Thursday, October 13, 2005

Buying, finding, friends and fun

EBay’s acquisition of Verisign’s payment processing business takes another chip out of traditional banks’ defenses. It seems to be more than just a PR alliance, given the purchase and the synergy with Paypal.

I’m intrigued to see a market maker becoming a banker. A market-maker is often has to be a guarantor of liquidity, and so it’s in a good position to clear payments too. I can’t think of historical precedents, but then I don’t know much financial history. None of the traditional banks have bought traditional exchanges (or vice versa) as far as I know.

This is part of the “horizontalizing” of computing infrastructure driven by the web architecture. It’s no longer a vertical layering of platforms and apps, but a web of adjacent functional categories. Two obvious centers of gravity:

  • How you find stuff on the web: lead competitors Google and Yahoo. Key assets: search technology and page view monetization.
  • How you buy stuff: eBay and Amazon. Key assets: inventory and user-produced content.
Then there are two more which are more debatable:
  • The “how you entertain yourself” category: Yahoo, Apple, Real. The assets are media deals and user experience.

  • The “how you hang out with other people” category. I lump all communications in here from IM and Skype to Friendster and MSN Spaces; the key assets are reputation and buddy lists. It’s not clear who the leaders are here; in IM it’s AOL vs Microsoft and Yahoo.

Application programming interfaces will be harder to monopolize in this scenario than in the vertical one. Since the major categories are webbed together, there are more interface paths to control than simply apps-to-OS. The lead players in one constellation are often strong in others; for example, Yahoo is #1 in content and #2 in search. The Number Two player will always be willing to give away functionality in when they’re not on home turf in order to undermine the leader; in turn, they'll be undermined by that leader encroaching on their turf. The end result will be a two or three confederacies that span multiple centers of gravity, eg Google-AOL-Real vs. Yahoo-Amazon vs. eBay-Microsoft.

The value for developers will be in bridging between the centers of gravity. The classic case of in fact sits between the “find stuff” and “buy stuff” constellations (Google and Craig’s List, respectively). They will have to deal with multiple possible combinations. It’s likely that individual developers will align with one confederacy, though their loyalty will shift as the constellations evolve. This is a good opportunity for tools makers, but inefficient for developers and frustrating for those with dreams of market dominance.

eBay becoming a banker signals the maturity of the web, and the likelihood of more regulation. The main players in regulating the internet in the US have been the FCC and the FTC, and it’s mostly been about communications (VOIP, law enforcement access, spam). The eBay action begins to lure in the Federal Reserve. International regulators will get even more involved once money flows across borders. Content and communications are pretty important, which is why governments are making a play for ICANN, but money is where the action really is.

As always, it’s striking that all the names are American (all the more so now that Skype has been swallowed by eBay). Asia and Europe are now on a par with the US on internet use (stats), and the mystery of where their champions are becomes more striking by the day. I guess it’s evidence of the USA’s first mover advantage coupled with a system that fosters entrepreneurialism. The players who are likely to use regulation against the market leader are probably going to be countries, not companies (cf. again the fight over ICANN). The one place where market innovation with global impact is likely to arise is China. I’m intrigued by the China/Singapore combo. They’re both totalitarian market economies; China has the audience, and Singapore has the lead in web sophistication. The surprise is South Korea. While it’s a leader in social adoption of the broadband web, its problem is that industrial policy is strongly biased towards advantaging CE manufacturers; software is just a way of selling boxes.

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