Umair Haque / Bubblegeneration

Tuesday, September 13, 2005

More eBay + Skype (Strategy Edition)

OK. Why did eBay buy Skype? The 2.6 billion dollar question.

Let's step back for a sec. What's eBay's biggest threat/problem? Simple - Google. That's another way of saying that eBay's business is predicated on slashing search (eBay reputation system) and transaction (PayPal) costs between buyer and seller.

Now, the problem is twofold. First, eBay hasn't really innovated on either of these dimensions for quite a while (Sorry guys). At the same time, second, Google has (do I even have to say it!) been vaporizing search costs in every domain it can find.

So what's been happening on the ground is that Google's been grabbing eBay's high-value power sellers, who find setting up their own shops largely using AdSense actually often drastically lowers their customer acquisition and retention costs compared with eBay. It's not hard to understand why - eBay's market structures simply aren't scaling, while the sheer number of Google queries has exploded.

This is really about Reed vs Metcalfe, or about what kind of network externalities dominate your platform, if you wanna get geeky with me for a sec. If a power seller shifts to AdSense, all of a sudden he realizes combinatorial gains from network externalities, because AdSense is many to many. eBay, on the other hand, offers exponential gains from network externalities - the auction mechanism is still essentially one to one.

And this is really eBay's problem: Web 2.0 is a shift to from tight, hierarchical architectures which realize exponential network FX, to loosely structured architecture which realize combinatorial network FX. eBay's being left behind in an exponential Web 1.0 world. See the graph above for pretty vivid evidence of how eBay realizing almost no network scale economies.

So, back to eBay's 2.6 billion dollar question. The question is: how do we create a discontinuous reduction in search/transaction costs, especially for our power sellers?

Well, in short, that's what they're hoping to do with Skype IMHO. One way is to leverage Skype into Paypal. Another way is to give power sellers an almost costless but hugely beneficial marketing channel. Etc, etc...the possibilities are huge and manifold.

To be honest, I think the best answer is probably that eBay doesn't know exactly precisely where Skype fits in, but given the curve above, they've got to make the transaction from zero network economies to Web 2.0 combinatorial network economies (viz, Google's value as f(user). And Skype is a pretty cool way to do it, because it instantly explodes the outdated mechanism that mediates transactions on eBay, and isn't letting them scale faster than users.

-- umair // 10:45 AM // 3 comments

Comments:

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 that sellers (including those on eBay) have fewer alternatives to reaching consumers that don't include Google. 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.

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Anonymous // 12:46 AM

"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."

I think that's almost *exactly* what Umir said.

eBay may give Skype to their shop-holders as a way of doing pre-sales, and post-sales ("up-sell" anyone?).

I'm just suprised we haven't seen the first Skype based distributed call-centre yet....as it would service precisely this shop-owning customer base.

Regards,
Lindon

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Anonymous // 4:53 AM

I don't really see google as a network yet - since very little of their revenue is coming from adsense, relative to the clicks they get on the search page.

Sean

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Anonymous // 2:00 PM