« SHARE and share alike | Main | Unloading MSN »
Communal delusions
September 14, 2005
Fortune's David Kirkpatrick makes a brave attempt to defend eBay's multi-billion-dollar purchase of Skype. But it doesn't wash. He ties the deal to the Internet's "empowerment of the individual," saying that "eBay seems intent on creating the first genuine conglomerate of what I have called the Contribution Economy." To achieve that (dubious) honor, eBay "will need as much of that economy's true currency - empowered users - as it can get. So we might expect to see more acquisitions by eBay of companies that meet a basic philosophical criterion: They give individuals great power they never could have had before the Internet came along. Those businesses don't have to be directly connected to eBay's online marketplace; I'm suggesting that eBay may see itself as not just an online intermediary between buyers and sellers but a nexus of personal Internet empowerment."
A nexus of personal Internet empowerment? No, eBay's a large, profit-making business whose fortunes rise and fall not with its philosophical purity but with its economics. As Meg Whitman herself took pains to point out, eBay's strength lies in its rigorous focus on being "just an online intermediary"; it's not about to reposition itself as some fuzzy nexus. Besides, what exactly is the basis for Skype's great "community of users," as Kirkpatrick terms it? Fellow-feeling? A shared love of empowerment? The harmony of the spheres? Nope, nope and nope. The community exists for one major reason: Because Skype is free. Charge ten bucks for the software or slap on a $5 a month subscription fee, and that community goes up in a communal puff of smoke. Yes, Skype takes in some money by charging for off-network phone calls, but again the attraction there ain't community, it's dirt-cheap rates. And with low barriers to entry and low switching costs, it's going to get harder and harder to make money in that business, particularly when you get Google subsidizing its own service with ad revenues. (Reuters quotes one Skype member about fears that eBay will muck up the service: "We can just sit back and watch. Smile. And hey, if eBay is doing that bad we can just switch to tons of other VOIP software.")
One of the best ways the Internet "empowers" users is by letting them do things for free or really cheap that they used to have to pay dearly for. Courting such empowered users as customers is a tricky business. If you're not damn sure how you're going to make money off them, you probably won't.
So it comes back to a simple question: Was buying Skype the cheapest way for eBay to add voice communication to its auction service? I have yet to see anyone, including eBay itself. make a convincing case there. Hell, Skype would have probably bent over backwards to be eBay's voice channel, on terms that would have given eBay a big chunk of any user fees with no upfront investment at all. And if Skype wasn't game, one of its competitors surely would have been.
The best analysis of the deal I've read is by John Hagel. He sees is as a classic case of "The Curse of the High Multiple." He explains: "Once your company ascends into the stratosphere and convinces shareholders that it has extraordinary potential for profitable growth, what does it do then? Well, you have to deliver. The higher the multiple goes, the more challenging it is to meet those expectations ... The pressure can become overwhelming. It pushes companies to look for really big plays that can feed the expectations engine (and potentially divert attention from the slowing growth in existing businesses). Since organic growth rarely delivers big enough impact (especially once a company moves beyond a certain threshold of size), management starts to rev up the acquisition engine."
In other words, the stock market made her do it.
Advertisement: Coming this spring: Nicholas Carr's new book The Shallows: What the Internet Is Doing to Our Brains. Preorder now from Amazon.
Comments
Post a comment
Thanks for signing in, . Now you can comment. (sign out)
(If you haven't left a comment here before, you may need to be approved by the site owner before your comment will appear. Until then, it won't appear on the entry. Thanks for waiting.)
Nick's next book:
Nick's latest book:
"Future Shock for the web-apps era" -Fast Company
"Ominously prescient" -Kirkus Reviews
"Riveting stuff" -New York Post
Greatest hits
Avatars consume as much electricity as Brazilians
The love song of J. Alfred Prufrock's avatar
Flight of the wingless coffin fly
Other writing
The end of corporate computing
Nick's first book:
Order from Amazon
Visit book site