Thursday, October 06, 2005
How Not to Analyse Strategy, pt 383183
Got the following comment I've been wanting to respond to for a while now:
"...Oh for Chrissake! This breathless blather is really quite irritating. I go to eBay like *many* other users, and then search for stuff. I get *many* results and I pick one or *gasp!* "many". It's many to many! This is very much like AdSense. You should stop smoking so much. Calm down.
The only reason Google makes more is because they often stand in-between users and eBay. They act as a bottleneck. That has nothing to do with combinatorial blah blah...It's just (approximate) monopoly pricing power. (Even though CPCs are set by auction, the Google monopoly has reduced choice for sellers...they have to go to Google...)
The reason eBay bought Skype is to have control over 53m and growing client software installations. If you have client software, you have a way to get to consumers that bypasses Google."
OK. I realize some of my stuff is pretty dense, so let me nicely explain what this commenter is misunderstanding.
1) I've shown that eBay is realizing no network scale economies.
2) So it would be a big deal for eBay to shift to realizing even quadratic (let alone exponential) returns - forget about combinatorial returns.
3) Even if eBay does nothing defections to Google, the reduction in transaction costs between buyers and sellers Skype offers can potentially break exactly this linear bound in returns to scale.
4) Note, the commenter is confused about what many to many means. To put it in his/her terms, it means that each user can be 'monetized' along different dimensions/activities/products/services/groups. Clearly, this isn't the case on eBay at the moment (but it is at Google, etc, etc).
5) The commenter's analysis is based on a comparison of relative monopoly power over customer acquisition between eBay and Google. This is basically saying 'Google qwns screen space relative to eBay'. I've tried to show it's about something a little cooler and deeper; how eBay can realize greater scale economies regardless of this (because Google will pretty much always qwn screen space relative to eBay, no?).
Anyways, two bigger points. First, this commenter is pretty someone I've hung out with (viz the smoking reference). Posting as 'anonymous' when we've met is a lot like (lamely) sniping from a distance, no?
Second, the root cause of this thread is that I don't put my analyses into terms that industry strategists find easy to understand (CPC, ARPU, etc, etc); I use a lot of academic terms because I think they're more powerful. But I will start doing so, because I don't like it when people don't get what I'm writing.
How not to analyze businesses:
1. Make up vacuous abstractions without justifying their utility.
2. Pursue models without sharp definition, and without considering possible counter-examples and most importantly alternative explanations (especially: ignore secular trends such as the growth of online advertising during the same time period).
3. Ramble on in buzzword-compliant mode about models without strong foundation, and without suggesting real implications for business tactics.
How to make money as a "strategy consultant":
All of the above.
I believe that Skype will give Ebay a different channel-of-access. It could possibly be a way to eliminate Google from its radar completely.
Gmail is the precedent for this.
How about this: