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TECHNOLOGY BREAKDOWN: The Morning After
*While I didn’t watch the Academy Awards this past weekend, there was no real escaping them either. Even ESPN’s SportsCenter hosts made allusions to Oscar on Sunday night. By now, we are all too familiar with the happenings at the show and on the red carpet beforehand, and we know about the parties that happen afterwards. One of the weird thoughts that crossed my mind was thinking about the number of hangovers generated from those huge parties, and how many of the “beautiful people” have to do double time at the gym to deal with the excesses of Oscar night reminds me of what Google and eBay may be going through in trying to digest their respective mergers with YouTube and Skype.
In its January earnings report, Google reported fourth quarter net income of $1.03 billion, up from $373 million for the same period last year. The wild thing was that in the face of an earnings report that once again beat the Wall Street analysts’ expectations for the company, the stock slipped about 1 percent in price during after hours trading on the day of the report. A number of financial reporters suggested that while Google exceeded the analysts’ public numbers, the company did not meet the analysts “secret” numbers. For those who don’t pay that much attention to the business pages, many stock analysts [for the major investment firms] will publish an expected value for what a given company’s earnings will be, but they also have a private (sort of) value which they base their investment decisions on.
Only a few days earlier this past January, up the road in Silicon Valley, eBay published its earnings report, which showed an increase of approximately 30 percent from the same period last year at $1.72 billion. eBay CEO Meg Whitman remarked in a conference call, “2006 was a "pivotal year" for the company, as it made adjustments to improve conversion rates on sales and auctions alike and moved closer to fuller integration of some of its acquisitions, such as VoIP firm and shopping search engine Shopping.com.”. Of particular interest to analysts were the earnings numbers for eBay’s Skype division, which increased its revenue 150 percent to $66 million, and tripled its user base during 2006. Unlike Google, however, eBay shares rose 13 percent on the release of its earnings.
While the effects on the companies’ respective share prices were different, the common thread that both of these companies are dealing with is how they will digest these large scale, high profile mergers into their business. At the time of the eBay/Skype merger, the strategy was not to spin off into the VoIP business, but to provide a (self-contained) mechanism for buyers and sellers to communicate in real time. While the strategic link is weak, it is there. On the other hand, people are still scratching their heads trying to figure out how Google is going to make money from YouTube. Apparently, that crowd includes Google CEO Eric Schmidt who told analysts “that Google was “experimenting with advertising models” to determine the best way to monetize YouTube”.
Now that the party’s pretty much over, and investors have that “Well?” look on their faces, how much indigestion these two mergers will cause remains to be seen. For Google, the pain is likely to come sooner than later, because many analysts did not see the value in the YouTube merger in the 1st place. Similarly for eBay, even though Skype tripled its subscriber base last year, how many of those were U.S. based (Skype’s weakest market) and how many were “Skyping-out” (using Skype’s for pay service that extends Skype calling capability to regular phones – anywhere).
Russell de Pina is a Principal for n2active, a technology consulting firm located in Houston, TX and Long Beach, CA. Russell can be reached by email at rdepina@n2active.com
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