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What is the competitive advantage of Skype? Barely
any...but yet ebay is paying $4 billion for this
company with annual revenues of only $60 million this year!!!

I use skype...but there is no lock-in or switching costs. With a huge increase of VoIP offerings over the horizon, I don't see what will keep me with Skype.

The telco providers are poised to introduce their own
VoIP services and most customers in the world will
adopt them. Let's not forget that most customers of
this world don't use skype.

The more I think about it, the more i believe that
ebay is making a very big mistake by paying so much
for this company.

I can see some synergies, but frankly the price paid by ebay is just pure value destruction, at least IMO. The real winners are the VCs and founders of skype...

Alexander

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All your questions have already been discussed in posts over the last five days.
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All your questions have already been discussed in posts over the last five days.

Babble - the only question asked was what is Skype's competitive advantage. Answer: none. There were no other questions posed by Alexander, only crystal clear and realistic reflection of the facts.
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I think a similar argument about Google's search business could be made now. In other words, there is no reason for a consumer to prefer Google's search engine over any other. However, there is also no reason to prefer other search engines. In this case, it isn't a competitive advantage but rather being there first that has created such huge value for Google. New potential businesses and other operating segments aside, Google's search keyword business has huge value despite its lack of uniqueness.

"How is Skype different from other VoIP providers" doesn't seem to be the key question - I agree it is a commodity - but rather how many users can it gather and can it monetize them and stay free and good?
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being there first that has created such huge value for Google.

Boogie - for what it's worth, and to keep the historical record straight, Google was very, very late entering the search engine market. There were maybe 20 search engines that were up way before Google. Google just ended up doing it better - and they still do seeing as how most search engines now just echo Google's results.
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It might be argued Skype is late entering the telecommunications market...
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the only question asked was what is Skype's competitive advantage. Answer: none.

Maybe the one below was written in invisible ink?

Anybody could have made eBay's technology, but nobody can duplicate their network effect. Thats why they ponied up bigtime cash for the VoIP leader instead of rolling their own. Got a head start on the network effect, and will give it a huge extra kick in the rear by cross-marketing to the eBay community.
http://boards.fool.com/Message.asp?mid=23056572

Or this one:

I do buy the argument that Skype has similarities to eBay and PayPal in the sense that... there were numerous competitors to eBay and PayPal but they never gained traction due to eBay's and PayPal's critical mass.
http://boards.fool.com/Message.asp?mid=23056595

I also recommend listening to eBay's conf. call on the Skype purchase, which was pointed out in this one:
http://boards.fool.com/Message.asp?mid=23032505
Where eBay management goes into great depth explaining how Skype is way out ahead of the pack, and how that generates a network effect that eBay and Paypal will accelerate, and how important the brand recognition of Skype is.

These are terrific competitive advantages, folks. Or if you think not - why not?
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Right now, I think of it this way:

eBay is the catalyst to get Skype over "the chasm" (where nothing seems to happen) and into "the bowling alley" (where lots of things start to happen) (see Geoffrey Moore for the technology life-cycle explanations).

GoogleTalk and AOL's thang and Microsoft's thang are still in the chasm, but could get into the bowling alley as well.

Skype is certainly ahead of the game because of eBay's purchase, especially since it could lead to a lock-in type event. But the purchase by itself does not ensure success. That have an early advantage, but it's not durable just yet.

The advantage comes at lock-in. After lock-in (also known as Main St.), switching costs become too high and everyone else who was waiting on the sidelines piles in. This is also the time when the most value can be captured.

There is one more thing. eBay's management has experience in capturing network effects (eBay itself and PayPal). But so does MSFT and GOOG management (I am not sure I can say the same for AOL, but you could make the case the Case has experience there). This cannot be discounted and is another reason why the current advantage is not durable.

The funny thing about the history of capturing network effect is that a random event usually tips the network. Could the meeting in China between Meg, Janus and Niklas be that event? Hmmm ...

Dave
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Skype is certainly ahead of the game because of eBay's purchase, especially since it could lead to a lock-in type event. But the purchase by itself does not ensure success.

Aren't you overlooking the fact that even before the eBay purchase, Skype was far and away the VoIP leader in terms of community size?

At least thats what Meg and the rest told us on the conference call.

Also that 'Skyping' is now a verb, much like Googling or blogging or IM'ing. Indicating the leadership power of their brand.

The Fool has waxed eloquent time and again on the enormous value of being first mover and prime brand.

Or is that all baloney?
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Just because you have a huge base does not mean that you have a business that is going to create value. I'll refer you to Arthur and Moore once again.

Not all networks will turn into great businesses. What about Ka-zaa? That is a hugely powerful peer-to-peer network. But is it a great business?

Certainly there are first mover advantages in network effect situations. And its the first one into the "tornado" that usually wins. But not every network will turn out to be a great business.

If Skype was such a dominant force before eBay bought them, how come they could only create $1 of sales per user? I think it's because as a stand alone, it wasn't necessarily going to create tons of value.

BTW, first mover advantage is not baloney.

Dave
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If Skype was such a dominant force before eBay bought them, how come they could only create $1 of sales per user? I think it's because as a stand alone, it wasn't necessarily going to create tons of value.

Skype isn't yet a dominant force. If it became one eBay would be in a position to nickel and dime certain users, like eBay sellers and other businesses. This would be similar to the situation with PayPal. It's easy for buyers to set up an account with BidPay or other services but few do and if buyers only want to pay with PayPal then sellers generally have to accept that (and be charged a fee for it). If Skype became dominant and if callers to businesses didn't want to bother using anything but Skype then businesses would have to take Skype calls and be charged fees.

I think it was mentioned in an article somewhere but if WiFi ever had wide coverage you could replace cell phones with VOIP phones. If Skype was the dominant VOIP service it could replace the cell phone business.

One switching cost which might tend to lock users into a service is their unique calling ID. With cell phones people want to keep their numbers but their numbers are portable. Skype IDs probably won't be portable.

Whether Skype does become dominant is the big unknown. However, if it does become dominant it could be an extremely valuable business.
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I know ebay's network effects very well and I understand how they create a competitive advantge. There are network effects with Skype...but as I said earlier nothing will keep with Skype if I can use a Voip sevice with my regular phone.

The point I wanna make is that VoIP will soon see mass-adoption, there will be numerous VoIP services from telco, cable, and ISPs that one will be able to use to basically call for free.

In short, ebay's network effects for its auction system are much more powerful than skype's and that's because most users don't use skype today and will most likely not use skype tomorrow.

Skype could offer the ebay community some valuabe new services, but paying $4 billion for a company with barely 60 million in revenues this year, which is poised to see increased competition doesn't make sense...at least to me

IMO, they should not have piad more than 200 mIllion

alexander

alexander

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"Just because you have a huge base does not mean that you have a business that is going to create value "

This is so true. Very few networks will turn into great businesses. Very few!!!

Does anybody know the margin structure of skype's business. i would bet it's not impressive, unlike ebay in its early days.

alexander
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there will be numerous VoIP services from telco, cable, and ISPs that one will be able to use to basically call for free.

Skype is free, already (if you ignore the cost of the internet connection, which is already paid). Can't get cheaper than that. So I wonder what advantages the me-too services from Microsoft, Google, telcos etc. will bring to the table. They can't undercut a price of zero.

Probably the battle will be over the cost/benefit of value-added services.

Skype with its early lead and now strong backing from eBay looks darn well positioned to stay ahead of the others.

And the brand thing is also pretty important. Why does Apple iPod outsell competing models from Creative and all the rest that are cheaper and more powerful? iPod has become 'the' brand. Nokia's brand carried it ahead of the pack too.

Skype has that going for it so far. Skyping is a verb.

Google has a great brand and I imagine that if anybody puts up a serious challenge to Skype, it will be them.

Telcos don't worry me. They are awfully-managed, over-charging businesses in general.

The situation seems to be sizing up a lot like the IM wars. IM networks are proprietary so you can't call into one from another. Even if free you have to maintain accounts with each in order to inter-communicate (though there is one service that bridges them I think).

At some point people will start asking why the VoIPs don't inter-operate. Maybe services will crop up to bridge them. In the conf. call Skype explained that they wanted to be first to market rather than go through the long process of establishing an industry-wide standard (which would have also left them without a business model). Even if a standard emerges, there will be differentiation among providers for value-added services and that's where Skype's brand will be worth a mint. If they continue to execute well.

As far as eBay's interests are concerned, they will limit their VoIP provider to Skype I presume just like they limit their bill payment services to PayPal. So if ya wanna play ball on eBay you are driven to Skype sooner or later. Yes this is coercion but I can't think of anybody who can challenge them competitively with a better deal, except perhaps Google who as SwapUSA has pointed out pose an alternative through their paid search model.
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Very few networks will turn into great businesses. Very few!!!

Are you kidding? The network effect is the single most valuable competitive advantage of the most successful internet companies. It is a monster advantage if you can get it. eBay, Microsoft, Google all succeed because of their networking effects.
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Babble

Of course Ebay, msft and goog succeeded partlt because of network effects....but there is many more businesses with network effects that never succeeded or never really made money from it.

Ever heard of the survivorship bias?

Survivorship biases, arising from the fact that we see only winners and get a distorted view of the odds.
Conventionally, when something or someone is successful, we assume that the extent of the success is proportional to some underlying measure of merit or significance. Successful artists are creative geniuses, successful leaders are visionaries, and successful products are just what consumers were looking for. Success, however, is a descriptor that can only be applied after the fact, and with hindsight it is easy to be wise. Our typically outcome-oriented view of the world, therefore, leads us to attribute the success of something to whatever characteristics it happens to exhibit, whether or not those characteristics were ever recognized as special beforehand.

What we don’t generally consider is that the very same thing, with the very same characteristics, just as easily could have been dismal failure. Nor do we typically waste much time lamenting the multitude of unsuccessful innovations that also could have been contenders had their circumstances been perhaps slightly different. History, in other words, has a tendency to ignore the things that might have happened but did not. Obviously, what actually happened is more relevant to our current circumstances than what didn’t. But we have an additional predisposition to assume that the actual outcome was somehow preferred over all other possibilities, and this is where our perceptions of the world can misconstrue arbitrariness for order. From a scientific point of view, therefore, if we want to understand what might happen in the future, it is critical to consider not only what happened but also what could have happened.

Network effects is one of the reasons MSFT succeeded, but I would say MSFT's ability to achieve architectural control over its value chain was even more important.

I'm personally unconvnced goog has a sustainable advantage...the switching are just too low...I'm curious to see if goog will still be so succesful some years from now. Anyway, the stocks reflects way too high expectations.

The same can be said about ebay.

In short, network effects are an importnat driver of competitive advantage, but there is much more needed to truly create a sustainable competitive advantage.

alexander
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Survivorship biases, arising from the fact that we see only winners and get a distorted view of the odds. What we don't generally consider is that the very same thing, with the very same characteristics, just as easily could have been dismal failure.

Fine statistical theory. Statistics apply to populations and are a useful tool for index fund investing for example. But as Garrison Keillor likes to remind us, all the kids in Lake Wobegon are above average, no matter what the statisticians might predict.

Stock-picking seeks the exceptional cases, where statistics don't help much. If our interest here is what Skype means to eBay and vice-versa, these are not run-of-the-mill companies. The outcome is unlikely to match the statistical average.

eBay management makes their case for the Skype purchase based on synergies they think they can create, building on the network effect. Their track record of success in exploiting the network effect in those two businesses suggests to me that they're not just blowing smoke (or smoking blow?). Their appreciation of the network effect was a prime reason they spent so much to buy the leader rather than rolling their own VoIP technology.

I'm personally unconvnced goog has a sustainable advantage...the switching are just too low...I'm curious to see if goog will still be so succesful some years from now. Anyway, the stocks reflects way too high expectations. The same can be said about ebay.

Wow, it takes a lot to convince you! I tend to think that eBay has proven its merit and is gonna do well for quite a bit longer. And Google has got fearsome old Microsoft quaking in its boots.
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In examining this issue it's useful to break it up into 2 parts: 1) can this type of network effect be monetized and 2) will Skype dominate VOIP.

It's true that not all large networks can be monetized. Purely social networks (Friendster) don't have much potential because the best you can do is sell banner ads and maybe charge a bit for membership. Networks like Kazaa are based on an illegal activity so not much potential there. However, networks that can naturally be associated with a commercial activity (shopping) can be easily monetized. That's why eBay and Google succeed. Is a large network based on phone calls the type of thing that can be naturally be associated with commercial activity? Probably yes.

Will Skype dominate and if it does is its lead durable? Too early to tell but it has a good head start. However, this is the type of thing that can change overnight. If Microsoft decided to include VOIP into Windows the value of the Skype investment would evaporate overnight. One advantage that Skype has over a service like Vonage is it's viral by nature, one friend or relative pursuading another to get Skype and the larger the network gets the more useful it is. Another advantage is it spreads by software. Services like Vonage require you get their equipment which introduces friction to growth.

Slightly off the subject there's an intangible benefit to the Skype deal. While Skype could be a distraction integrating it profitably into eBay and PayPal and guiding it toward world domination could be a very interesting problem for management.
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Survivorship bias has nothing to with statistics or at least very little. It's a bias that distorts how we look at evolution.

Anyway, I have learned the hard way that there is a price for evreything and that when a stock is loved by the masse i should start to question if it still makes a good investment.

alexandre
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1) can this type of network effect be monetized

I think the key to monetizing Skype will be in a paid advertising market similar to Google's PPC Adwords, except that the customer will make a Skype call to the advertiser. Virtually any business with a toll free number could be a potential paying customer, and any web based business without a toll free number will also be a potential paying customer. At any given time, there are over 3 million Skype users online and that is a big market advertisers will not ignore. Skype is signing up over 140,000 new users a day. Granted, most of the current users are in Europe and Asia, but advertisers and web based businesses are global and, with eBay behind it, U.S. internet users will get to know Skype fast and add to the total base quickly.

Before eBay bought Skype, Google was in talks with Skype but it fell apart and eBay won. And then Google came up with its own Google Talk solution that has limited VOIP capability and is nowhere near what Skype offers. Look at everything Google has done in it's short history and they somehow end up tying it to PPC advertising to monetize it. Gmail, Froogle, Google's WiFi (in test), etc all get tied in with Google's PPC ads. This makes me beleive that Google's VOIP will also somehow be related to advertising and pay per voice call.

Ebay was king of the hill in internet shopping before Google's PPC ads took away their PowerSellers from them, and by the time eBay figured out the power and threat of Google's PPC ads, it was too late. Ebay lost over $30 billion in market cap to Google's PPC ads. Ebay could not and should not let the same thing happen again with Pay Per VOIP ads. The $2.6 billion eBay paid for Skype may seem high now, but if eBay did not snap Skype to get the upper hand, it stood to loose a lot more than the current price tag. Skype is a killer app, lots of other applications and peripherals are being developed for it, just like all the thousands of peripherals made for iPod, and is is already a verb in the English language. Ebay pre-empted Google in one swift move!

Microsoft , Yahoo, and AOL all jumped on the same VOIP bandwagon in the last few months for the same exact reason. They all compete with Google in search and they all realized the big new threat early and got in on the act. Spending all this money and effort on a free or almost free service like VOIP just for the sake of being in the good old communications business makes no sense. I think there are bigger plans in the works. All other side benefits will be co-incidental and be the icing on the cake.

Ebay was fooled once by Google, but shame on their execs if they got fooled twice!!!

cheers,

Mehran,

SwapUSA
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If Microsoft decided to include VOIP into Windows the value of the Skype investment would evaporate overnight.

What makes you think so?

Skype is free, so Windows could not bring a cost advantage.

Windows IM Messenger is free but has not displaced ICQ, AIM or Yahoo Messenger.

Windows has built-in desktop search and Outlook search ad-on ('Lookout' I think its called) yet Google came in later and drilled a big hole right thru Microsoft's desktop. Google did it again against free search offerings from Yahoo, MSN and other search engines.

Be not afraid. (Except perhaps of Google).
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What makes you think so?

VOIP is still new and not widely used. As many users as Skype now has IMO there aren't yet so many users that their lead would be durable. I don't think MS would but if they put a VOIP phone icon on the Longhorn desktop and rolled that out all over the world I think most people (and most won't be Skype users) might use it by default.

I was mainly making the point that something else could come along that would quickly render the Skype investment worthless.
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