Thursday, September 22, 2005

I give in...





(...wasn't planning to blog on Skype, but I couldn't resist.) Lenn Pryor, head of Skype's developer program, came to eBay yesterday and gave us a download on the Skype platform. Lenn pointed out some pretty amazing (and fairly well known) results (55M users, 171M downloads, users in every country in the world) since Skype was founded two years ago. He also walked through Skype's efforts with developers (some really interesting apps coming out like Festoon, Jyve and SkypeForce).

Now, I can understand why there's concerns around eBay/Skype, focusing on things like fit, acquisition cost, competition, etc. That said, the value in any community-based online company (including MySpace, eBay, Paypal or Skype) boils down to how deep the moat is around that user community. If the moat is there and users are compelled to stay with the service/company, there's HUGE value per user based on layering paid services to that user. eBay, Yahoo! and Paypal are great examples, with massive communities enabled with free services (no cost to search and buy on eBay, find content on Yahoo or send $ to another individual via Paypal). How a site monetizes these communities ultimately should drive the market value, but given the prior success of these business models, one can safely assume some lifetime $/user as the basis of an acquisition.

So first let's start making some comparisons. MySpace was purchased for $580MM with 28MM profiles (~$20/user). Alibaba's market value was $2.5B ($1.0B investment/40% stake) with 18MM users ($139/user). Skype was acquired for $2.6B with 55MM users ($46/user). Hmm. Skype is growing 2-3x faster than Alibaba, with a third of the cost per user. Revenues for Alibaba and Skype (~$60MM for 2005) are also similar.

Now someone might rightfully point out that Alibaba is an eCommerce company where each user is more easily monetized. Two points here. First it's an eCommerce play in CHINA (with almost all of Alibaba's revenue coming from B2B subscriptions and NOT Taobao users). While the Chinese online market is growing fast, the $ revenue/user in China is safely 5-20x less than the $ revenue/user outside China (hence the value per user should be 5-20x less as well). Second, this is exactly why eBay's acquisition of Skype makes sense. What better way to make Skype more eCommerce/transaction oriented than combine its services to Paypal and eBay? Layer on an eCommerce/transaction service on that moated 55MM Skype users (growing 1MM users per week) and you have a revenue juggernaut on your hands.

The second question is as important. Does Skype really have a moat around its users? At first blush, it seems very simple for one user to switch from Skype to lets say Google Talk or Yahoo! Talk. But how easy is it to switch every one of the contacts that each of the 55MM Skype users have over as well? Would you switch from using AIM to Yahoo! Messenger because of a better Yahoo! commercial? Obviously not. You stay using AIM because of the network of friends, peers, workmates you communicate with through that service. Easy to move 1, very hard to move 100. That's called a moat for AIM, for Yahoo! and yes for Skype.

eBay/Skype might confound the nonbelievers, but thanks to Lenn, I've been fully converted (and yes I'm a mite biased). And for everyone who loved Yahoo's investment in Alibaba (per the above) but frown upon eBay's purchase of Skype, go to www.skype.com, download the app and Skype me :) SkypeID=RoChoy.

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