perspectives, but I don’t address those here.)

Desktop Applications
processing occurs on the desktop

Pros:

1. Disconnected operation: continues to function without Internet connectivity
2. Responsiveness: responds more quickly, you don’t have the latency caused by loading pages
3. Rich Functionality: enables things like drag and drop, real-time spell checking, type-down suggestions, cut & paste, etc.

Cons:

1. Turns every user into a systems admin, managing the operating system, applications, upgrades, conflicts, spam, etc.
2. Turns every user into a security specialist, managing firewalls, back-ups, etc.
3. Application functionality evolves more slowly, according to release cycles
4. Weak in providing interactivity and community benefits (e.g. group editing)
5. Not integrated with the rich data on the Internet

Internet Applications
processing largely occurs on the server

Pros:

1. Very powerful interactivity and community benefits
2. Hyperlinked to rich data throughout the Internet
3. Rapid application evolution and bug fixing
4. Managed services offload system admin and, to a lesser degree, security functions.

Cons:

1. Requires connectivity, doesn’t work when disconnected or mobile
2. Less responsive, more latency as pages are loaded
3. Less rich functionality, lacking things like drag and drop

Hybrid or Shared Processing

Recent developments are enabling a blending of processing, or a hybrid processing model. Internet applications are shifting some of the processing to the client, using methods like AJAX. This approach reduces the latency in web applications, because the applications aren’t refreshing whole pages, instead they send small pieces of information that can be processed locally.

An example of this is Gmail’s type-down capability. When you compose an email you start typing the recipient’s email address and Gmail offers you suggestions based upon the letters typed. It does this without refreshing the entire page.

At the same time, Microsoft and Apple are adding more Internet functionality to their operating systems. For example, Vista, the future version of Windows will provide an RSS platform. This will make web-based data available to applications through a common API. Imagine, for example, using Outlook to set-up a meeting with someone out of state. Outlook might automatically offer flight options, weather information, hotel and car information, and more, without requiring you to request that information, but merely selecting from what it finds on the Internet.

In short, operating system companies are embracing the Internet and exposing it through their OS platforms. At the same time, the Internet companies are processing more and more information on the client to provide desktop-like application functionality. This hybrid approach moves the processing dial somewhere into the middle between server and desktop processing.

This is nothing new. We’ve had client-server architectures in the past that shared processing between, well the client and the server. We’ve seen applications like Half-life’s Counter-Strike. Counter-Strike relies on server-based data management and local processing to create multi-user virtual worlds with incredible responsiveness.

The press and Silicon Valley act like Don King promoting the next heavyweight battle with a fresh contender going up against Microsoft for control of the platform. Which of course, means battling for the hearts and minds of users and developers. We’ve seen failed efforts before, is the webOS destined for success?

There are several unanswered questions that will ultimately handicap this battle.

1. Generally speaking, where is the right balance of processing between the server and desktop?
2. Is connectivity sufficient to support a webOS model?
3. Will a standard local suite like MS Office suffice for most disconnected requirements?
4. Can web development leverage its speed and cost advantages to own the hybrid computing “platform” or will Microsoft leverage its installed base (developers and users) and resources to overwhelm the web upstarts?
5. Can a generalized engine, possibly the Java VM, browser, etc. satisfy the local processing needs of all web applications?

Let’s hope this isn’t yet another quick knockout in the early rounds. This sort of battle can be hell for developers (think OS/2 versus Windows), but it is great for consumers.