Meanwhile, AT&T asserts that while it prefers existing internet principles and does not want radical expansions under the FCC, if the Commission does choose to further regulate, "It absolutely must ensure that any such rules apply evenly - not just to network operators but also to providers of Internet applications, content and services. Anything less would be ineffective, legally suspect and, in all events, a direct repudiation of President Obama's call for a 'level playing field'."

In your opinion should Google Voice be subject to the same rules that apply to AT&T or do you believe that web-based telephony groups like Skype, Google and Jajah should fall under a separate set of regulations?

Photo Credit: Aislinn Ritchie

• Limited choice of mobile phones. I chose the BlackBerry, because I'm used to it. No, T-Mobile doesn't offer the iPhone!
• Wi-Fi phone and data on your mobile. This is the interesting bit. Basically, wherever you have Wi-Fi, you will have free minutes.
• GPRS, which is what you would use if you don't have access to Wi-Fi.
• Wi-Fi land line. This looks like an ordinary phone but connects to your high-speed line as a VoIP phone. Other companies offer this, but getting the whole bundle from your cell phone provider is pretty cool.

My Experience

First, no disclosure needed. I bought this at a regular T-Mobile store and paid the regular listed price. This was not a journalism assignment.

Here are the key points:

• I've reduced my cell phone minutes dramatically... as in, cut them in half.
• Most of my calls are from the office, home and other locations that I visit regularly. The phone picks those up regularly. For example, when I get home, the phone says "Home" (it says "T-Mobile" when I am in cell phone mode). That's it. Nothing else to do. Just make (free) calls.
• Call quality is mostly fine. If you see three Wi-Fi bars or fewer, it's a bit flaky. You'll hear voices in slow motion, like a tape winding doooown.
• Push email comes through fine. This matters for when you are out of the country. You will still get email without having to sign up for an expensive international plan. You are not 100% always on, as you are with GPRS, but for many people who travel, it's good enough. If not, just pay for the international plan.
• It's amazing how many places I found in my test across Switzerland, France, and America that have open Wi-Fi access. I just hit "Scan for networks" on my BlackBerry, and there they are. Note: I'm writing this in Herald Square, New York City, with three open Wi-Fi bars on my BlackBerry. Hm, who shall I call?

Industry Implications

• The implications are practical mainstream stuff and carry a very simple message for consumers: save money.
• It shows that big companies can innovate and are not always afraid to disrupt their own cash cows in their quest for more market share. Kudos to T-Mobile.
• This will make Apple even keener to dump AT&T as soon as possible.
• This puts pressure on Skype to deliver a practical, simple device for mobile phones.

Skype's Antoine Bertout argues that this move to shut down Extras was inevitable as "not enough people were using them to justify our continued support of the Extras programme." We have to wonder, though, if killing off a good part of its third-party developer ecosystem is really the right thing to do. After all, applications like Pamela, Skylook, or Pretty May added important functions to Skype and made the software more useful for a larger group of users.

Of course, this is not necessarily the end of the road for third-party developers who really want to write applications for Skype. The company, however, will not actively promote these apps and they won't be certified. For developers, this means that they are now on their own and can't expect any more help from the company.

Skype itself is clearly making these decisions in order to trim unnecessary expenses from its books as its new owners are looking for ways to make the company operate more efficiently. It could also be that Skype plans to enable some of the services that the third-party Extras plugins currently offer in its own core client.

With the public API still being open, we are not ready to declare the death of the Skype ecosystem just yet, but developers will surely be wary of Skype and might just shy away from developing for a platform whose future looks uncertain.

Online telephony service Skype will be sold by eBay to a group of private investors, possibly including Netscape founder Marc Andreessen's new venture capital group, and the deal will be announced on Tuesday according to a report by a team of reporters from the New York Times.

EBay faces legal challenges from Skype's founders that the company said earlier this summer could mean the end of Skype as we know it. From an innovation perspective, we're always excited when such an interesting company breaks free from a slow-moving monolith that acquired it.

If the Times report is accurate it will be very interesting to see who runs the new Skype and what kinds of changes are made to the service. With $600 million in reported annual revenue and nearly twice as many users as Facebook, Skype's international network of P2P software installs powering multimedia communication, file-sharing, chat and status still has boundless potential to do interesting things.

Update: PaidContent's coverage points out that TechCrunch broke this story three days ago.

Joseph Galante at Bloomberg News cites Jayanth Angl, an analyst at Info-Tech Research Group, who argues that replacing the technology will not be easy. "It would be quite difficult to replace what they already have as the underlying component to their service," Angl told Bloomberg. "There are a number of barriers to that, not the least of which are legal barriers." The creation of another global P2P VOIP and video network that doesn't infringe on existing patents is no small task.

Skype is one of the shiniest stars in eBay's portfolio of companies and is aimed to spin out as an independent company that can sell its own stock in an IPO sometime soon. That's unlikely to happen until this most important of several lawsuits the company faces is somehow resolved.

This Spring we reported that Skype's founders were also interested in raising enough capital to buy Skype back from eBay. It's been three months since that news was first disclosed and there have been no updates on the effort that we're aware of.

Skype continues to grow very quickly. Now with 480 million users around the world, it is twice the size of Facebook and adding users almost as fast. Skype being gutted would cause substantial disruption to the communication of millions of families around the world.

Release notes are here, download is here. To be honest, we had some trouble in testing a few of the new features, though they'd been present in the beta version. If you haven't been using the beta, you'll want to upgrade now.

You can now receive a notification whenever any of your contacts change their mood status. This is turned on by default but can be opted-out of in preferences. About this Skype says "It's a bit like Twitter, but don't tell them we said that." That's true, it is a little like Twitter. Delivery of notifications really could provide incentive for people to change their status messages more often, though it would be nice to be able to opt-out on a person by person basis.

You can now assign one through three exclamation points to the chats in your chat drawer. We couldn't tell what that really does other than add a visual symbol though, so it's not clear how useful this will be.

Mac users now have beta access to a feature called Skype Access, which is said to allow purchase of connectivity to public wifi hotspots through your Skype account. We haven't been able to test this yet but if it works at Starbucks, that's going to be hot. Connectivity is purchased at 19 cents per minute, or about $10 per hour, which might seem high but could really come in handy in a pinch.

The ability to write notes to go along with your contacts' profile pages in your account is something that all social networks ought to offer. Each Skype contact now has a blank notes field that you can flip to with a click. That's very nice.

The chat management interface and options have changed substantially as well. All in all, this is a very nice update to the Mac client for Skype. It's nice to see Mac users getting some love; Skype users on Windows have long received more development attention. The fact that Skype keeps moving forward is just one more reason this hugely valuable tool deserves more credit than it often gets.

Thanks to this update, Mac users (who use the latest beta version) can now also finally share their screens with PC users, which wasn't possible until now.

Overall, while it works perfectly well, Skype's screen sharing features are pretty basic and allow users to either share the full screen or select a part of the screen they want to share. A number of third-party developers already offered Skype plugins that allow users to share their screens with their contacts. And quite a few of these offer a wider range of features than Skype's own solution, including white-board functionality.

The image of the screen is great, as one would expect. But in order to share a screen, a voice call has to be initiated, which might not always be what you really want to do, especially if you are like a lot of us here at RWW who often use Skype for text-only chats as well. Sadly, it also doesn't look like it is possible to share a screen with a group of contacts or a Skype room. For now, you will still need dedicated screen sharing programs like Yuuguu for this kind of functionality.

More New Features

Skype also added additional support for visually impaired users who use screen reading software, as well as birthday reminders that will alert you when it's one of your contacts' birthdays.

As always, we need to point out that this is beta software and you might still find some bugs in it. Overall, though, Skype's beta releases have generally been very stable. A full set of release notes is available here (PDF).

After the highly anticipated Skype application was released a couple of weeks ago, it quickly became one of the most popular applications in the iTunes App Store and has already been downloaded over 2 million times. However, for jailbroken iPhone owners, the Skype application was unstable, often freezing up and crashing on a regular basis.

The problem has to do with a jailbreak package called the "Mobile Substrate," reports the iPhone Hacks blog. This package is used by a number of jailbreak applications including Winterboard, Clipply, Lockdown, Five Icon Dock, and more. The solution is to download the latest update for the Mobile Substrate package which the developer and Cydia creator, Jay Freeman, has now released.

The Problem with Jailbreaking

It's apparent that Skype didn't want to be blamed for the problems that only affected the jailbreaking crowd. Since they obviously can't stop people from downloading or using their app, they put in the disclaimer to cover themselves from any complaints or liabilities.

This issue, however, highlights the problems of having the jailbreaking community underground and unsupported. Although the EFF is pushing the U.S. Copyright office to grant a DMCA exception so users can jailbreak their phones without fear of penalties, they have not yet been successful in doing so. If that was to pass, it would legitimize jailbreaking and that would mean iPhone developers would have to consider how their applications worked with the others outside of the App Store.

An issue like the one Skype had could possibly even have been discovered prior to launch by testing the app on jailbroken devices, then working with or simply alerting the developer of the app that caused the issues. But because jailbreaking is still considered this "naughty thing" some people do to their phones (instead of the incredible thing it really is), app developers don't have to test their apps or support apps running on the hacked devices. Is that OK? We guess that it is, considering the situation, but we're not happy about it.

The fact that eBay and Skype make strange bedfellows does not mean Skype doesn't have a business model. On the contrary, the business generated revenues of $551 million in 2008, which is a 44% increase year-over-year and represents a 21% profit margin for them. The press releases also states a projected revenue of $1 billion in 2011, twice as much as in 2008.

With promising sales, high adoption rates and an openness to new platforms such as their iPhone app, its not hard to think that Skype will have a booming IPO, and will remove the albatross status from eBay, which can return to its core strengths of online payments and e-commerce.

Zennstrom and Friis sold Skype to eBay for roughly $3 billion in 2005 but no one was quite sure why. The remaining Skype team has done a fair job continuing to innovate inside the much slower moving eBay, but we've got our fingers crossed: a buy-back by the founders would likely put innovation in the driver's seat again at Skype.

It's not been a happy marriage, though. Ebay has suffered an existential crisis, technology integration never came and now a patent fight over the core P2P technology that Skype's inventors retained rights over is going to court. If the details of all the fighting is of interest, that's one more reason to read the Times's reporting on this. What we're interested in is what this could mean for the technology of Skype.

Let's See What They've Got, Again

We want to see Zennstrom and Friis put on the Skype jerseys again and crank one out of the park. The two have been P2P geniuses since the start, they just got some failure out of their systems with Joost and we want to see what they'll do next with a technology we and millions of other people around the world use every day.

Get Skype out of the stuffy old confines of eBay and back in the action! We'd love to see a really strong Skype voice app for Nokia and iPhones that kicks the overstuffed carriers right were it hurts - the time is right now or soon. How about an enlivened developer platform? Those are hipper now than they were when Skype was born! We'd also love to see some enhanced security so people in repressive regimes can use it again without worrying that a back door is going to let them be spied on as the Chinese government has been, for example.

The possibilities are many and we hope that Zennstrom and Friis can do what it takes to retake the wheel. Good luck gathering those billions, guys, a Skype buyback is an exciting thing to think about.

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Web Products

PhoneGap: People's Choice Winner at Web 2.0 Expo Launch Pad

The Web 2.0 Expo's startup showcase, Launch Pad, gave five companies five minutes each to present their product to a panel of experts and the People's Choice winner was mobile development platform PhoneGap. We present a summary of the pitches in this post. The judges who narrowed the field from more than 80 applicants down to 5 were Matt Marshall (VentureBeat), Anand Iyer (Microsoft) and ReadWriteWeb's own Marshall Kirkpatrick.

Nomee Introduces New Social Aggregation Software

This week at the Web 2.0 Expo in San Francisco, a company called Nomee revealed a new software application for the purpose of aggregating all your social networking sites into a single desktop experience. In a way, this software is somewhat reminiscent of the web-based PeopleBrowsr in the sense that it's attempting to pool all your networks and identities into one single window. However, unlike PeopleBrowsr, Nomee is not just aggregation software - it also functions as a social identity management tool, letting you control which identities are shared with which people. That makes Nomee more like a next-gen social address book than anything else.

Status.net Could Point to the Future of Business Intelligence

Few companies have captured the world's attention online in recent years as much as Twitter has. Rapid, structured, public communication between groups of people is not only a personal paradigm changer for many who have seriously explored the service - it's also an incredible opportunity to analyze a rich and dynamic set of data about interpersonal conversation. However, just as Facebook will never be Twitter because of the lack of clear access it offers outsiders to social data, so too does Twitter have its own limitations. A service called Status.net will launch in May that could overcome some of Twitter's limitations and make a significant impact on the world we work in.

Skype for iPhone: It's Real and It's Spectacular

The official Skype iPhone client has arrived. Although video streaming is a no-show, both full IM and voice communication is supported directly over wireless networks. Plus there are a few additional touches specific to this client that make it really great.

Skype May Be The Biggest Winner From The Web 2.0 Era

Skype does not get the respect it deserves because eBay not only publicly admitted to overpaying for it, but is also making a mess of its core business. Another reason may be that Skype flies in the face of conventional Valley wisdom where it has to be all about social media. Or maybe it has to do with the fact that Skype came from Europe, and we all know that Europeans are just lunch-eating dilettantes. Whatever the reason, a company that has $500 million in revenue, is profitable and growing, and has a shot at becoming the largest player in what is now a $2 trillion (yes, "t" for trillion) market, should get more respect.

SEE MORE WEB PRODUCTS COVERAGE IN OUR PRODUCTS CATEGORY

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ReadWriteHire

Who's Getting Hired in Tech? Q1 Numbers from ReadWriteHire

Rapleaf's Auren Hoffman says that hiring is harder in a downturn because the noise goes up but the quality stays the same. That's a pretty strong statement to make, but if it's true then it's all the more remarkable to see which companies are making hires now.

Our site ReadWriteHire covers new hires in tech and new media. Today we're publishing our aggregate numbers for the first 3 months of 2009. Who's hiring? Software and IT companies, social media and social networking companies and marketing and advertising firms.

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Web Trends

RWW Live: The Local & Mobile Web

One of the big trends on the web is more and more location aware / sensitive web applications. Increasingly powerful mobile devices are enabling this. In the latest episode of RWW Live, we talked about how the Web is evolving to include more location aware applications and what barriers are still in the way. We also talked about privacy and other user concerns and what is being done to address them. We had special guests from Yahoo! Fire Eagle, Four Square and Outside.in on the show. The podcast is available for listening to here.

Five Technologies Tim O'Reilly Says Point Past Web 2.0

Tim O'Reilly, co-founder of the Web 2.0 Conference, gave a short address on the 5th anniversary of that event at this week's Web 2.0 Expo in San Francisco and offered some thoughts on what's going to come next. He discussed five applications that he believes point the way.

Two themes stood out: sensors will surpass humans in front of their keyboards as the primary data source on the web, and Moore's Law will need to be applied to humanity's greatest problems.

The Future of Mobile

This week at the Web 2.0 Expo in San Francisco, Jason Grigsby of Cloud Four, a mobile and web development firm, presented at a session about the mobile web's future. Specifically, he focused on the different types of mobile applications we have today - native apps, mobile web apps, and hybrid apps - and the challenges of developing across multiple platforms.

What Can Voice Do For You? Ribbit Announces Winners of KillerApps Challenge

Ribbit, the VOIP platform that was bought by British Telecom last year, announced the winners of its $100,000 KillerApps challenge today. The contest was obviously meant to stimulate interest in Ribbit's APIs among developers, and judging from the line-up of winning applications, a lot of developers came up with highly creative ways of using Ribbit's platform in their apps.

SEE MORE WEB TRENDS COVERAGE IN OUR TRENDS CATEGORY

That's a wrap for another week! Enjoy your weekend everyone.

First, let's talk about the interface. In short, it's about as close to the PC/Mac client in style and utility as it can possibly get. Contacts, instant messenger, dialing pad, call history and profile can all be accessed at any time via the navigation bar at the bottom. Here's some more of the primary features:

• Contacts can be listed alphabetically or by who is online.
• You can see all ongoing chats or just new chat messages.
• When calling out, there is a button that links to the iPhone address book.
• Call history can be switched from everything to missed calls.
• The info page lets you update your status (even with a photo!), access your profile, change your status, buy more credit and check your voicemail.

Rest assured the interface is slick and the app works as promised. But, I think the real reason why we are all so excited about this release over other Skype-enabled iPhone apps like Fring or Truphone is simply how much it works like its desktop-bound big brother that we know and love. Instant messaging chats just work. Group chats just work. Getting at-a-glance status on your Skype friends just works. The bottom line is, other apps may get the job done, but due to bad interface design, a critical missing feature, or trying to do too much, are not a pleasure to use. This client actually is a pleasure.

With all that said, it's still not perfect. It's better than everything else Skype-related on the iPhone, yes, but optimally it could support Skype SMS (though the carriers would probably never allow it), notification of new IMs when the app isn't in use (hopefully coming shortly after the iPhone 3.0 firmware hits), and.. well, support for video. Why not? People were recording MMS videos with their cellphones in 2004. The Japanese have had dual-camera phones with live video streaming for quite a while now.

And yes, I do realize the camera is on the back of the iPhone, making it hard to use the screen and the cam at the same time. I don't care. It's time Apple realized people are willing to trade some battery life for the ability to record a short video and start allowing apps that support it. But, until that day comes, Skype for the iPhone is highly recommended. I have already put it up on the first page next to Tweetie and DVR Remote. You can find the link to Skype in the iTunes app store here.

In ten years time we may look at Skype in the same way we look at Amazon and Google, as a huge built-to-last company, for these ten reasons:

1. It has revenue, about $500 million in 2008. Ahem, only in the strange world of Web 2.0 is that considered remarkable. I love using Twitter, but without sustainable revenue their future has to be in question.
2. It is profitable. We're talking "high-teen margins," according to eBay's CEO at the Accel Symposium. That does put it in a different league. It means they can survive the harshest of economic climates. If Facebook is having to raise money in these markets their model must be fundamentally flawed, which means their time as an independent company may be limited. To control your own destiny, you need to be profitable.
3. Skype's growth is accelerating in a tough market. Skype is publicly talking about growth rates of 30% to 40%. That's not bad in an economy where flat is the new 30%. Skype has the perfect recession pitch: cut costs now! This shows in its most recent numbers. In the last quarter, Donahoe told us that Skype-to-Skype grew 73% and Skype Out grew 63%.
4. Disruptive technology. Disruptive technology is an over-hyped term, but in this case it really fits. Skype's peer to peer technology enables them to dramatically under-price the competition and still make money. New users don't cost much money - compare that with Facebook and YouTube. Even better, each new user that comes on improves the service for others - the core P2P proposition.
5. Viral marketing. Skype is the perfect viral business. I have lost count of the number of people I have told about Skype, for the simple reason that I want to communicate better/cheaper with them. Many of them are doing the same.
6. Massive market with vulnerable incumbents. $2 trillion is a lot of money. That is the size of the global telecom market. As to vulnerable, how many people feel so loyal to their telephone company that they won't switch to get lower prices? Yes, when Skype dominates the market it won't be worth $2 trillion any more. Even if it is worth 25% of that, say $500 billion, that is OK for the dominant player. Faced with the Skype threat, incumbents have a horrible innovator's dilemma. To really match Skype will destroy their current business even faster.
7. Just wait until it bites into those cell phone bills. Skype on mobile phones - really native Skype you can use for free wherever there is WiFi - has been possible technically for some time. This has been held back by the mobile operator's head lock on the device manufacturers. At some point the dam will break. Consumers pent up anger over nickle and diming cell phone bills will ensure that a real alternative will be welcomed.
8. Skype is totally mainstream. This is not about being hip or early adopter. Just show the video conversation to anybody with loved ones in distant places. You will see the surprise and amazement that makes it seem like magic.
9. It is a sticky service. Google still gets my business because they are better than the alternatives. But switching to an alternative will be totally simple. When somebody suggests using something other than Skype, I resist. I have my contacts in there, know exactly how it works and have integrated some external tools. Skype can continually add new features to make the experience better as our hunger for communication is pretty well limitless.
10. Skype can do an IPO. For anyone younger than 30, we should probably spell that out: Initial Public Offering. We keep being told that the IPO market is moribund because of Sarbanes-Oxley. Baloney! The IPO market is moribund because we have lacked profitable high-growth companies that move into huge markets.

My prediction is that as soon as market conditions improve, eBay will sell Skype through an IPO. Their shareholders will pressure them to do so. There is no synergy logic in being part of eBay. The value of Skype is obscured by the problems in eBay's core business. The Skype IPO can be early in the market recovery, as their story resonates so well in a recession (markets usually recover well before the economy recovers).

Who Else?

Who else can take the title "biggest winner from the Web 2.0 era"?

• Google: not really Web 2.0, though; born in 1999.
• YouTube: still losing money, no clear monetization model, and video-serving costs are substantial. It is hard to imagine YouTube as an independent company
• Facebook: how long can the great hope remain the great hope? At some point, it has to demonstrate a sustainable revenue model and some profit. It still doesn't have a native revenue model that makes sense to both users and advertisers.
• Twitter: see above.
• Salesforce.com: not really Web 2.0 either; born in 1999. More revenue than Skype today, but smaller addressable market.

Real human social networks (as opposed to the tools that facilitate online communication between people in a social network) have an obvious reverse network effect. If I have too many people in my social network, I cannot pay enough attention to each of them, and without attention, relationships fade.

Back in September 2007, we looked at social motivation in the real world, specifically the two distinct types of motivation. One is, "I want to communicate better with the people I already know and trust". The other is, "I want to increase my visibility so that I can connect with more people."

Both have clear limits. The number of people I can really know and trust is limited, because knowing and trusting take time and attention. Increasing visibility, whether by blogging or tweeting or advertising or PR, is less limited. But when visibility goes beyond a certain number of people, it becomes no more social than broadcast media or spamming. The personal touch is gone. The real community spirit is gone.

As Groucho Marx remarked, "I refuse to join any club that would have me as a member." If it is an exclusive club, the membership has to be limited. If it is not exclusive, is it really "social"?

eBay is the classic example of a network that lost its community spirit after reaching a certain scale, as the comments on this post vehemently demonstrate. This loss opened the market for eBay alternatives, such as Bonanzle. It is unclear whether these alternatives will face the same issues when they get to scale.

Etsy will be an interesting case study. It looks like it may avoid the reverse network effect by being focused entirely on handmade goods. That focus may limit its eventual scale, as not everybody wants to make or buy handmade goods, but it will still be able to build a business more than big enough to satisfy even the most demanding dreams of avarice. That focus on handmade goods will act as its social glue. It will grow as eBay would have had it decided to remain focused on the global garage sale, not getting lured into selling mass consumer goods. I suspect if eBay had done that, its core business today would be smaller but ultimately more profitable and sustainable.

Networks Without Messy Human Interaction Are Immune

eBay the corporation owns two businesses that have almost perfect network effects and do not suffer from any reverse network effects: PayPal and Skype.

PayPal works for consumers because merchants use it, and merchants like it because consumers like it. The fact that everybody likes it won't make me like it any less.

Skype gets more useful with each new user, and each new user promotes Skype, consciously or unconsciously, for his or her own reasons. Even better, the cost of providing the service goes down with each new user, and that is really unusual (a function of Skype's P2P architecture). Google and PayPal also benefit from each new user, but they still have to service that user, and that costs money. In the case of a video service such as YouTube, the servicing cost is significant. So Skype really is in a league of its own when it comes to network effects, and that is why it may become the world's largest telephone company and the biggest economic success story of the Web 2.0 era. (Google Voice, having just thrown its hat in the ring to battle Skype, will be interesting to watch. My bet is on Skype.)

The difference, though, is that we do not look at these services as communities. They are simply enablers of commodity transactions: payments and phone calls.

What About Social Networks?

Does Facebook still feel special now that it has 175 million users and is growing at a rate of 600,000 per day? That is a sincere question for Facebook users. I am one of the few people who do not use Facebook. For whatever reason, I never got into the habit. And I have no compelling reason to start now. This has made me a bear on Facebook for a long time. As a non-user, I miss what makes Facebook special and why it grows so fast.

The network that I use is LinkedIn. I use it to connect to people who my contacts know. As far as I am concerned, it is a utility in the same way that the phone or my email/CRM system is a utility. Do I care that LinkedIn has 7.7 million users now? Does that make it more valuable to me? No. Is Facebook 22 times more valuable to me than LinkedIn because it has 22 times more users? No.

Here is the theory:

In a social network, the value for existing users of a new user joining the network plateaus once users have most of their own contacts in that network.

Of course, the social network grows in value as a business as more users come into it because the network then has more eyeballs to sell to advertisers. But that is different from network effects. As a LinkedIn user, I do not benefit when more strangers join. I already have about 90% of my contacts in there, and the remaining 10% may remain hold-outs; and I don't really care anyway, because I can always reach them outside of LinkedIn. When I meet somebody in business, I look them up on LinkedIn and connect if they are on it (I cannot recall anybody recently who was not on it). I do that to keep my Rolodex updated, which is a very valuable utility for me. But my actions are not growing the network. If I joined a new network, I would spam all my contacts asking them to join, but I have zero motivation to do that.

As a long-time Facebook user, do you care when more strangers join? Does it make any difference to the value you get from Facebook?

So, it is possible that the network effect has a natural plateau.

A Plateau Is Okay, But a Steep Downward Slope?

Whether that plateau turns into a downward slope depends on the monetization strategy adopted by the "owners" of the social network. And in the social networking business, a downward slope can very quickly become a steep slope or even a cliff. Trust tends to be binary; viral can work both ways; and switching costs are minimal. That is why I put "owners" in quotation marks. You can never really own a social network or community. You can provide services and extract rent for only as long as the community wants those services and is willing to pay the rent.

This is where the incredibly high valuations of businesses such as Facebook and LinkedIn may become problematic. If these businesses get too eager to monetize to justify those valuations, they may create the reverse network effect.

There are only two ways to monetize: ask for revenue from users who regard the service as a utility (like paying for the phone company), or ask for revenue from vendors that want to sell something to the people using the service. Thus far, all the major social networks have taken the latter fork in the road. They don't want to become utilities because that wouldn't justify their lofty valuations. So they have to sell more to those who use the service. At that point, the reverse network effects may kick in.

Craigslist

Craigslist chose a different path by not taking on external investors. It has no valuation to justify. It can leave masses of money on the table without any worries. So Craigslist won't suffer the reverse network effects that come from over-eager monetization. Its model of allowing lots of free listings will sustain high growth and is clearly impacting eBay's business.

Twitter an Interesting Case Study

Once again, Twitter is the interesting one to watch. The ease with which one can add and delete who one follows makes its size self-regulating. As a real-time search tool, its value goes up with each new user. As a communication tool, it goes up as new people join who might be interesting to follow. Its openness may prevent the reverse network effect.

The other reason Twitter is an interesting case study is that it has not yet disclosed its revenue model. If the revenue model it does adopt involves selling to its users, the reverse network effect may kick in. Twitter would become classic MBA case study material, a fact of which management must be well aware!

John Donahoe made the very reasonable point that online e-commerce will look like offline commerce: fragmented. Consumers will buy from eBay, Amazon, Walmart.com, Zappos, whatever gets their attention and has the right product at the right price. That rings of common sense.

To illustrate this fragmentation, he told us that the mighty Walmart has only 4% of the market.

For a more extensive discussion of the problems facing eBay's core service, read this very well-reasoned (but long) post on SeekingAlpha.

When queried on these issues, Donahoe simply indicated that the problems did not originate on his watch, that he was aware of them, and that they were complex to solve. That does not seem enough. The bits of insight above may be great, but eBay needs to fix its core service to regain its stature as a leader and give investors a good return. You don't transform a company without fixing the core, and investors clearly feel that eBay needs transforming; that is the message behind a stock price that in the last 12 months trails the NASDAQ and peers like Google and Amazon. eBay is actually in the rather miserable club with Yahoo, as perceived by investors.

PayPal: Jewel in the Crown?

Donahoe contrasted the fragmented e-commerce business with the highly consolidated payments business. Clearly, the latter has greater appeal. One can see why. The payments business is global and dominated by a few players: Visa, MasterCard, and Amex. As the low-cost player best suited to the web, PayPal has enormous potential.

I'm pretty sure I even heard Donahoe say, "PayPal should be bigger than eBay." As he spoke about the global payments system, one could see why.

He described the national banking regulatory challenges, a major barrier to entry. Taking money online is the easy bit, he said. Moving that money in and out of the traditional banking system is hard, because the banking system has to adhere to a maze of local regulations. Donahoe told us that eBay works on penetrating something like 5 to 15 new countries each year. Some, like Japan, remain a challenge.

This is clearly a huge opportunity, but these local regulations are a big barrier to entry. Anyone who has done a lot of international business can attest to how archaic some of the processes are. Wiring money is bad enough, but the processes around letters of credit seem positively arcane, almost 19th-century.

Oh, and a $500 million High-Growth Skype Business

Skype is the eBay business I am most familiar with as a user. We use it all the time here at ReadWriteWeb. It is a core tool for running a small business in which colleagues, clients, audience, partners, and everybody else in the community are all over the world. For entirely selfish reasons, I evangelize Skype to everybody. Now, I want Skype on my cell phone to cut my mobile bills; it is definitely ready for prime-time.

And yes, Skype is a real business. Donahoe told us that Skype generated $500 million in revenue last year, with "high-teen margins" and growth rates of 30% to 40%. Saying "That's not a bad business" got a wry laugh from the audience (all of whom would consider it a totally amazing business). In any other market, that would be a red-hot IPO.

Skype is perfectly positioned for a long recession, too. That already shows in the numbers. In the last quarter, Donahoe told us that Skype-to-Skype grew 73% and Skype Out grew 63%. I can personally attest to seeing many smart people, who had not used Skype previously, see it and say, "OMG, it's amazing."

$500 million was only 6% of eBay's total $8.5 billion revenue in 2008. But with Skype growing at 30% to 40% and eBay's core service hurt by a slow-down in consumer spending, this percentage could change significantly in 2009.

How much could eBay get for Skype, a business that already has scale, good revenue growth, decent margins, and a model and technology that are disrupting the massive telecom market globally? It is not entirely outrageous to think that Skype could become the biggest telecom company in the world at some not-too-distant point in the future. At some point, the IPO market will come back. All of eBay (including PayPal and Skype) is currently valued by the market at $15 billion. How much would the market value of Skype as an independent entity be? More than 6% of $15 billion? I think so.

eBay spinning off Skype was one of the three web-tech market events that I wished for (not predicted) for 2009. It looks possible. Methinks it is simply a matter of timing and market conditions.

The VC Portfolio

As well as being a collection of great but unrelated businesses, a kind of online conglomerate, eBay also looks like a VC with a strange but interesting mix of minority stakes. The most interesting and oft-discussed is its 28% stake in Craigslist. It is clearly not a happy relationship. But that 28% must be worth something.

The Economic Question

The underlying question for everybody at the Accel Symposium was, "What about the effect of the economy on your business?" Donahoe pointed out that they saw the downturn in their PayPal and eBay lines as early as May. Signals from millions of small buyers and sellers are far more reliable than any GDP numbers. So they were able to take corrective action early.

eBay's biggest action was to offer coupons to buyers, to help sellers. As he pointed out, small sellers have weak balance sheets, so a downturn can make them vanish quickly. eBay moved quickly to support its sellers.

Asked if eBay was recession-proof, Donahoe pointed to Skype as being perfectly positioned, but he noted that if consumer spending slows, then even e-commerce is affected. And e-commerce is down.

Time to Fix E-Commerce While it's Down

eBay needs to have a compelling core proposition for e-commerce that unites auction, fixed price, and classified ads. Donahoe pointed out that search is the obvious unifier. But it is not clear how eBay can use this to its advantage.

E-commerce still makes up only 7% of retail. Given the amount of time we spend online and the obvious opportunities, this could grow to 15% to 20%. A big prize awaits here when the economy turns around. eBay has the financial strength to build through the downturn.

Donahoe also painted a vision of mobile e-commerce. It is one that others have painted before: you go into a real-world retail store; see an item you like; scan the barcode to get the price; find a better price online; then decide whether to buy it in the store or online, depending on whether you prefer convenience or lower price.

As he pointed out, this could encounter a bit of resistance. I can envision videos popping up on YouTube of irate shopkeepers throwing out barcode-swiping bargain hunters! Physical retailers will have to adapt, but online folks such as eBay will have to be sensitive to their needs. This will be interesting to watch.