The social graph . . . the silver bullet for all things previously haven’t worked online. Seems like for the last 3 month, everyone has been recycling dot-bomb ideas, adding a “social graph” angle . . . and calling it the next great thing. Here is the deal. . social graph will ultimately be an important part of the formula for building the next great web application BUT its not a panacea for an idea that never worked in the first place. Understanding user behavior and context will still be the fundamental first step to creating the next killer app.

Buried in the various posts of the week, is this little gem on Venture Beat on eBay’s experiments with merging the social graph and e-commerce that anyone (entrepreneurs, pm’s etc) experimenting with the social graph need to take note.

One interesting exploration is whether and how social connections between friends (the so-called “social graph”) can enhance seller trust ratings and thus facilitate purchases on eBay. EBay’s first exploration — or the “first inning,” as Mancini described it — was playing with Facebook apps. It built one, called eBay Marketplace, which lets you see what your friends are buying on eBay. This is somewhat similar to Facebook’s own Beacon advertising program. Note, eBay was an early Beacon experimenter. The company concluded that people want to keep social and commerce activities separate.

What eBay has discovered. . . (and BTW Facebook learned the same thing too from Beacon) is that social recommendation does not spur an impulse purchase from another user. Extrapolating even more broadly, social recommendations do not cause a passive user to become an active user. One area where this data point could help predict success is in the display advertising targeting technology. Social graph based display advertising targeting companies (too many to mention) will not have the success that many think they will . . . display is still a passive medium . . . it will never be like search an active medium.

But is it true that “people want to keep social and commerce activities separate”? That is part I think eBay had it wrong. Its too broad of a hypothesis.

I believe where social graph will have the largest impact is when users are already taking an pro-active stance (for example, all kinds of “search” like activities) and the social graph based recommendations and applets can act as a catalyst to improve conversion. For example, Amazon’s recommendation system generates between 10-20% of its e-commerce revenue (based on common research analyst estimates) so in that context, when an user is already take a proactive action, recommendations can be very valuable. Social Graph applications is just another method for segmenting like-minded users . . . collaborative filtering gets to the same end just through a different mean (ie from actual purchase behavior) . . . so anything that improves the targeting and relevancy of recommendation would in theory improve conversion (and prove valuable) to the end user.

I, as a user, don’t necessarily need to know that Joe, my best friend, just bought a pair of Ted Bakers 2 seconds ago. What I do care about is when I eventually need to buy a pair of shoes, you remember to show me a couple pairs of Ted Bakers that I might like. Simple, certainly not ground breaking (. . . hell, collaborative filtering could already be far more relevant than social graph based recommendations . . . ) but doesn’t mean social graph could not be a small but important part of the inevitable march towards the next generation of web applications.

I just spent the last 2 hours scouring the web on anything I could find on the first shoe to drop since Wenda Harris Millard warned the whole indsutry at the most recent IAB “We must not trade our advertising inventory like pork bellies..” Thats not forget that Millard was most recently head of ad sales at Yahoo where ads ARE traded like pork bellies (at places such as panama and rights media exchange).

It appears that ESPN (crown jewel of Disney) has decided to boot out all ad networks in order to keep them (ad networks) from selling ESPN online advertising inventory. Disney itself control a sizable amount of premium inventory and I’m sure it is looking at this experiment very carefully as a model for the rest of its properties. Some in the industry are even taking a broader view, expecting reverberating ramnifactions across all top publishers. Of course, this is not new . . many in the industry has been beating the drum for ages. For sure, as MediaWeek contents:

Two sides have formed—those who want to protect traditional, direct selling of premium content brands and the math-loving crowd that favors automation and data. The math lovers make the traditional sellers nervous.

So how did we get into this mess in the first place?

Well . . . you take an industry accustomed to direct selling for most of their media inventory (TV, Radio, Cable, OOH, Print etc) and you throw them in the middle of the digital revolution led by geeks crunching numbers - obsessed with optimization and efficiency - and you get as much FUD as SAP and MSFT has ever generated together. Added to this, you have inherent time sensitivity of a perishable inventory AND the real time nature of online ad serving - making selling/buying online ad inventory almost like a game of chicken. (or prisoner’s dilemma).

There is nothing inherently wrong with Ad Exchanges and Ad Networks. In theory, premium inventory that drives advertiser success WILL eventually be priced at a premium (with thus implied efficiency). But unfortunately the pre-conditions for that simply doesnt exist - and will probably never be. First of all, a significant portion of the online inventory (premium and “remnant”) must be available to the ad exchange in order to truly aggregate supply and demand for efficient pricing. Secondly, perhaps even more unlikely, some sort of measurement must be available to truly value and account for the the “premiumness” of online inventory beyond clickthroughs.

What we have today is an “arbitrary” definition of premium inventory sold through direct sales force at a huge premium while remnant inventory is sold through ad networks at a huge discount. For whatever reason - ad inventory is artificially bifurcated between the head and the tail - there is no “body,” no middle ground. Furthermore, many publishers have not succesfully segmented their online inventory due to the mis-guided application of offline inventory management strategies to their online inventory. (buy one ad space direct for $30 CPM on week one; buy the same ad space through adsense for $1 CPC on week 4) causing channel conflict as well as artificial downward pricing pressure on the most desirable ad spaces (most likely the ESPN experience).

So whats the solution? I believe in ad networks, but I believe in the evolution of the current model . . .

The pricing decision MUST go back to the publisher - be it manual acceptance perhaps augmented rules based decision support (maybe a little bit of automation)

Inventory can no longer be exclusive to a particular channel or network- ie multi-channel sales strategy for single ad space to create true competition thus price efficiency (ad “exchange” is trying to solve this particular issue somewhat)

Maintaining the process efficiency of ad networks while bring more transparency to availability and pricing (but not clearing)

Lastly, publisher must learn to bundle inventories (and other alternative pricing model such as “subscriptions” and “taxes”) and services to targeted advertiser segments in order to truly allow for price discrimination
. And ofcourse, ad networks much evolve to support publisher’s increasing SKU’s and pricing models.

. . . and as usual, easily said than done

If Yahoo wants to fend off a 60% premium hostile offer, close to the ONLY thing it can do is to buy eBay inorder to make itself so big and the potential hostile merger so dilutive that Mr. Softie would say no thank. Chances of this happening is close to 1%.

If Yahoo + Microsoft does happen, eBay can kiss its chance of being acquired goodbye . . . and thus, it better figure out a plan to turn itself around quickly or the stock price will tank cause there will be no potential acquisitions around to artificailly pump up the stock price. (why the hell did eBay go up 7%? today?). Outside of a merger/acquisition by Yahoo or a straight up acquisition by Microsoft, I really dont see anyone with a modicum of strategic fit with eBay. Google is way way too proud/smug to be interested in a web 1.0 business . . . and even just looking at it financially I dont think there are many companies out big enough to buy ebay at a $30-$40B price tag. (adobe is the only one and thats really farfetched).

Another note. MSFT really saved the stock market today. Instead of crying recession wrt to the Google miss . . . the market was pumped up by the acquisition offer . . . and since most wall street models (quant and fundamental houses) use some sort of comparable valuation model, the jump in Yahoo really help keep the rest of NASDAQ afloat . . . that said, this is a short term thing. . . great time to play short on the market starting monday.

Meg is leaving eBay and handing it off to John Donahoe. It’s big enough news to bring me back to my keyboard to riff some more.

I cant believe the negative press Meg has gotten in the last few month. In the “what have you done for me lately” world of business (and especially tech ) media and punditry. . . you would have thought that Mark Zuckerberg was/is a more successful CEO than Meg. If you look at the numbers its simply not true. I certainly agree with those that Meg had the winds at it back cause of eBay’s business model (network effects) but the 1990’s dot com generation is littered with great concepts/business models with incredibly strong initial traction . . . but failed to live up to its early promise due to incompetent execution . . . friendster, webvan, netscape . . . to name just a few. . .

But enough kissing ass , I do have a few a few honest thoughts about eBay’s challenging future.

John Donahoe: Buyers and sellers have more choices and higher expectations than in 1998, but the guiding principles are the same—the best values, the widest and most abundant selection, and a fun shopping experience. We will make it easier and safer to shop on eBay. The second thing we are going to do is build on this fabulous auctions business that is unique and is the best format for many items.

But we have used an auction approach for fixed price. We are not optimized to get those values in fixed price. Time-ending-soonest makes sense in auctions, but does not surface the best items in fixed price.

In the past 12 month, eBay has been “re-focusing” on the auction business through its TV advertising (emphasizing the joy of winning) and raising prices on stores items to re-emphasis on auction listings and the core marketplace. This new strategy to focus on fixed price is certainly a retrenchment and an admission that the path it had been following for the past 12-18 month was wrong. eBay’s problem (as I had always believed) is driven by a few factors 1) that it owns 100% of the auction market already and 2) google through its search engine has the aggregate inventory of all “listings” which threatens eBay’s position in the market for breadth and selection (and thus as a destination). In the fixed priced context, it means that fixed price (and non-auction) “advertising” is its only growth engine left and that shoring up its core auction business is not likely to deliver the growth so enamored by Wall Street through Google.

That said, we must be in distributed commerce in the future, taking listings for auctions and Shoppng.com and distributingthem to other sites. If they ar not going to come to us, we are going to come to them. We are not at all averse to distributed commerce.

Donahoe: In many ways, our buyers will lead us there. We are making it much easier to bring eBay listings to your Facebook page, Myspace page, and shopping listings to various sites. eBay’s unique inventory offers better alternative [than other sources].

This eBay listing widget as an “ad unit” concept is not new. In June of 2006 it announced its AdContext program which used to be located at “http://affiliates.ebay.com/ads/adcontext/” - if you click through these pages no longer exists. No sure what happened but it was certainly in Beta for a while but never released publicly. Did the company lose focus? Did the company not have the technical chops to create a contextual advertising algorithm? If it didnt work as a business, why does parading it out again (re-treading an old idea) make it better this time? And lastly, why did it take so long?

Donahoe: In payments, we are enabling faster checkout and easier payment on thousands of Websites off of eBay. In reputation, we think that reputaion is something we can increasingly outtake.

Whitman: We wonder if there is a way to embed reputation into Paypal. Is there a way to travel across the Web with your Paypal wallet and some other aspect of reputation?

Reputation . . . this is a huge opportunity for Paypal . . . but something that also took YEARS to bubble up to the executive ranks. eBay cannot continue to rely on consultants to filter out the latest “trends” and re-package it in digestible powerpoint speak for any idea to be relevant. Bill Gates recognized this early and had a team of recently out of college “technology advisors” (aka geeks) to keep him grounded and abreast of the latest changes. eBay’s executive team must learn to be the same . . . in many ways the most junior people (usually cause they are younger) at eBay was most ahead of the the times. In the end, people making the decision cannot rely on data spoonfed to them in a powerpoint, they need to write a blog, try to get 500 friends on myspace, play vampire/werewolf on facebook, learn RoR, go on a WoW raid, and adopt a penguin - to become a consumer of technology in it purist form (dirty, aimless, useless, emotional - completely non strategic) as to be able to not just absorb information and data - but challenge it and form opinions based on a holistic understanding of all the trends thats happening in the internet - not just the topic at hand.

eBay just launched an application on Facebook called (unimaginatively) eBay Marketplace. As of now, there are only 250 people on the app so I’m guessing its only in beta. Otherwise just by encouraging the employees to get on, it would have a huge number of users.

There are a few cool features. For one, you can actually “push” an eBay item to your friends’ watch list. For another, you can solicit comments from friends on items you are looking to bid on. All very cool. . . I was surprised a third party app hasnt been launched to do exactly the same and make some money off eBay affiliate program (damn, another item crossed off my crazy idea to-do list).

Another thought is that Facebook has it’s own “marketplace” application which is somewhat competitive with this ebay app. Wonder what they will do. Speaking of conflict of interests, given that Rock You’s “super wall” has become such a big hit, it is inevitable that Facebook enhance the its own “wall” application to allow embeded codes. . . When that happens, I wonder if people are going to start screaming the usual “extend and embrace” MSFT-ish rants about Facebook stealing ideas from its api partners.

Not letting eBay off the hook either, why hasnt eBay’s own social networking app “My World” been given the same the same functionality? My World is a 2001 implementation of a social network . . . ie more like friendster than myspace (win on personalization) or facebook (win on relevance).

This is a big weekend for the eBay seller community because of eBay Live in Boston. Its a huge bash . . . and generally lots of good feelings all around (sprinkled with some encouraged honest venting as well). Well, it looked like Google planned to crash the party and got the heisman . . .

I remember in 2005 Alibaba pulled the same stunt and gave away mp3 players at a hotel suite next door to the convention center. (sad to say I didnt get one but not because I didnt try! . . . ) Not sure if it was effective at all except it helped expose the poor quality of no name chinese made mp3 players.

I believe eBay and Google still have a detante as far as open warfare, but this is still a crack in the facade. We now know what are the first few cards each side will use when open warfare starts . . . Perhaps Google gently provoked eBay just to see what eBay’s first move might be (brilliant!).

I certainly hope that eBay has all the scenerios planned out (actually I’m pretty sure they have given how meticulous the whole place it) cause the first card they showed Google is certainly a face card and you have to save your better cards for the end. If open hostility does happen, it wont be pretty for everyone. Google probably knows exactly how much revenue they would loose which not only includes direct spendings but also the incremental bids eBay’s ubiqitous adword program generates. eBay on the other hand probably knows all the transactions Google helps drive from NATURAL as well as PAID search as Google will likely blacklist the entire eBay site from its index as the last resort.

If they do so (wipe ebay.com from its index), the act will no doubt be labled and considered “EVIL.” For quite a long time, Google has pointed to the integrity of its organic search results as something they will not compromise for its own interests. (eh. . . ex China ). As bad as this action will be for eBay, long term, it might be even worse for Google as it will forever have to throw away its “do no evil” mantra and come to the self-realization that they too are willing compromise the user’s experience and interests to win at all cost . . . MSFT lost its ways in the early 90’s when it started down this road . . . and it is still trying to rehab that image despite almost a decade worth of PR and hard work.

Hubris . . . this need to “win” against the competition despite all else. . . has and will continue to be the downfall of the mighty.

Another random thought, I took a college class a long long time ago on nuclear warefare/politics and the principles of MAD - Mutually Assured Distruction during the cold war. Using game theory, the logical Nash equilibrium would predict both parties will not provoke eachother ONLY IF both sides remain equally likely to destroy each other if conflict breaks out. So ironically the best course of action for BOTH eBay and Google would be to not only continue to maintain the status quo but also to INCREASE the mutual dependency of both companies - raising the stakes if you will. And thus, coopetition is not only a product of the wierd dynamics of the technology industry but the LOGICAL and RATIONAL thing to do!

The blogosphere likes to report rumors as facts and edit post title accodingly in real-time as information changes. Om has some coverage (with the required hedging) while techcrunch is not hedging at all.

I have some random thoughts, not very coherent at all, but all pertaining to the transaction.

First of all, I love stumbleupon. I installed it about 4 years ago when I read about it in PC Mag, and I sincerely believe “browsing” is beginning to take shares away from search (more here and here) as a discovery methodology. So I say this is a smart move.

However, I did hear from my Yahoo buddies that they took a look at StumbleUpon (for an acquisition) and found that the active user base to be much lower than downloads. (sour grapes? ) For whatever its worth, I would think 3-6M users would be a $xxxM transaction but the rumored price is a little bit lower.

I also talked to some smaller websites and they have been telling me that StumbleUpon has been increasingly becoming a major source of traffic. (biggest ramp was 6 month ago, and now its a little flat). However, the traffic themselves are not very sticky (just stumbling through).

As Om mentioned, eBay beat out Google for the the acquisition. I wasnt surprised at all. Josh K. of First Round Capital is an eBay alumni (Half.com founder) and the driving force behind StumbleUpon’s board. David Feller (co-worker and friend from eBay) is StumbleUpon’s VP of Marketing and is also an eBay & Half alumni. Josh and Dave knows eBay inside out and have access to the very top of the company as well as the very buttom. Transaction among friends are usually more honest and straight forward . . . who wants to deal with Google’s cocksure M&A team? and un-certain integration strategy?

Ok so lastly, what can eBay do with StumbleUpon . . .

- eBay auction toolbar is one of the stickiest applications eBay has. This could potentially give the functionalities in the eBay toolbar some distribution on the SU toolbar. (wanna stumble on some auctions?)

- Phishing is THE reason user trust on eBay and PayPal is so hard to improve. Paypal and eBay are working overtime on creating industry working groups and blacklist databases to solve this problem. SU is the missing link to the end user to allow for distribution of the warning systems to the browser.

- Skype + SU toolbar are ways with which Paypal can creat a persistent wallet on the “browser-top” which would be significantly more convinient than hunting down the wallet. (as always I believe Paypal is the main benefitiary of most eBay acquistions)

- eBay can exert more leverage in the search game . Firefox generates $100M+ in revenue a year simply because google is the default homepage. Having the search box on the toolbar makes eBay in control of the user relationship while making search engines depend on it (for once!) for traffic. (there is some HBS case study on this. . . I think its called the “judo strategy”)

- I wonder how the Skype ToolBar is doing. Maybe its doing really well and StumbleUpon would be a good source of distribution for its functionalities too.

- I’m unsure what eBay is planning to do with SU’s small but growing advertising inventory. But maybe eBay does have grand ambitions on running its own ad network.

Yesterday, Amazon launched endless.com (coverage at techcrunch and techbeat). Obstensibly its an obvious response to the $1B that Zappos.com is taking in a year (close to 35% of the total shoe market) . But even more strategically, its an increasing sign that the first generation internet giants has reached some sort maturity and limits to scale that traditional marketing techniques like brand extensions (ie, Coke -> Diet Coke) are beginning to become popular if not standard strategic growth options.

Furthermore, as much as the web 2.0 crowd (we? me?) would like to believe, mashups are not invented by the internet generation. Using internal assets and re-aligning them to create new products our services was invented when Henry Ford (finally) launched Model A.. And continutes today, the Chrysler Crossfire uses the same chasis as the Mercedes SLK, another example. (What is interesting is that mashups has moved form assembling internal assets to mixing external and internal assets through loose couplings and arms length relationships). For endless and ebayexpress, the main assets that are being leveraged are the inventory (both share a subset of inventory from the mother site).

I blogged about this a few month back and it appears to me that Amazon is hitting the same scalability issues.

For giants like eBay, Yahoo, Google, and even Facebook and Myspace (today). . . the MARKETING FACT OF LIFE - SEGMENTATION has slowly reduced the value of network effects. By definition, network effects is a mass market play. It is in opposition to the concept of niche marketing, niche product, for niche segments - ie the better you can target your product or service to a particular niche the more likely he or her will chose your product over a competing generic solution. These giants cant no longer band-aide new site wide features and functionalities hoping to attract new segments to their website as USAGE TIME, SCREEN REAL-ESTATE, USABILITY limits the feature creep. This admission that network effects is no longer the dominant driver of their business - that segmentation is - is widely seen but rarely discussed . .

It further amazes me how the mentalities of a startup can blind someone from making the right business decisions (better, faster, cheaper /= better for the customer). For some reason, the “why’s” of endless and ebayexpress were not obvious to the pundits of the tech world. . . but for someone that works at Gap, P&G, or a HomeDepot it must seem very obvious.

Every brand has its limits, even Amazon and ebay. Ofcourse, Amazon decided to completely remove itself from the endless brand while ebay tried an extension to target new segments of users.

One size fits all is only true for baseball caps (and even that is questionable). Beyond the brand, the flexibility to create custom search/discovery experience within a category can create a significantly better conversion rate AS WELL AS re-enforce the brand itself. In the physical world, the Apple Stores and its shopping experience are a clear extention of the Apple brand.

“Enhancements” are not always better. Ajax might be cool, you might love all the drag and drop functionality of the latest website profiled on TechCrunch. But you and I are a sample size of one. For incumbent companies, by definition through the size of its userbase, late adoptors are the largest segment. In the end, the feature needs to be rigorously tested with a large enough sample size to really know if “enhancements” are good for the bottom line. . . not just kinda cool.

Thought provoking conversation on Enterprise 2.0 by Jeff and his buddies (Sadagopan, Barry) + a retort by a VC at polaris. Surpisingly, the conversation helped me reconcile a part of my past with my current path. (original post )

First caveat is that I’m completely out of my depth when it comes to discussing SOA, master data management, customer data integration, and product information management (eh?). But I did dabbled my feet in the dot-com days in selling to enterprises (notice I didnt say enterprise software, small businesses is probably a better word) so perhaps I can share in literal terms about my experiences. In fact, Jeff was one of my board members, (I’m sure Jeff have already completely erased his association with our venture from memory ) .

We were a “B2B Marketplace” that allowed general contractors to find and manage subcontractors. Even in the beginning, we recognized that we were really a provider of web based application software to the industry, and that the “discovery/search” value proposition of the marketplace was minimal. In fact, at the time, there were so few “SaaS” (a term that appeared much later) examples, that hotmail was my main source of inspiration. We were blazing a trail but haphazardly, inconsistently, and perhaps even without a hint of self-awareness (for better and mostly for worse). We had some of the characteristics of so called “enterprise 2.0″ but because we lacked the self-awareness to created a coherent strategy & execution plan that would have become the ethos of enterprise 2.0/web 2.0. My failure was driven by naivite, inexperience, and in small part, the lack of precedence. . . . and that is the hardest part of enterprise 2.0 . . . having all the pieces wasnt enough, everything has to fit just right because there is no playbook . . . yet.

1) Direct enterprise selling sucks, is highly inefficient, and makes you do unnatural things in your product strategy in order to drive higher deal sizes. We vacilated between thinking that we were an enterprise productivity tool vs. enterprise software. Enterprise productivity tool should have been the right answer especially after spending time at eBay (its sellers are the SME sweet spot) . . that recognition changes everything you do from marketing to design . . . on one hand, we had a hotmail like viral acquisition strategy (self service, self signup, referals as expected functionality, and bottoms up adoption/sales cycle starting with the end user rather than the CFO) on the other hand, we also had a sales force focused on the enterprise RFP process. We couldnt reconcile freemium vs. value pricing . . . and we should have, by coming up with a revenue model focused either on services or scale rather than seats. This is how open source has thrived, and how salesforce.com scaled.

2) Large enterprise software vendors are not the future. There just has to be a way to grow our collective markets by appealing to millions of small business users and this isn’t going to come from SAP, Oracle, or IBM.
The million niches like construction are the future. . . its the gap between Intuit and SAP; the gap between accounting and ERP application that is the future. (both is usage & in segments)

3) The SOA-ification of big enterprise products has attacked a technical dimension, not an economic or business model one. In a somewhat bizarre turn of events, the historical strength of market leading business applications, the integrated suite approach, is being turned from an advantage into a liability.
Taking a productivity view of the product rather than an ROI, creates a whole different approach to development & design. Instead of focusing on ROI, inefficiencies, and risk managment of the enterprise, we could have focused on ease of use, adaptability, and integration at the end user interface level (rather than at the data level). Furthermore, click stream usage data becomes the overwhelming driver of development plan rather than feature/check box focused. It also focuses the company on serving its current customers rather than using product development to chase after deals which might not be in its sweetspot.

5) New big killer apps that are not going to be built for today’s enterprise. Most of the enterprise software market today is about finding gaps and filling them, linking products in new ways, and leveraging more value out of IT investments that have already been made. The consumer side of business may offer better opportunities.
Adobe calls a similar segment, “prosumers” . . . having all the characteristic of a consumer (usage & decision making) but with a profit motive as well. Small business owners evaluate sofware (webapps) like consumers and even pays like consumers, thus scaling sales is more important than chasing elephants. (eBay retrenched from its elephant strategy in 2003 if you read the press release carefully enough)

Lastly, I believe AJAX will have a much larger impact in the enterprise than in the consumer market. Consumers were anchored to the experiences of web 1.0 which made web 2.0 dynamism a refreshing improvement. On the enterprise side, end users are used to the interactivity and responsiveness of desktop applications already. As a result, some of the lack of adotion for webapps in the 1.0 (or dot com) days could be attributed to usability concerns. Ajax finally allows SaaS to compete on the same interactivity level as client/server applications. Web 1.0 simply did not have the RELATIVE impact on the enterprise world as it did for the consumer. I think Enterprise 2.0 could potentially be the step wise improvement of consumer web 1.0 and 2.0 combined for the enterprise world.

I was going to title this post Marketplace 2.0 (you know like software 2.0, enterprise 2.0) but I realized I dont want to create another empty bandwagon Anyways, last week, oDesk raised a good chunk of cash from an investor that knows more than anyone about building marketplace businesses - Benchmark. Which reminded me of one of the most important things I learned in the 2000 B2B craze.

As much as most people think that the value created by market places are from counter party discovery (aka search), capturing that value rest solely on providing transactional settlement services.

eBay.com is the exception rather than the rule. For consumer goods, the search cost of finding a business is high and the switching cost low. Thus EVERYTIME you want to buy a laptop, you will try to find someone to give you the lowest price. Thus eBay was able to build a gigantic business focusing solely on “discovery” as its main business. However, in the long run, when Google has taken over the world’s entire need for search, I would venture to guess that in 5 years, Paypal will generate over 2x the revenue of eBay’s Marketplace business. Note that Paypal is an example of a settlement service (financial one).

During the B2B days, eBay’s success on its business model let many to believe that if one created a marketplace and help business x find business y (or person x and person y) one can charge 10% for helping to broker that transaction. Oh boy, were we (I) wrong.

For most other businesses (non-consumer goods) counter party discovery is a commodity. It is also part of the transactional value chain that is hardest to capture. In most transactions, relationships matter much more (finding a plumber, contractor, house, supplier of PCB’s, or babysitter). The switching cost to of changing vendors/customer are very high. In that environment, once the introduction is made, the relationship between buyer/seller is taken “offline” - there is no longer a need for the marketplace going forward (for the completion of the initial transaction AS WELL AS the next transaction) . . . UNLESS you can add value through settlement services.

The marketplace (the discovery portion) is actually NOT the core competency of the marketplace business, it is just another way for the venture to hedge and reduce spending on Google. The marketplace acts as a FEEDER into the settlement services provided by the marketplace. As does Google. . .

Google has create the biggest “suckout” in the history of business by rendering metcalfe’s law irrelevant.

In such a world, oDesk has created the model for the next generation of online marketplace ventures. While others are still stuck in the 1.0 world competing with Google on search/discovery, oDesk has instead focused on how to lower friction and increase trust for the ENTIRE value chain. It has created a platform for relationship management that does not in anyway pigeon hole the value of the marketplace to fulfilling the initial need for finding a counter party. It has inserted itself between the buyer and seller permenantly. And that, is the brilliance of oDesk.