September 20, 2005

SeaCode: Offshoring of a Different Kind

Here are two important and widespread problems that have so far remained unsolved:
  • Large number of individuals with "specialized knowledge" in India, Russia and other developing nations cannot secure H-1B visa because of the quota imposed by the US government and therefore are deprived of working full time in the US.

  • Employers in US who wish to take advantage of high quality work and competitive wages in offshore locations also require physical proximity to the workers to sort out complex issues.

The answer? An innovation by a startup called SeaCode. Their basic idea...
Take a used cruise ship, plant it in international waters three miles off the coast of El Segundo, near Los Angeles, people it with 600 of the brightest software engineers they can find around the world (both men and women), and run a 24-hour-a-day programming shop, thereby avoiding H-1B visa hassles while still exploiting offshore labor cost arbitrage [US labor laws such a minimum wages don't apply in int'l waters] and completing development projects in half the time they’d take onshore or offshore.

Should the clients need a meeting, they can hop in to a 30-minute boat ride from LA. "Clients will have access to on-board facilities as well -- including "first-class" cabins, conference rooms looking out onto Los Angeles, and a helipad for the helicopter that will take them to and from the ship," say SeaCode founders. The engineers will also be able to visit the mainland when they are not working. The "love boat with a time card" comes with private cabins, meal service, leisure activities, swimming pool, library, duty free shopping, water taxi to the shore, etc etc.

I've considered working from Toronto (no restrictions on foreign workers and just 45 minutes from NYC by air) as a solution to these problems but this seems more interesting and efficient. But is it viable? A $10 million investment in a used cruise liner along with the overheads that will come from providing these services will take a long time to recover. I think the answer hinges upon how much the clients will be willing to pay for proximity compared to a lower cost offshore competitor offering similar services. Also, in order to remain competitive, SeaCode must venture into high end high margin services or even products rather than simple backend programming of the kind that many Indian firms provide.

However, I'm still not certain it's a big VC opportunity because of the high costs involved in working from a sea liner. A similar setup based (on land) in Toronto makes much more financial sense to me because the proximity advantage of SeaCode is also only half true. The engineers can't really work on client's site where they are most needed. Instead, the client must travel for a meeting. Although this works better than travelling all the way to India but still remains to be seen how much they'll be willing to pay for it. Also, why can't the client fly to Toronto the same way they'd need to fly to LA (unless the West coast has a much larger concentration of IT companies than the East coast, not sure)? In any case, it's a pretty interesting idea and we'll know soon if it works. According to a report, SeaCode plans to be "on station and in operation during the first quarter of 2006."

Read the details here. The story has also been featured in Forbes, Fortune, LA times and WSJ (all require subscription) among others. The SeaCode website doesn't carry much detail, its founders seem too concerned of a backlash or too guilty of being considered anti-American. The copy on the site is so biased to make their venture look favorable to US and so entangled in marketese that it ends up confusing the visitor. For example, the words: H-1B, India, Russia or even "foreign workers" find no mention on the site. Instead, we are told that "SeaCode is creating new high-end jobs for U.S. engineers!" This makes the one-page site completely useless. Unless users read an article, they will have no clue what SeaCode really does.

The above article also bears out the bias of the founders. Funny, in this globalised economy and a particularly globalised business.
Mr. Green and Mr. Cook point out that they’re not doing pure offshoring. "It does disturb me to think that when we spend all these dollars over seas, all of the money leaves [the country]," says Mr. Green. "It goes to real estate, it goes to food, it goes to workers over there. We’re going to keep about 10 percent back, which goes to direct wages. And the rest of the money that we get as revenue goes to the US. We’re an American company with American shareholders. We’re going to buy our fuel and food right in the US. And the money is going to get returned right in California."

September 13, 2005

Skype's Revenues and The VoIP Opportunity

Although I misjudged the reasons for the Ebay-Skype deal, I was indeed correct about Skype's failings in capitalising on the VoIP opportunity which I continue to contend is huge.

Emperor's new clothes: Skype's revenues

Ebay's press release presentation reveals Skype's financials for the first time. So far, the founders have always refused to mention revenues in their interviews except by saying they are "very very good". The only numbers they talked about was its subscriber base and the number of downloads. Well, the truth is now out and Skype's revenues are even bleaker than the market estimates (of 70 million).

So how much will Skype make this year? According to the release, Skype's expected revenues for 2005 are 60 million. Skype will have more than 60 million subscribers by the end of the year. Put another way, Skype's yearly revenue per subscriber is less than $1!

Now, this is not to say that Ebay paid too much for the deal. For one, we must look at the opportunity here. Skpye is part of the global internet telephony business that everyone agrees will eventually eat up the phone companies. And secondly, Ebay mainly intends to use Skype in the marketplace, where I expect it will be a much bigger driver of Ebay's growth, at least in the short term.

The big gap - the opportunity window

There's a simple way to understand how big VoIP is going to be. Add up your cell phone and landline bills for an year and reduce a dollar. Ten years from now, that's the kind of revenue per person the leaders in VoIP will share, solely from their internet telephony services.

Why Ebay Bought Skype

Looks like I was wrong about the reasons why Ebay-Skype deal would make sense and why Skype should cost so much. I contended that it's because Ebay wants to enter the internet telephony business and that the deal had nothing to do with auctions. Well, turns out it's about both - the Ebay marketplace as well as Skype as a standalone business.

While I'm kicking myself for not seeing this, I'm also extremely glad because this is a terrific, terrific deal. If Ebay can make this work in both the above areas - the price is indeed a bargain. By integrating Skype in the marketplace Ebay intends to remove what it calls a key friction area in categories in which a simple webpage listing isn't enough to make the sale (how do you expect someone to buy a car or expensive jewelry from a simple listing?) and expand globally in countries where trust is an issue (countries like India have a "Culture of haggling").

I see two other big reasons why this is a great deal:

1. Ebay will suddenly acquire millions of new members. Skype will have 57 million subscribers by end of Q3 2005 and apparently, there's only 1% overlap between Skype's US subscribers and Ebay's members.

2. Paypal will help Skype monetize its business of internet telephony.

If you're still skeptical, take out some time to go through the Ebay's news release presentation of the deal and your skepticism will evaporate. The presentation is divided into four sections 1. description of Skype, 2. how Skype can be applied in Ebay's marketplace, 3. Skype as a standalone business and 4. Skype's financials.

The complete Ebay+Skype presentation. (3.5mb PDF)

I've listed highlights from the second section, on how Ebay intends to apply Skype in the marketplace:

1. Create a new way to monetize e-commerce
  • Transaction AND lead-generation monetization. New Pay-Per-Call feature enables monetization of new marketplaces. Example shown: Pay Per Call button on Local Classifieds. (no details on how it will work but here are some interesting ideas)

2. Remove a key friction
  • Communications can accelerate categories that are: High involvement, Expensive and Complex. Examples: autos, business and industrial products, jewelry and watches, sporting goods etc.

  • Skype allows superior access to categories that Require significant communication and Are less suited to transaction-based monetization. Examples: new and used cars, travel, services, real estate.

  • Expanding the global footprint

    • Emerging markets (India, China, Poland, Brazil, Russia): Large grey markets, Limited trust on Internet, Culture of haggling, Culture of IM/mobile, Price sensitivity

    • New markets (Japan, Nordic countries): Limited eBay presence, Large growth in Skype users

    • Cross-border trade: Limited trust, Buyers need more interaction and information from sellers

September 12, 2005

This blog has always been a low traffic one. There have been surges in traffic now and then but for the longest time I didn't have a feed and had only a handful of regular readers. I keep writing because I love to write and because writing makes me think better (though must admit that most of the times the ideas just remain in my head). Another thing that has kept me going is the praise I've received from a few readers.

The best comment I've ever got came from Phil Hood, formerly CEO of a think tank/research firm and author of 2x2 matrix: "I'd like to offer criticism but honestly, this is one of the best postings I've ever found in any blog, so I'm going to have to read your archives." Paul was referring to this post, my most visited one so far.

Now for the past few days I've been getting unprecedented traffic (for this blog) to my Skype posts, most recently from Om Malik's blog. My feed subscription has gone up, just discovered that an article linked to my Ebay-Skype post and today a mainstream journalist wrote in to ask my opinion regarding the future of VoIP: "I understand that it is not your specialization as a professional and that it is just your hobby but [...] everything you write here is much more interesting than what or write...". Recently, someone asked me if I'm an IIM alumni! (IIM is India's premier management institution)

Nothing much to celebrate about...but not bad for a user experience designer. Thank you, dear readers.

September 10, 2005

Skype Valuation: Why it Deserves to be High

There's been a lot of talk recently1 about how much Google/ News Corp/ Ebay/ [insert name of the latest corporation rumored to be buying Skype] should be paying for the acquisition.

I'm not a VC and I haven't studied the different valuation methods in any detail, so not sure what exactly would be the right price for Skype. But I do understand why Skype is so valuable. First, as I said previously, VoIP is a pretty big opportunity. Once it gets on a wireless device this sector would explode. Now, think about delivering location-aware advertising to that device and you'll begin to have some idea of the astounding amount of money that's to be made here. GoogleTalk isn't about click-to-call feature for local search, as Om Malik and others2 have been speculating. That's a silly idea. It's way too bigger than that. I'll discuss all this in more detail in my next post that I'm writing at the moment.

Back to Skype, the second and more obvious reason for the high valuation is its large subscriber base. Skype's 52 million users are over double the number of its closest competitor (AOL has about 23 million users, Yahoo 19 million and MSN 14 million) and remember, unlike the others, almost all of Skype's subscribers use the VoIP feature. Another important distinction for Skype is that its users are intensely loyal. Wherever I see Skype users, I get to hear about how wonderful it is3 and how much it has changed their life for the better. I'm sure this reputation is well deserved. Skype provides amazing value at no cost so no surprise that all the good experience Karma would lead to loyal subscribers.

So, Skype does deserve a high price even though, as I pointed out in the previous post, it has miserably failed to capitalise on the opportunity so far. However that's something that can be improved upon, the opportunity still remains immense and untapped. Now, whether Skype should be valued at three quarters of a billion, one and a half billion or even four billion, I'm not qualified to say. Since a lot of people seem to be interested in buying Skype and since the telcos haven't even started queuing up yet...shall we say: let the market decide?

Update 13-Sep: I was wrong! Ebay has announced the acquisition and there are more reasons for Skype's high valuation than the ones I cite in this post. See, my final analysis and comments on Skype's revenues, which are now public.

Notes and Links
1. Here are a couple of posts questioning Skype's valuation - one and two. I mention these in particular because they linked to my last post which explained why it makes sense for Ebay to buy Skype.
2. See Om Malik's post where he speculates that Google's VoIP plans are about a click-to-call feature on local search results that would lead to pay-per-call advertising.
3. Rashmi Sinha, entrepreneur and Skype fan, extolling The Wonders of Skype.

September 09, 2005

Ebay Wants to Buy Skype? Makes Sense

Fred Wilson, VC at Union Square Ventures and prolific blogger at 'A VC' blog wrote about a WSJ article that speculates that Ebay might be considering buying Skype. Fred wonders why eBay would want to do that. The WSJ article isn't free to read but here's another story that says Skype could be priced as high at $5 billion.

My first thought when I read Fred's post was, could it be because Ebay feels threatened by Google's growing stature? Let’s face it, until a few months ago, Ebay was the largest internet pure play business around. At around $55 billion in market cap Ebay is three times the size of Amazon and significantly larger than Yahoo. Now, all of a sudden here comes Google and before Whitman could even blink it races past Ebay to reach over $80 billion in market cap. Now that Google is poised to launch an online payment mechanism, possibly threatening Paypal (even though Google denies they would compete) - it makes eBay all the more insecure.

Another reason is the huge opportunity that VoIP presents today. Ever since the release of GoogleTalk I've been itching to write about the untapped, languishing elephant of an opportunity that all the bigwigs - Yahoo, Microsoft, AOL have ignored so far and those that haven't, namely Skype and Vonage, have been unable to capitalise on. Now when Google is all set to make the most of this opportunity, it makes perfect business sense for Ebay to want to have a share of that cake.

Sure, this has nothing to do with Ebay's auction business but it does represent a big market and a perfect vehicle to enter it. Amazon too had nothing to do with search prior to launching A9. It entered the industry by about the same time Microsoft woke up to the fact that there's big money to be made there. Now that Microsoft has bought Teleo and when Yahoo is probably already revving up Dialpad, why would Ebay want to be left behind?

I must clarify here why I think Sype and Vonage missed the bus before I get mowed down by the cult of Skype. I know I know, everyone who uses, loves Skype. But this isn't 2000. Lets make a distinction between a business that makes big profits and one that has a big user base that expects free lunch. To have a 50 million subscriber base and not to be able to make good money out of it in two years in a way that keeps everyone happy is, to me, a disgrace. The SkypeOut business model is so ridiculous that even the most voiceferous supporter of Skype tries to avoid it as much as possible, which explains Skype’s measly revenues per subscriber. Vonage? Well, here’s the simple math: divide the number of Vonage subscribers with the households that have a broadband connection and multiply with 100. That's the percentage of market that Vonage has tapped so far.

The question in my mind is not whether Ebay would buy Skype if it could. The question is would Skype be interested in being bought by Ebay? If you ask me, they should. To me, if Skype was actually offered $3 billion by Murdoch, as the media has been speculating, it made a mistake by refusing the offer. GoogleTalk is about to take over the world's telecom business. Now’s the time to exit! But more on that soon.

13-Sep: I was wrong! Ebay has announced the acquisition and the reasons aren't the ones I cite in this post. See, my final analysis and comments on Skype's revenues, which are now public.

9-Sep: Another reason why this isn't about Ebay's auction business - Skype's inherent value is its large subscriber base. If it was only about enabling communications in the auction community or making support easier, any VoIP service would do. Ebay is willing to pay in billions for the established distribution that Skype brings to the table. Sure, it may find some applications of the service in the auction business but this is clearly about taking a lead in the internet telephony business. (Meanwhile, the Wall Street doesn't like the idea much. Ebay's stock took a beating today over the news of Skype buyout.)

See Also
my thoughts on Skype's high valuation

September 08, 2005


They went there expecting to hear about the iTunes phone. What they got instead is marvel of design and engineering. The iPodnano replaces the iPod Mini. Thinner than a pencil. Will fit into the coin pocket of your Levis. Holds as many songs as the first iPod four times its size.
It is... breathtaking. You won't believe it until you hold it in your hands. A thousand songs. An amazing color display. A clickwheel.

It is one of the most amazing products Apple has ever, ever created.

- Steve Jobs

Watch Jobs unveil iPodnano to stunned audience

Read the story