Monday, October 17, 2005

eBay and Skype logic

Why did eBay pay billions for Skype? Because it was a great deal. Here's why:

The most expensive elements of putting together a telecommunications network are 1) capital investment for infrastructure 2) customer acquisition costs and 3) a billing system. Now let's consider each of these elements for Skype under the eBay umbrella:

Skype customers use their own computer an internet connection to make calls, so there is essentially zero capital investment required to create the network. Nice. eBay is great at identifying projects with high return on very little capital.

Skype ID's look a lot like eBay ID's --in fact they are essentailly the same. If you have an eBay ID, you already entered the data you essentially need to have a Skype account--thus, eBay is one mass emailing away from establishing the largest telecom network in the world---at NO COST to eBay. Very nice.

Skype users can use Paypal for their bill payment. Convenient that eBay owns Paypal--maybe thats how eBay became aware of Skype in the first place--the guys at the paypal division gave Meg a call, and said, "Check out the guys at Skype, because their Paypal billings are going through the roof". Now that they are one big family, Paypal becomes the deFacto billing system for this new global telecommunications service---at ZERO COST since it has already been built and integrated. Does it get any better than this?

In fact it does, because aside from the value of the business itself, eBay gets the derivative benefit of now connecting it's users for free via voice. Voice communications build trust more easily than email. Trust it the basis for the eBay economy. Skype will further enhance the value of the eBay network and increase already impenetrable barriers to entry. They already have Skype Me buttons you can add to your website--or your eBay listing.

Monday, July 25, 2005

MIT Media Lab: Reality Mining

MIT Media Lab: Reality Mining The Reality Mining project at MIT uses the cell phones of students and Faculty to track their behavior and then predict their future behavior. They claim that it's accurate in predicting someone's next move 85% of the time. This is pretty poor performance. If I know the MIT student is in the lab, there's a 100% chance of correctly predicting their next activity will be to go to their dorm room. Similarly, if they are in the dorm, there's a 100% chance that they are going back to the lab. I'm guessing they had a bad sample set, and that 30% of the students were from Harvard and they had a 50/50 chance of predicting if they would show up at lab versus sleep in, or if they would go to a bar after lab or take the bus to Wellsley.

Psychology of Intelligence Analysis

Psychology of Intelligence Analysis Wow! Online presentation of a book used by the CIA on Intelligence Analysis. Big focus upon how our brains are wired to make mistakes.

Del.icio.us - Complete Tool Collection

Quick Online Tips: Absolutely Del.icio.us - Complete Tool Collection: "kmarks manager. It allows you to easily post sites you like to your personal collection of links, to categorize those sites with keywords, and to share your collection not only between your own browsers and machines, but also with others. RSS feed"

Friday, July 22, 2005

Slashdot | Mac OS X Gaining Ground In Corporate Environs

Slashdot | Mac OS X Gaining Ground In Corporate Environs Apple's strategy is working. the best way to unseat microsoft is to get more developers working on their platform. By basing OS X on Unix, they've captured the Linux community and have done just that. The money is in the enterprise, and now the numbers are starting to show it. Folks have been so focused upon desktop Linux as an idea without realizing that it already existed--it's called Tiger/Panther by Apple.

Thursday, July 21, 2005

The Forgotten Technology

The Forgotten Technology OMG! This guy has clearly nailed a simple explanation for how the pyramids were built. What blows my mind is the combination of the solution's obvious simplicity with the fact that it's been thousands of years before anyone re-discovered the idea. How many other "obvious" ideas are right before our eyes that we don't see, yet have the capacity to fundamentally change our capabilites and the world?

Wednesday, July 20, 2005

EBay's 2nd-qtr profit soars 53 percent - Yahoo! News

EBay's 2nd-qtr profit soars 53 percent - Yahoo! News Let me start by saying, eBay is the largest position in my personal portfolio. I hold it in such esteem because the market currently does not know how to value this company. How should the market value eBay? While one can analyze the current financial metrics in detail, the primary driver of eBay’s valuation is the “terminal value” approximation for the cash flows created beyond the two year time period forecasted by most analysts. Analysts depend upon comparables for approximating the terminal multiple. Unfortunately, there are few comparable business models to the unique nature of eBay’s business.

eBay’s unique combination of seller and buyer ratings create a high switching cost for the users of its liquid market place. Moreover, the barriers to entry continue to rise as the business expands—something reflected in its continuous rise in gross margin. The business is not capital intensive, so free cash flow margins are very high. eBay’s primary customers are consumers and small businesses. It not only controls the platform for its services (the market place), but it leverages that control to expand into other services like eBay Stores, PayPal and Half.com. Finally, eBay is the undisputed leader of online auctions.

After listing these business model attributes, one might notice it sounds a lot like Microsoft. However, I have never seen anyone use Microsoft as a proxy for a comparable valuation analysis. Of course, this is in part due to the fact that Microsoft is at a very different point in its maturity relative to eBay. However, at some point in the past, Microsoft was the size of eBay. As such it might be instructive to consider Microsoft’s valuation multiples at the time to determine two things: 1) would the multiples square with eBay’s multiples today and 2) how accurately did the market forecast the long term cash flows that were ultimately realized. Following this line of reasoning, I found Microsoft generated strikingly similar financial performance from 1985 to 1993 (FY) relative to eBay’s 1997 through 2005. The revenue is nearly the same in absolute dollars during each of the last five years of this time series comparison.

One of the similarities in growth rates could be related to the similarities in the underlying customer base (consumers and small businesses) and the rate at which this market segment adopts technology. Another similarity could be attributed to the speed at which a standard spreads and the associated rents that a monopolistic provider can capture over time. Whatever the reason, the growth rates and absolute revenue numbers are very similar. It is notable that the analyst community has consistently underestimated eBay’s growth rate (the same can be said for Microsoft in the past). In both cases, the estimation error in forecasting could be attributed to the dependence upon “comparables” that were not really comparable. Comparing Microsoft’s growth to other software companies at the time would cause an analyst to consistently underestimate results. The same can be said of eBay when compared to other Internet companies.

The similarity in revenue leads to the next logical question—how do margins compare? To compare apples to apples, I’ve taken eBay’s margins from 1997 through 2005 and compared them to Microsoft’s margins from 1985 to 1993. Given the similarity in revenue during those respective time periods, comparing margins should be a fair exercise. If I knew how to post a chart I would, but suffice to say, these metrics are very close to each other near the end of the time series comparison.

Given the similarities in business models, it is not surprising that every element of the P&L between the two companies are similar. What’s is surprising, however, is that eBay’s gross margin has been higher than Microsoft’s for some time, and its other metrics are on track to meet or exceed as well. Is it possible that eBay could be a better business than Microsoft?

The sustainable monopoly position of Microsoft was not clear in 1991. Competitive offerings from IBM and even Apple kept the markets guessing as to who would win the war for standardizing the operating system. In contrast, most recognize that eBay has defeated Yahoo and Amazon’s efforts to create competitive online auctions. While Google has the potential to compete for some share of the small business online market, Google does not provide an auction marketplace that is competitive to eBay’s platform.

There are a few reasons to believe that eBay should trade at a premium to Microsoft now and in the future.

In the long run, eBay’s margins could be greater than Microsoft’s. For example, Microsoft will invests billions in R&D to develop the next generation operating system and technologies to extend into other markets like video games, voice recognition, and home entertainment. In contrast, eBay does not have to innovate its platform because the value comes not from the features offered by the platform, but the liquidity of the market place it supports. eBay investment dollars fund expansion into different markets like used cars or trading cards, but the expense required to develop the software for those markets is trivial relative to the cost of developing a new software application like Microsoft Office or Windows XP.

eBay’s revenue growth could exceed Microsoft’s in the long run. eBay’s revenue growth rises with the economic activity of its users since it charges on a per transaction basis. This model efficiently captures the consumer surplus created by the platform. In contrast, Microsoft fails to capture a significant amount of the consumer surplus it creates. As an example, the analyst who uses Excel every day to model a billion dollar portfolio pays the same price for the software as the student who uses Excel once a month to keep track of their MP3 music collection. Moreover, eBay has multiple sources of growth that do not require it to stray from it’s core platform and service, including international markets, verticals such as Motors, Sports and Consumer Electronics, category expansion, and extensions of PayPal. In 15 years eBay could be the global distribution environment for retailers and manufacturers.

While a case can be made for why eBay is the next Microsoft, there are plenty of counterpoints that highlight the risk of such as position. First, Microsoft benefited from several exogenous factors that had nothing to do with the merits of Microsoft’s model. In particular, the decision to base Windows upon an Intel platform looked smart in hindsight. However, they were fortunate that Intel outpaced IBM, Sun, and DEC to dominate the market for CPU’s. Second, the failures of Claris (WordPerfect), Lotus (123 spreadsheet), and Corel (Quattro spreadsheet) were due in part to Microsoft’s aggressive strategy, but each had their own idiosyncratic execution failures that collectively contributed to Microsoft’s dominance of the office application market in addition to the operating system market. It was only after the release of Windows 95 and the introduction of MS Office that the integration of the office applications with the operating system began to give Microsoft and unfair advantage. Both companies have strong management teams and aggressive cultures.

Only time will tell whether or not eBay will be the next Microsoft, but it is well positioned to achieve such a potential. The business has high barriers to entry, enjoying a virtual monopoly in its market. It delivers value to the consumer and small business market on a global basis. eBay enjoys extraordinary revenue growth and high margins with low capital requirements. Finally, it controls the proprietary platform that delivers its value directly to the customer without dependency upon distributors or other intermediaries.

del.icio.us noise filter

del.icio.us/lightray I'm a little late to the game, but del.icio.us is the coolest web service I've found in a long time. It hold the promise of solving the "filter" problem for information overload. If you are reading this blog, then chances are you also read stuff that's of interest to me. bookmark your sites in del.icio.us and let me know your user name so I can link to your feed.

Friday, June 10, 2005

WSJ on eBay--clueless

WSJ.com - EBay Agrees to Acquire Shopping.com: "The following excerpt was from the WSJ on the eBay acquisition 'The acquisition is eBay's latest effort to reignite its growth, particularly in mature markets such as the U.S. and Germany.'

The authors had the data needed to understand the real reason for the acquitition when they said, 'Shopping.com, for example, relies on Google to place advertisements on its site. Those ads accounted for 44% of the Brisbane, Calif., company's revenue of $28.9 million in the first quarter, according to the company's quarterly filing with the Securities and Exchange Commission. EBay officials declined to address the future of the relationship between Shopping.com and Google, which also declined to comment.' BUT THEY MISSED THE POINT. eBay is Google's largest customer, as they buy ads on Google to redirect traffic to their own auctions. Shopping.com competes with eBay for SUPPLY of words on Google. This competition drives up the price of words on Google, reducing the ROI on marketing spend for both companies. By acquiring Shopping.com, eBay will be able to reduce their marketing spend ($$ to Google) by paying less for ad words because they can integrate Shopping.com's demand rather than compete with it in an acution. eBay bought Shopping.com to reduce their cost and improve margins--the rationale for the acquisition was not motivated by growth.

The Wall Street analysts missed the point too, as the subsequent quotes in the article point out 'There appears to be a substantial amount of interest from buyers and sellers away from eBay,' said Derek Brown, an analyst at Pacific Growth Equities. 'It seems to be a way for eBay to reach a new pool of potential buyers and sellers.'

If the price of Google ad words goes down, Google's revenue growth rate will slow. Given the time it will take eBay to integrate the Shopping.com acquisition, look for this to happen around the time eBay's margins begin to expand late this year."

Friday, May 27, 2005

CNN.com - Sex offenders get Viagra paid for by Medicaid - May 23, 2005

CNN.com - Sex offenders get Viagra paid for by Medicaid - May 23, 2005: "This was just too wacky to not post. It's a good thing the breaucrat responsible for this is working for Medicaid rather than the DoD, otherwise, we'd be using foreign aid to subsidize weapon purchases for alQu'eda...oh, wait, that was a different breaucrat"

Tuesday, April 26, 2005

Friday, April 22, 2005

podscope - I spoke too soon

podscope - your're listening. we're searching. Well, it looks like Podscope is taking a wack at the search engine for podcasts concept, but it's pretty ineffective so far.

iPodder.org , blogging without a keyboard

iPodder.org : Unlike most of my early adopter friends, it wasn't until Feb. that I bought my first Ipod--a 30 gig Photo iPod. At first, I thought I'd use it at the gym. I haven't been to the gym since I got it (so much for the new years resolution), but I've been using my iPod every day--in the car, and walking down the street to Starbucks. I use the iPod to listen to audio books that I downloaded from the iTunes store--not music as I would have expected. While I'm blessed with an 8 minute commute, I'm managed to consume three books in the past 2 months this way--three books I never had the time to read. This is important, because listening to a book is much slower than reading. However, I cant read while driving, and carrying a book to starbucks just doesn't happen.

As I reflected upon the new value that the iPod brought to my otherwise wasted time, I ran across iPodder.org and discoverd "podcasting". While Blogging is profoundly huge in its emerging impact on society, I think podcasting might be even bigger. Why? Because more people listen to the radio than read the newspaper. More people will end up getting a podcast feed via RSS to their portable mp3 player than people who really have the time to spend reading blogs like this. Finally, content producers will have an easier time cranking out audio content than trying to compose the written word--remember its much easier talking to your friends than writing a letter to them, at least for most people.

If after contemplating this potential and you figure out a slick idea for using voice recognition to drive a podcast search engine, let me know and we can talk about VC funding terms.

Thursday, March 17, 2005

Dell quits 'white box' PC biz

Dell quits 'white box' PC biz | The Register Looks to me like Dell is eating it's seed corn. The 'white box' market for Dell was a great way to take share in the reseller market away from competition and achieve price discrimination on a commodity product. Why would Dell change strategy?--because they need a new source of profit growth and there's nowhere else to go. Nice for the short term, but bad for the long term prospects of profit growth.

Wait to see if Apple jumps on this opportunity to start supplying 'white box' G5 X-servers.

Monday, February 28, 2005

Yahoo! News - Leaking Gravity May Explain Cosmic Puzzle

Leaking Gravity May Explain Cosmic Puzzle Here's a great example of really smart people wasting valuable brain cycles. For over 3 years, there's been a clear explanation for the dark matter anomaly published by Randell Mills but it's obvious simplicity eludes erudite physicists. Dark matter is simply hydrogen emitting from different quantum levels than people would expect. There's no such thing as leaking gravity. However, if you get suckered into believing string theory and it's claims of an 11 dimensional relaity, anything's possible with enough math and assumptions that can't be tested.

Wednesday, February 02, 2005

HP Feature Story: Eliminating the Need for Transistors: HP researchers are reinventing the computer at the molecular scale (February 2005)

ObsoletingTransistors HP has now demonstrated a working crossbar latch at the nano scale. Something tells me that Carly's not going to focus on the opportunity to transform HP into the Intel of the next generation.

Tuesday, January 11, 2005

Azul Systems: Products & Solutions

Azul Systems: Products & Solutions I've got gigs of storage and megs of RAM, but one CPU. Is the new multi-core vector of CPU development the new tipping point that will drive the new metric in computing to be kiloCPUs? Will the CPU unit of measure be the last generation of Pentium before Intel went multi-core? It looks like Azul might have an early lead in a new paridigm in this computing trend.