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September 30, 2005
First eBay, now Yahoo!
Interesting. Nuance, a voice technology company I've followed for years, is suing Yahoo! over 13 Nuance engineers who were hired away to work on voice-based applications. Nuance claims they are stealing confidential information about a new service Nuance was building.
What's intriguing to me isn't the lawsuit, but the fact Yahoo! is staffing up aggressively in this area. The company bought Dialpad, a VOIP company, several months ago, and it has VOIP capabilities in Yahoo! Messenger. Like eBay, which bought Skype, Yahoo! has some unique assets that could position it to deliver innovative voice-based applications, beyond basic voice calling over the Net. Keep your eyes peeled.
Posted by Kevin Werbach at 9:51 AM | Comments (0)
Reintermediation vs. Disinermediation of IP
Over at Prawfsblawg, Doug Lichtman raises a good point about the Google Print litigation. We might be comfortable with Google scanning libraries of books into a database, he says, because they have incentives to behave responsibly with respect to intellectual property, security, etc. Does that mean we're comfortable with every individual doing the same thing?
To put it another way, some of the Internet-based challenges to traditional intellectual property are about reintermediation -- replacing old intermediaries, like publishers and record labels, with new online ones. Some, however, are about disintermediation -- getting rid of the intermediaries entirely. One is iTunes, the other is MyTunes. The latter is much more threatening. Intermediaries can be controlled through law and other means, but individuals may be too numerous, distributed, and unruly to respond to those mechanisms.
The wild card here? Storage.
The price/performance of digital storage is growing even faster than processor speed or Internet capacity. When every new mobile phone can hold the total output of major record labels over the past decade, and every new TV can do the same for Hollywood movies, the hold of the intermediaries becomes increasingly tenuous.
Posted by Kevin Werbach at 9:40 AM | Comments (0)
"The game is over, it's dumbpipeville all round."
Martin Geddes weighs in on IMS, the telcos' latest three-letter acronym for turning the Internet into the old phone network (see, e.g., QOS, ATM).
Look, guys, this is a different world. There's no Bellcore out there to bring everyone together. And it's the applications that get users interested in voice communication, rather than the reverse.
The Internet diehards need to change their views too. Skype is a proprietary platform -- it's not just dumping bits onto an open-standards network. Google is buying fiber and exploring wireless and broadband connections. Sprint and Nextel are building a company that's half about wireless and half about sports and entertaniment.
We're not going back to the "good old days" of the public switched telephone network, but we're not going back to the "good old days" of the 1990s open-interconnect Internet either.
Posted by Kevin Werbach at 9:25 AM | Comments (0)
Who Rules the Net?
The European Union has joined a chorus of developing countries arguing that the US has too much control over the Internet. The fight directly concerns ICANN, the quasi-private group that oversees the Internet's domain name system under agreements with the US Department of Commerce. But it's really about much more than that.
What's remarkable is that this fight comes as American dominance of actual Internet activity is waning. The US doesn't dominate the emerging wireless Internet, or the emerging broadband video Internet. They are being shaped largely in Europe and Asia, where broadband and mobile penetration is higher.
And before long, there will be far more Internet users in China than in the US. The US argues (correctly, I think) that keeping Internet governance out of the UN will protect against intrusions such as content regulation. However, US Internet companies such as Yahoo! and Google are already bowing to demands from China and elsewhere to comply with anti-free speech policies that would be abhorrant in the US. While the bureaucrats meet in Geneva, the Internet policy decisions that matter are happening in the real world.
This reinforces the notion, mentioned in the article linked above, that what has caused the Internet governance fight to boil over is anger about America's foreign policy, especially Iraq. That's a shame. Yet it's a reality we must acknowledge.
The Internet is less and less removed from the physical world. Internet politics can't be seen in isolation from geopolitics. That's the difficult reality.
Posted by Kevin Werbach at 9:11 AM | Comments (0)
September 29, 2005
Shutting down a third of the Net
eDonkey, a leading peer-to-peer file sharing service, just announced that it's shutting down in response to a cease-and-desist letter from the record industry. Post-Grokster, the company decided, the legal risk is just too great.
eDonkey may not be a household name in the US, but according to Cachelogic, which tracks P2P traffic, it's now the leading P2P network. eDonkey represents about half of P2P traffic by volume, which in turn represents 60% of all traffic on the Net.
In other words, the company responsible for about a third of all bits moving across the global Internet just shut down. And nobody seems to notice.
Posted by Kevin Werbach at 9:51 PM | Comments (1)
It Takes a Disaster
In the four years since 9/11, the US has spent billions upon billions of dollars on homeland security and disaster preparedness. The vast majority of that money has gone to the traditional vendors and service providers. At the same time, the government has thrown road blocks in front of promising decentralized communications technologies, like low-power FM radio and voice over IP.
What's the connection?
It turns out that these new technologies may be our best hope for building a disaster-resistent communications system. In the hectic hours after Hurricane Katrina hit, it was a Vonage VOIP line that let the Mayor of New Orleans communicate with the outside world after conventional phone lines went dead. Meshned wireless networks proved essential for emergency communication at Ground Zero after the 9/11 attacks. And now, word comes that regulators are looking to expand authorization for low-power FM stations as a way to improve resiliency of broadcast communications in the event of a disaster.
If only our policy-makers had been so enlightened before the disaster hit. The regulators and Congress need to recognize that emerging decentralized communications technologies aren't a threat to the network; they may its salvation in times of crisis. If this is what it taks to clear some of the roadblocks to innovation, so be it. The benefits of things like meshed wireless, VOIP, and low-power FM will be felt even when there isn't a disaster.
Posted by Kevin Werbach at 10:16 AM | Comments (0)
Location, Location, Location
I'm still not entirely sure what Google is up to with its various WiFi and netowkr infrastructure flirtations. Google probably isn't entirely sure itself -- like Intel, it benefits from any growth in the relevant market, so it doesn't have to figure out everything ahead of time.
Still, I'm beginning to suspect that another casualty of the dotcom bubble, location-based services, are about to make a big comeback. This is another topic I wrote about five years ago in Release 1.0, but the market was clearly ahead of itself back then. Now, though, things are different.
Combine local wireless infrastructure with powerful handheld devices and central repositories of location-tagged data (such as Google Maps, Yahoo! Local, or Amazons A9 search engine). Add location detection through GPS, or, intriguingly, triangulation from known WiFi access point locations (something Microsoft and at least one startup have demonstrated). What do you get?
Well, I'm not sure, but potentially something very, very big. Local advertising is a massive business. There are billions of dollars out there for the companies that figure out how to effectively extend e-commerce into the physical world. Google, Microsoft, Yahoo!, and others are well aware of that. So is eBay, which is why I'd put the Skype aquisition potentially in this category as well.
Posted by Kevin Werbach at 10:06 AM | Comments (0)
Mobile TV is real
At the TPRC policy research conference last weekend, I listened to a presentation about digital mobile broadcast (DMB) service in South Korea. DMB means television on your mobile phone. It's up and running today in Korea, with plans to expand the system to include local as well as national channels. The audience was skeptical. One questioner wondered aloud whether any customers would actually pay for such a thing.
Well, guess what? Mobile TV is going to be big. In fact, it's already happening here in the US. A company called MobiTV is sending TV programming to mobile phones over cellular data networks. This isn't nearly as good as the full-scale mobile broadcasting they have in Korea, and it's only available on a few phones from a few carriers. Nonetheless, customers seem to be responding. There are already 500,000 subscribers to MobiTV's service here in the US.
Let's see now. 500,000 subscribers at $10/month means a $60 million annual revenue run-rate. That's not chump change. And it's nothing compared to the numbers we'll see once real digital mobile broadcasting hits these shores. Qualcomm is investing hundreds of millions of dollars in the infrastructure for mobile TV, and other companis are as well.
While the telcos' IPTV platforms get all the attention from regulators and the business press, I suspect true alternatives to conventional television like digital mobile broadcasting and the Internet-based platforms that companies like Google, Yahoo!, and Brightcove are building will have more of an impact sooner on transforming the TV industry.
Posted by Kevin Werbach at 9:57 AM | Comments (0)
VOIP confusion
Looks like the FCC's attempt to clarify the legal environment for voice over IP is having exactly the opposite effect.
This is what happens when a regulator tries to take half-steps at a time when bold action is required. The reality is that the telecom industry is being tranformed before our eyes. FCC Chairman Kevin Martin is absolutely right to believe that social policy obligations like law enforcement access and emergency access (911) shouldn't go away, simply because the technology changes. But by trying to stuff VOIP into rules designed for old-fashioned telecom, he's just going to harm competition and innovation. A better approach would be to look at how VOIP could facilitate achievement of social policy goals, but that means rethinking the entire regulatory edifice.
Posted by Kevin Werbach at 9:50 AM | Comments (1)
September 27, 2005
Starting Over
After months of struggling with performance and stability issues on my new Powerbook, I finally decided to bite the bullet and do a clean reinstall OS X. Nothing else seemed to work, and even the folks at the Apple Store "Genius Bar" couldn't find anything in particular wrong with the machine. So I did multiple backups, wiped the hard drive, and held my breath.
I'm still in the midst of restoring everything, but at least I was able to get the machine running again without any apparent loss of data. It's too early to judge the performance, but I'll keep my fingers crossed. It would be ever so nice to have the stable PC I thought I was getting when I switched back to the Mac.
Posted by Kevin Werbach at 2:46 PM | Comments (0)
September 24, 2005
The FTC joins the muni wireless debate
Wow, this was a surprise. Jon Leibowitz, a commissioner of the Federal Trade Commission (FTC, not FCC), gave a ringing endorsement yesterday of municipal wireless networks, according to Telecommunications Reports. "It is not only wrong; it is unacceptable" to pass laws barring such networks, he reportedly said. He pointed out that cities do all sorts of things that in theory compete with the private sector, such as operating libraries, schools, and police forces. Laws barring municipal wireless are tantamount to using regulation rather than competition to succeed in broadband, according to Leibowitz.
Leibowitz is a Democrat, which means he's in the minority at the FTC. So one shouldn't get too excited about this going anywhere. Still, it's interesting to think about whether municipal wireless and other broadband restrictions at the behest of incumbents could be reframed as consumer protection discussions.
Posted by Kevin Werbach at 7:58 AM | Comments (0)
Yesterday's News
I'm here in Arlington, Virginia, at TPRC, the annual research conference for telecom policy and cyberlaw. I've been going for several years, since I was at the FCC; it's a unique venue that brings together scholars, government staff, and policy advocates in an academic setting. That makes it possible to float new ideas and cross boundaries in ways that aren't possible once you take the short trip across the river into Washington DC. Last year I joined the board of the organization that organizes TPRC, in part to bring more Internet and cyberlaw discussion into the event.
Anyway, this is all background for the session last night, a debate between former FCC Chairman Dick Wiley and Reed Hundt. Wiley is the eminence griese of telecom policy, an influential Republican lawyer and lobbyist best known as the driving force behind the US plan for digital television. Hundt, who was my boss at the FCC and has close ties to Al Gore, is an ascerbic, brilliant character, never hesitant to create a cotroversy.
Reed readily conceded that the debate over "unbundling" incumbent phone and cable networks was "yesterday's news." He praised the current FCC, led by Republican Kevin Martin, for its deregulatory policy toward the phone companies. That was shocking to some, The unbundling rules were among the most visibile products of Hundt's tenure at the FCC. But as Reed pointed out, the entire logic of the 1996 Telecom Act was to create competition for voice telephone service. Today, it's clear that voice pricing is going to zero. Voice will be an application or feature on top of broadband networks. So, Reed argued, let's create as much broadband competition as we can (in part by reallocating wireless spectrum now kept idle by television networks), and radically deregulate everything on top.
I'm not doing justice to his argument (and certainly not to the presentation). But I think it's important to appreciate Hundt's point. The Brand X decision this summer, in which the Supreme Court endorsed the FCC's rejection of unbundling rules for cable networks, closed a chapter in telecom policy. We need to realize that the landscape today is radically different.
Posted by Kevin Werbach at 7:24 AM | Comments (0)
Here Comes the Videonet
Saul Hansell, in today's New York Times, has an article about Yahoo!'s video programming efforts. It's a bit of a puff-piece, given the internal turmoil that group has generated within Yahoo!, but it contains some important nuggets, particularly this one:
"Increasingly, Mr. Semel and others are finding that the long-promised convergence of television and computers is happening not by way of elaborate systems created by cable companies, but from the bottom up as video clips on the Internet become easier to use and more interesting."
I get a lot of skepticism, even from technology enthusiasts, when I talk about the convergence of the Internet and video. People point out all the ways that TV is hard to distribute over today's broadband and wireless networks, and all the business or regulatory challenges new entrants face in trying to replicate the businesses broadcasters and cable TV operators developed over decades.
That's not the goal.
The Internet won't completely replace television as we know it. Instead, it will mutate and extend it. Right now we're seeing the long-promised "convergence" play out on two levels. Big phone companies are deploying digital platforms on fiber optic networks to compete with cable operators, who are rushing to add on-demand features in response. To me, though, that's less interesting than the distributed, bottom-up activity around short video clips on the Net and wireless networks. One is about competition; the other is about transformation.
At some point, thanks to VOIP, most of the voice conversations we engage in across the network won't be phone calls. (That's at least part of what eBay/Skype is about.) Similarly, most of the video content we watch won't be television. Those traditional forms will still be around, but they will become specialized, much like radio after the emergence of television.
This is what the incumbents can never appreciate. They are hard coded to assume that voice = phone calls and video = TV. The two great economic drivers of the communications industry, advertisers and users, will have no trouble adapting. AOL, Yahoo!, and Google, each in its own way, cracked the code for harnessing the text Internet as an advertising medium. Those companies, and perhaps others, are bound to do the same for the video Internet. Once they do, look out.
Posted by Kevin Werbach at 7:04 AM | Comments (1)
September 22, 2005
More thoughts on the fragmenting Internet
This quote in a Light Reading article about Google's network infrastructure plans encapsulates why I suspect we may be moving into a new, vertically-integrated phase of Internet development:
“Traditionally, people went to Internet peering points. But because Google is so large, it could be the Internet. People would go there and never leave.”
If Google is big enough to do that, so are Microsoft, Yahoo!, AOL, eBay, and probably a few others. And I'm sure the network owners -- Verizon, SBC, and Comcast in particular -- would love nothing more than to "be the Internet" for their customers. Wireless operators already are, for the most part.
The threat of vertical integration from the bottom of the stack has been with us since the earliest days of the commercial Internet. Now, surprisingly, it may be coming from the top as well.
There's nothing necessarily evil in what Google is doing. And they aren't alone. I just can't help thinking that we're moving away from the common platform that defined the Internet for the past decade, and we haven't really examined what that will mean.
Posted by Kevin Werbach at 10:14 AM | Comments (4)
September 21, 2005
Timing is Everything
This semester, I'm teaching the honors section of Legal Studies 101, the introductory law course for Wharton undergrads. One of the topics we cover is intellectual property. I decided over the summer that I would ask the class to write papers evaluating whether Google's new Google Print service, which involves scanning millions of books in university libraries, violated copyright law.
Today was the day I planned to hand out the assignment. Lo and behold, a group of authors picked today to announce they were suing to block Google Print. Perfect timing!
Posted by Kevin Werbach at 10:23 AM | Comments (0)
"It Just Works"?
By the way, I'm still having problems with my Powerbook. Things have gotten somewhat better, thanks to constant tinkering, but I still find myself having to restart at least once every other day. (And about half of the time I try to restart, nothing happens, forcing me to pop out the battery in order to shut down.)
The latest annoyance was that my USB keyboards started going haywire. Several keys produced the wrong output -- i.e., I'd hit "M" and get "'m/" or something like that. So I switched to another keyboard, and the Powerbook acted as through I was holding a key down -- it kept repeating that one letter over and over again. I couldn't figure out any way to stop the problem... and then, the next day, it was suddenly gone.
I'm also still annoyed by little things that I would expect to work better. For example, when I move my laptop from home to work, OS X isn't smart enough to realize that the printer I had selected is no longer attached. I have to keep remembering to manually switch back and forth. It's also about 50-50 whether the Mac will recognize an Ethernet cable and connect to the Internet, which is a pain.
In general, I find things "just worked" more on Windows XP than on OS X, which is the last thing I would have expected. I've made a commitment to this Mac, and it's generally functional now, so I'm not going back. But I still hope -- for Apple's sake -- that my experience improves. They can't compete at all unless their products really are better than the competition.
Posted by Kevin Werbach at 9:32 AM | Comments (2)
Antitrust as leverage
I mostly yawned at the announcements several months back that AT&T and MCI would be acquired by incumbent local phone companies SBC and Verizon. The long-distance telephone industry, which is what AT&T and MCI used to represent, is dead. It was created out of whole cloth by the AT&T divestiture in the 1980s. A combination of regulation and technology have since destroyed the notion that carrying telephone calls over long distances between central offices is a stand-alone business.
The industry AT&T and MCI thought they were getting into, competitive local exchange service, has also largely disappeared. The 1996 Telecom Act was designed to facilitate competition in local telephone markets, but for a variety of reasons, most of the competitive efforts were spectacular failures. Local competition is finally happening, in the form of mobile phones and cable VOIP, but that doesn't help AT&T and MCI.
So, other than the loss of effective pro-competitive policy advocates in Washington, DC, I wasn't all that concerned about the effects of the two mergers. Now, however, it looks as though the deals may be the catalyst for a significant pro-competitive development in US telecom policy.
Reportedly, the FCC is considering requirng the merged companies to offer "naked DSL as part of its antitrust review. This means that the phone companies could not require customers to purchase their voice telephone service in order to get broadband Internet access. Although some telcos, such as Qwest, voluntarily offer naked DSL, most insist that customers buy voice service even if they don't actually use it. The FCC, on its recent deregulatory course, hasn't seemed particularly interested in barring this practice.
Allowing naked DSL won't change the competitive landscape much today, but down the road it could be extraordinarily significant. For VOIP and other broadband applications to reach their full potential, customers must have the opportunity to choose which voice services they wish to use.
If antitrust review is the lever that makes naked DSL happen, that's fine with me.
Posted by Kevin Werbach at 9:10 AM | Comments (0)
September 20, 2005
John Hagel @ KM Cluster SF
John Hagel, a brilliant Internet business thinker, was supposed to speak at this year's Supernova conference with his co-author John Seely Brown. Unfortunately, he missed his flight out of London and wound up in a youth hostel instead. Too bad for John, too bad for us.
But here's some good news. John will be keynoting the KM Cluster event in San Francisco September 27, and everyone there gets a copy of his fantastic book, The Only Sustainable Edge. John Maloney's KM Cluster network is a decentralized community of communities focused on collaborative business. It's a great venue for what should be a great talk.
Posted by Kevin Werbach at 1:32 PM
The Great Internet Transformation? A First Stab
Is it just a coincidence that some of the leading Internet-based application companies are pushing aggressively into network connectivity at exactly the same time the major telephone companies are pushing into content? Or are we witnessing the end of the Internet as we know it?
Think back to the online world fifteen years ago. There was AOL, there was Compuserve, there was Prodigy, and there was Apple's eWorld. Sure, there were researchers and students posting to Usenet newsgroups and navigating through Gopher sites, but the Internet was a sideshow for individuals and business users. It was a time of great innovation and excitement. Yet the online world of those days was fragmented and small. Every online service was an island.
Are we going back to those days?
As Om Malik has been reporting, Google is putting together a next-generation network infrastructure platform including a national fiber backbone, WiFi wireless networks in cities, and, through its investment in Current Communications, powerline broadband connections to the home. And eBay spent billions to acquire Skype's VOIP and presence platform. Meanwhile, the telcos are feverishly working to put together multi-channel video services to compete against cable TV operators. They are trying to move up the stack at the same time the other companies are moving down. While all this is happening, Yahoo! is positioning itself as a video arms dealer, and Microsoft is talking about an alliance with AOL.
I don't quite see the big picture yet, but something tells me the model of the Internet and communications world we've followed since the early 1990s may be falling appart.
The concept is that connectivity, applications, and content are distinct technical, business, and regulatory spheres. I'm one of the culprits, as an advocate of the "layered model" for Internet policy. But if you go back to Mary Meeker's seminal "Internet Report" in 1995 (written, she told me, because so many prospective investors she met on the Netscape IPO road show were completely clueless about the Internet), you'll see the same pattern: infrastructure businesses (ISPs), application businesses (search, advertising, and e-commerce), and content businesses. The only company that seriously spans all those markets today is AOL Time Warner... and look where it got them.
Soon, though, most of the major Internet players are likely to be hybrids of two or more layers. Google and eBay will be infrastructure and applications; Yahoo! and News Corp. will be applications and content; telephone, wireless, and cable operators will be infrastructure nad content; Microsoft and Time Warner will span all three levels. And that's just what we've seen announced so far. In this market, everyone is in play.
Is this good or bad? Honestly, I'm not entirely sure. I'm not so much of an open platforms bigot to think that rigorous formal separation of network layers is always desirable. GoogleNet and eBay-Skype are incredibly exciting, because they herald a frontal challenge to manifold inefficiencies of legal telecom. On the other hand, there are good reasons to think that the separation of networks, applications, and content helped catalyze the Internet's extraordinary success over the past decade.
It does sound as though all of us excited about the "Web 2.0" vision of open standards built on top of open standards, facilitating mashups and lightweight innovations all around, might want to question our assumptions. Yes, that is where we have been heading, but it might not be where we ultimately go. If GoogleNet, SkypeBay, MSAOL, Telco Fiberia, and CableLand emerge as competing integrated fiefdoms, we'll see something more like the early 90's online services, albeit on a much bigger stage.
As noted, I'm entirely sure what's happening out there, or what I think of it. I just have the sinking suspicion that it's more than we appreciate. I welcome your comments.
Posted by Kevin Werbach at 11:01 AM | Comments (4)
September 16, 2005
Thoughts on eBay-Skype
Many investment analysts and technology industry observers are scratching their heads about eBay's announcement last week that it would acquire Skype for $2.6 billion (and possibly as much as $4.1 billion if performance targets are met). Skype, for those who don't know, is a software-based peer-to-peer VOIP company, started by the same team that created Kazaa, a leading P2P file-sharing application. Skype offers free phone calls between Skype users, and is particularly popular in Europe and Asia.
From the eBay side, spending that much on a startup with negligible revenues, in what seems to be a completely different industry, sounds like the height of dotcom bubble wishful thinking. At the same time, Skype supporters who reveled in the company's rebellious image see enhancing online auctions as a huge comedown from their dreams of revolutionizing the global telecom business. What's going on here?
It's hard to look at the numbers and not think eBay overpaid. There is just no way to justify the price tag under traditional financial metrics. eBay's management clearly wanted this deal badly, felt concerned that another well-heeled acquirer (Google? Yahoo? News Corp.?) would snatch it away, and had to make a spectacular offer to convince Skype to sell out.
On the other hand, Skype has grown in less then two years into far more than a group of Scandinavian and Estonian hackers thumbing their noses as the telecom industry. Skype came out of nowhere to become not just the leading VOIP company, but the dominant player in an exploding market. While Vonage just passed one million lines in service, and Japan's YahooBB claims roughly four million VOIP customers, Skype has over fifty million registered users. At least two million of those pay Skype for services, such as the ability to dial in and out of the public switched telephone network.
One of the striking slides in eBay's 78-slide PowerPoint presentation justifying the deal compared Skype's revenue ramp ($7 million last year, $60 million this year, $200 million anticipated next year) with eBay and PayPal. And remember, there are still nearly twice as many phone users worldwide as Interne users -- some two billion. By some measures, Skype may already be the world's largest phone company, and in a few years it could have more users than any other company on the Net. Whether Skype is really on that kind of growth path remains to be seen, but the point is that this isn't just a free piece of software with lots of users, like Kazaa or ICQ; it's a serious business.
And on the other side of the deal, eBay is already a behemoth, with a market capitalization north of $50 billion, a stable cash-firehose business, and an outstanding balance sheet. It can afford to take some risks. As a Legg Mason report noted, investor concerns about the rumored Skype acquisition knocked more than the actual purchase price off of eBay's market cap by the time the deal was announced. The implication is that the market values Skype's potential contribution to eBay's business as zero. That's clearly an over-reaction. It's based on a misunderstanding of the two businesses involved, and a lack of creative vision about the future of e-commerce and communications.
Don't get hung up on the fact that eBay is an "auction company" and Skype is a "VOIP company." Think about eBay as a radically efficient virtual platform for moving goods between people, and Skype as a radically efficient virtual platform for moving real-time communications between people.
I see two ways to justify the deal. eBay has tried to articulate the first one. Real-time communication has always been an important component of commerce, and eBay sees opportunities to enhance its particular form of electronic commerce with the voice, messaging, video, and presence capabilities Skype brings to the table. Add to that the low-hanging fruit opportunities for pay-per-call advertising, in which eBay would take a commission for generating leads that turn into Skype-powered phone calls, and the potential connections between Skype and eBay's subsidiary PayPal, not to mention Skype's potential for continued organic revenue growth through eBay's user base, and you've got some solid opportunities for real synergies.
Frankly, in hindsight, there may not be a more logical acquirer for Skype. Any established telecom company would be cannibalizing its own business. Most of the other top Internet players, like Yahoo! and Microsoft, are better positioned to build VOIP platforms internally, leveraging their instant messaging clients and strategically acquiring technology that can enhance them. And then there's the PayPal angle. eBay's presentation justifying the deal was called "The Power of Three" -- eBay, Skype, and PayPal. The company clearly sees PayPal not just as a template for the Skype deal (it faced similar questions when spending $2 billion for a peer-to-peer payments intermediary), but as the real linchpin for integrating Skype's VOIP capabilities.
Traditional telecom companies face two huge economic anchors that prevent them from innovating and growing new revenue opportunities. (They also have to struggle with regulation and internal cultural limitations, but I'll put those aside for the moment.) The biggest economic challenges for a telecom carrier are the costs of its physical infrastructure and its billing system. Skype solves the former, by virtualizing the network into peer-to-peer links between end-users riding on top of the broadband Internet. And PayPal solves the latter, by virtualizing the financial system into similar peer-to-peer links. If Skype wants to realize its potential for generating real revenue and profits, it's going to need a cutting-edge billing infrastructure capable of scaling to hundreds of millions of users. It just got one.
It's also possible to look at the acquisition in broader terms. And that's when things get especially exciting, not just for Skype-eBay, but for entire world of e-commerce, communications, and digital media.
The "primary accumulation" phase of the Internet economy (to borrow a phrase from the ever-quotable Karl Marx) is now over. There are still plenty of opportunities for entrepreneurs and niche players, but the major powers are set: Amazon.com, eBay, Yahoo!, Google, and perhaps IAC/InterActiveCorp, if you consider the latter as one entity, plus a handful of non-pure plays such as Microsoft and AOL. Those companies dominate the application layer of the Internet: the services and tools delivered through the network. One one side of the application layer is content, a market far more fragmented and beset by conflicts about intellectual property and pricing. The companies listed above do some content development of their own, but what's striking is that the vast majority of lucrative "content" they leverage is created by their own users.
On the other side of the application layer is the network infrastructure that moves bits from here to there. It's the communications sector, along with some under-appreciated companies like Verisign that focus on addressing and identity. Telecom is a trillion-dollar global business... and it's about to undergo a traumatic transformation.
Communications and the Internet are converging. As a result, the idea of paying per-minute for basic telephone calls is quickly becoming an anachronism. The telecom industry as we know it will be replaced by a converged broadband environment with very different economic drivers. The major communications infrastructure providers -- telephone, cable, and wireless companies -- think they will dominate this new world. By controlling the pipes, they hope to extract a share of profits from the applications running on those pipes.
eBay-Skype represents an end-run around that "walled garden" vision. Skype is a self-contained communications platform, effectively designed to circumvent both traditional government regulation and private efforts to constrain applications. Given its huge user base, it could become the dominant Internet communications ecosystem, just as eBay has become the dominant ecosystem for person-to-person transactions online.
eBay isn't alone. There are persistent rumors that Google is putting the ducks in line to create its own global communications platform. Yahoo! has multimedia capabilities in its instant messaging client and it recently acquired DialPad, a significant consumer VOIP player. And Microsoft has understood for several years that communications will be an important part of its future, albeit not as a traditional telephone company.
No one knows how exactly this story will play out. What is clear is that every major player will want to have communications capabilities as part of its toolkit. Users will get converged communications services from multiple providers: it will sound as awkward to talk about "your phone company" as it would to identify "your e-commerce company" or "your search engine company." Get ready for some creative disruption!
Posted by Kevin Werbach at 5:09 PM | Comments (0)
Smoking Gun on Network Neutrality
A number of us have been arguing for a while that network owners such as cable and telephone companies should not be allowed to destroy the open business and innovation ecosystem of the Internet. Specifically, we've called for "Net Neutrality" -- the idea that customers should be able to use any device, visit any site, access any service, and view any content they choose on the network.
With the move from narrowband to broadband networks and the convergence of telecom and digital media with the data, this promises to be one of the key policy battles that will shape the future of the Net. It's especially significant in light of the growth of voice over IP. Carriers that see VOIP as a competitive threat can be expected to do everything they can to keep it off their broadband networks.
The Net Neutrality concept has gradually gained steam in recent years. Former FCC Chairman Michael Powell advocated similar principles in his "Four Freedoms" speech in early 2004, and the full FCC recently adopted a "policy statement" along similar lines. Unfortunately, neither of these statements had any binding force. And the FCC's recent pronouncement was full of caveats and limitations. As Susan Crawford notes, several tech companies have been lobbying for enforceable Net Neutrality rules in the forthcoming rewrite of US telecom laws.
All along, carriers have been making the argument that Net Neutrality rules are unnecessary. Where's the evidence, they ask? What incentive would we have for hurting our own customers?
So then, what to make of this press release from Verso, announcing "Carrier Grade Skype Filtering Technology"? Here's how Verso, a network equipment manufacturer, is pitching its product:
"This new application provides the most comprehensive array of optimization and content management options currently available for cable operators and internet protocol service providers seeking to selectively disable undesirable network traffic and improve service levels on their networks. Applications such as Skype, Peer-2-Peer (P2P) messaging, streaming media and instant messaging increasingly cause congestion on service provider networks and interrupt or degrade service for other critical applications."
So Skype is "undesirable" traffic, along with instant messaging and streaming media? Given data from Cachelogic suggesting that roughly half the traffic on the global Internet is peer-to-peer video file transfers, the argument that Skype VOIP traffic (which uses far less bandwidth) is causing congestion is a red herring.
A more revealing quote comes later in the press release:
"This traffic runs outside the traditional carrier revenue generation models and is therefore highly undesirable for them."
In other words, Skype VOIP traffic is undesireable to broadband network operators because it poses a competitive threat. Verso's solution allows those operators to filter, degrade, or block that competitive traffic, leveraging their control of the network.
The Verso announcement calls to mind a Cisco white paper published several years ago for cable broadband service providers. It walked through how Cisco gear could be used to slow down or block access to Websites that weren't business partners of the cable companies. I guess things haven't changed.
Companies like Cisco and Verso don't create these products for their own enjoyment -- they do so because they believe their customers (the cable and telephone companies) want the ability to block innovations that may threaten their competitive position.
The scary thing is that, if equipment like the Verso box is deployed in the network, users won't realize what's really happening. They'll notice Skype isn't working as well as it used to, and perhaps isn't allowing them to connect at all. In all likelihood, they'll assume Skype is the problem, not their broadband provider. The only way to prevent this from happening is to have affirmative legal pronouncements safeguarding the open Internet.
Posted by Kevin Werbach at 4:38 PM | Comments (0)
I'm back
Don't ask where I was.
Posted by Kevin Werbach at 4:35 PM