Speaker Information

by Sente

Concept Cards

John Donahoe
President, eBay Marketplaces

Thank you for inviting me here today. I'm delighted to be here and have thoroughly enjoyed the program thus far. Let me apologize up front that not only did I not bring a video, but I don't have any sound either. I'm certainly not as smart as Clay Christensen, but when he comes up here I'm almost as tall! [laughter] So, one out of four isn't so bad.

The topic of disruptive innovation and the history of eBay have a lot in common. In many ways, eBay itself was a disruptive innovation. All three of the major businesses that are a part of eBay are disruptive innovations. I'd like to spend a little bit of time talking about how eBay got to where it is and then talk about how we approach innovation going forward. Today we're dealing with phase two or phase three of disruptive innovation. We've had the disruption, now we must disrupt our own disruption. That's part of the challenge.

It's a true story about the laser pointer being the first item sold. EBay started on Labor Day of 1995. We have a saying at eBay: "It was a really good idea." Pierre Omidyar wrote the code over Labor Day weekend and the first thing he sold was a broken laser pointer. He had the laser pointer in the first place to entertain his cat. He was a software programmer. When it broke, he wanted to get rid of it but couldn't think of how. So he listed it for a dollar and left it. Two days later it was at three dollars. Three days after that it was at five dollars. It sold for fifteen dollars. He actually called the buyer and asked him if he really wanted to buy it, because it was broken. The buyer responded that he collected broken laser pointers.

Pierre had a brilliant disruptive idea. That idea is quite simple: make inefficient markets efficient. The idea has two pillars. (1) Create a market mechanism to put value on things that have uncertain value-whether it's a used good or a hard-to-find good. (2) The way Pierre did that was to build a global marketplace that empowered people in the lower left-hand part of Clay's model. EBay went around traditional distribution channels and allowed the small guy to go directly to consumers globally. These two things resulted in a pretty profound disruption that led to eBay.

Twelve years later, eBay has been a huge success. Last year we had over 230 million registered users participating in 38 markets around the world. We're the number one global brand in e-commerce with 15 percent market share. That ranges from almost half of e-commerce in Italy, on down. About $1,800 worth of items sells on eBay each second. Last year, $52 billion of merchandise sold through eBay. Meg has a favorite saying: "If eBay were a retailer (but we're not), it would be the 7th largest retailer in the United States." Another statistic that's inspirational for me is that 1.3 million people make their living selling on eBay. And, critical to our innovation, over 45,000 developers develop off of our APIs.

EBay is an immense marketplace. On an average day a diamond ring is sold every two minutes. Over 300 stamps are sold every hour. And then there's the ultimate disruption. About seven years ago, cars started popping up on eBay. Think about what a counterintuitive notion this is. You have a buyer and seller who have never met one another and they're going to sell and buy a car without touching it or looking at it. That started virally on eBay and today over one million cars and trucks have sold on eBay. One is sold every minute, making it the largest reseller of autos in the world. More than three watches are sold every minute on eBay, five women's handbags, over 3,000 video games each hour, and 3,600 MP3 players. This disruptive idea that Pierre had twelve years ago has become a very successful business.

We're also blessed to have a second disruptive idea: PayPal. Like many other disruptive ideas, PayPal was created by an unmet customer need. Buyers and sellers on eBay were having trouble figuring out how to pay one another. They were using cash and checks. Remember that the sellers on eBay are individuals and small business people. They can't get a merchant account from a credit card company. So they couldn't accept money from a credit card, being the low guy and frozen out of the market. The founders of PayPal came up with a very disruptive notion. (1) Anybody with an email account can send and receive money without sharing financial information. (2) They did that by working on the backbone of the banking system. But because funding mix is partly driven off of bank accounts, they do it at about half the cost of a merchant account. Lower cost, easier to use. Again, this is Clay's lower left-hand quadrant. PayPal started on eBay and has grown tremendously over the years. EBay brought on PayPal in 2002. Today there are over 123 million accounts at PayPal, which is more than American Express or Discover. There were 611 million transactions in 2006 and over $200 million in stored balances. It's almost a small bank. PayPal is also as global as eBay. It's in 196 markets around the world, is available in 17 currencies, and last year over 42 percent of PayPal's business occurred outside the United States.

PayPal has helped realize Pierre's vision of global trade. An artist and seller in Mexico can directly sell their pottery to a buyer in Tokyo and have the currency transaction happen automatically through PayPal. Two-thirds of PayPal's volume is off of eBay and it's just getting started.

We have a third really disruptive idea at eBay, which is Skype. Many of you are familiar with Skype. The founders, Niklas Zennström and Janus Friis are serial disruptors and entrepreneurs. They founded Skype on the simple concept of free phone calls. That's a disruptive idea: taking something that everyone needs and making it free. They did that using peer-to-peer technology which went around large parts of the traditional telecom system. When you have "free", it opens up the possibilities. For instance, you can put together a Japanese instructor who lives in Tokyo who wants to teach Japanese around the world with a student in New York who wants to learn Japanese. They can put a little video camera on their laptops and have a free (the telephony and the video) one-hour tutorial. It can create commerce and trade. Skype is a three-year-old company that is just getting started and growing. We bought Skype in 2005. It is currently adding 380,000 new users each day. It has over 220 million registered users. Nine million users are online at any given time. Three billion minutes of calls go over Skype. This is 4 percent of worldwide long distance minutes. A lot of this is with people who are not in the mainstream. A lot of the use comes from immigrants and families who are separated around the world who can now connect with one another. We've started monetizing Skype. Last year's revenues were over $200 million.

EBay is blessed to have three disruptive innovations that have led to three leading disruptive businesses. We have a lot of respect for the disruptive entrepreneurs and founders of these businesses and feel a lot of responsibility to help their dreams materialize.

I'd like to talk next about innovation at eBay. Innovation has been critical to our success over the last decade. You can't just start with an innovative idea and ride it out. You have to continue to innovate. Innovation has helped fuel an almost ten times increase in eBay's revenue over the past six years. When we think about innovation at eBay, we think about different approaches to it depending on the situation. Many of them share Clay's principles of disruption but how we apply them can be different. I'd like to talk about how we approach innovation in our core business, how we approach it around our core, and how we look for new disruptive innovations to add to our company.

Let me start with innovation within the core. In many ways, this is the least sexy kind of innovation. It's hard work. You don't always see results immediately. It doesn't always have some of the easy elements of separation where you can break off into small teams internally. I joined eBay about two-and-a-half years ago. When I got there I found one of the most successful and proud businesses ever created. However, with that comes a little resistance to change. There's a hugely successful business model with a massive installed customer base. It has a large number of lines of code. The business model was successful and also entrenched. For the first eight or nine years, little incremental changes on this business have led to great success. EBay had a playbook that worked in the US and got rolled out around the world. The job of eBay employees was to implement the disruptive playbook. That worked, but we were spending more time managing the ecosystem and not enough time paying attention to what customers want and what the competition was doing. Our community of buyers and sellers are very opinionated and vocal. They like our product and have an opinion about any changes that we make. As a result, our risk profile started going down. It's funny for a company that was only ten years old to be seeing some symptoms of that.

We set out a year ago to think about how we could change before we are forced to change. We took a good look at ourselves in the mirror and didn't like everything that we saw. We saw a very successful business and a lot of momentum but we saw that our user experience and ability to satisfy our buyers and sellers wasn't what we wanted it to be. By using a real focus on the customer, we embarked on a series of fundamental changes that will ultimately span a three year period. We started by creating a future vision. This was critical because not everyone felt the impetus to change, given the amount of success we were experiencing. There's a real push to keep doing what you're doing because it's working. We dove deeply into an understanding of our customers, their needs, their unmet needs, and their alternatives. We had to confront some sacred cows. These are often some of the most difficult things to handle. They're perceived as values of the company. For example, we talk about the level playing field. We treat every seller the same. Now, the level playing field really means that the little player shouldn't get shut out. It was never intended to mean that we treat a bad seller the same as a good seller. Intermediation is another one. It doesn't mean that we can't intervene to make a better buying and selling experience. We also had to address some of the cultural and organizational dimensions.

A year ago, eBay was a website where we applied the same approach to all categories. It was one size fits all. We wanted to create a vision built around our competitive strengths instead: providing great value, providing the best selection, and doing it in a fun and engaging way. We created some prototypes that were built around tailored shopping for our users-tailored to individual users, to different categories, and to different experiences. This future vision was important to help us understand where we were coming from and where we were going to. It also acknowledged that we were going to take a few years to get there.

We reorganized and started onsite innovation. Historically, we focused a lot on our sellers because they're the ones who pay our fees. But the buyer was someone we had lost sight of. We increased our focus on the buyer and this year we will make more changes to our onsite experience than we have in the past three or four years. Here are some examples.

One of the most fundamental activities is "finding", or what most people think of as "search", on eBay. Historically, the core part of our business model started with a search and the results came back with time ending soonest-the items that are ending soonest at the top of the list. That makes sense during auctions because at the last minute you want to bid and win. Today over 40 percent of the items on eBay are fixed price. We have such volume that many of our buyers said that there was too much abundance. They just want to buy a Nike watch and instead they get 12,000 results back. That's too many. They want to get to what they want, faster. We agreed. There's a lot of talk around the Internet about relevance engines for advertising. Nobody on the Internet has more close transaction data than eBay or PayPal. We have the opportunity to build the best finding experience there is. We weren't collecting the data in a way that we could use it, so we had to change that. Tinkering with the finding experience is also tinkering with one of the core jewels of eBay. But we recognized that eBay has more product searches than any other property on the net, including Google. We convert single digits from searches to bids or buys-a fairly small percentage of those searches-and all we have to do is move that by a fraction to have a profound impact on our company. Over the last eighteen months we have set out to make a series of incremental improvements in our finding functionality. We bought Shopping.com, which is a great destination site but also brought us great finding and search technology. We experimented with eBay Express and built a separate parallel site to experiment with relevance-based search. We went completely with relevance-based search in Korea. Finally, we began layering in something called "best match" into our core site. Those of you who use eBay, if you look in your search box, you can select best match as an option which will help you get to the items you want more quickly. Finding is a core area that we're going to launch a series of improvements in during the next few months.

Here's a second example and it lines up with Clay's notion of a job [ask yourself what job this product is being hired to do.] Our conventional wisdom is that our users love the thrill of auctions. But our auction growth wasn't quite what we wanted. We talked to our buyers. They told us that they love auctions but they're also coming to eBay because they want to buy something. They use auctions to get better value but they also lose three out of four auctions. They don't have time to lose three times to finally get what they started out wanting to buy. Our job is not to provide just a fun experience, but to help them get what they want. About two months ago we launched Bid Assistant. I used it yesterday and let me describe what it is. I bought my daughter a new Apple laptop over the weekend and I wanted to get Microsoft Windows for Mac-the student version. I went on eBay and there were 140 different items to bid on. So I picked five and put my maximum bid on them. EBay automatically put my bid on the first one and if I didn't win that, it would automatically bid on the second and so on. If I won the first, I wouldn't have to worry about the other four. As it turned out, I did this Monday morning and by five o'clock that night I'd won. In this case I won the fourth auction. This was a product enhancement that helped solve for the job.

One final innovation that I'll talk about is listing. The first time you sell something on eBay, it's not the easiest thing to do. It takes a first time user about thirty-nine minutes to list their first item. When I came in I really wanted to reduce that time. Our engineering team found out that we list 6.6 million new items a day so we needed to make sure that the solution was industrial strength. In about six months they enhanced the listing flow on eBay, cutting it from 39 minutes to 29 minutes and spent $5 million doing it. At the same time we had a product manager in the UK who said, "this is nuts." She went out and found two outside developers and spent $48,000 and built a really intuitive way to list. Over six weeks she refined it and tested it on small focus groups. She came out with something that we could use on some of our users in the UK that cut the listing time in half. We grabbed hold of the idea, built it on our core platform and are rolling it out. Innovation doesn't just come from good strategy but from every part of the organization.

Based on our experience, here's how innovation at the core worked. We had to create a mind shift at our company-we had to think bold and not just incremental. We had to create a vision of the future so people could let go of a very successful past. We had to understand that this wasn't going to just happen overnight. While we're doing this, we're running a successful business. We need to drive these principles of disruption at the same time that we're executing a very successful business. Second, we have to look at all parts of the business model-the whole end-to-end user experience. We're using our global portfolio to test and learn. We're testing ideas in Korea, France, Italy and elsewhere around the world. We're testing various pricing mechanisms. All of this requires new infrastructure, whether it's new data, testing or advertising capabilities. Finally, even I may have underestimated how important organization and culture are. Antonio [Perez] talked earlier this morning about needing to get rid of 70 percent of the people to change a culture. We don't have that luxury. We're growing at 30 percent a year. We need to build on the team we have and help shape the momentum in the right way. We had a bit of a restart with our vision. We set off on this and the senior team was all aligned. But we hadn't invested enough in the rest of the organization. So last year in the fourth quarter we took our entire organization through the process.

Driving innovation through our core business, then, depends on little increments and successful growth that lead to huge payback.

The second kind of innovation takes place around our core. We are disrupting ourselves before we get disrupted. We started noticing about three years ago that online classifieds were growing, particularly in the vehicles category. We recognized that online classifieds represented a tremendous opportunity that threatened eBay and also offered great growth potential. We immediately set off to break out a separate organizational unit to build an online classifieds capability. We bought 25 percent of Craigslist in the US and made a number of other small acquisitions. The separate unit had complete freedom to build a new platform nimbly and quickly without worrying about monetization right out of the gate. Today we're number one or two in the Customer to Customer [C2C] classifieds business in over 50 countries and 400 cities around the world. We have 32 million unique visitors a month, growing at 80 percent per year. We have 2.2 million page views and 8.3 million listings. This is a classic disruption. For the first 18 months we didn't charge. We called it "free to C." The insight was that people would use online classifieds if they didn't have to pay. Craigslist has really low barriers to start because it's free. We told the classifieds team to get the user experience right, get penetration, get viral adoption and then we would worry about how to monetize it. We discovered that we can charge subscriptions in some cases, charge companies when they list jobs and charge dealers when they list autos. Now the business is growing revenues and profits as well as users.

A second example is some changes we made to go beyond our walled garden. EBay has been a destination for many years and that served us very well. But we realized that if we didn't disrupt our walled garden, others would disrupt it for us. We set out to bring the web to eBay and vice-versa. We also needed to get beyond the desktop onto mobile phones. Over the last 18 months we've taken Shopping.com and eBay listings to other websites. It turns out that products monetize better than advertisements on sites where people are looking for products. This has driven a nice new source of growth to both take eBay to the web and bring users back to eBay.

We're partnering with internal and external partners to innovate our widgets. EBay To Go is a classic widget that we developed earlier this year in about six weeks. It allows you to pull eBay content and put it on your blogsite or website. You can track your listings at all times. We created a listing for Facebook as well. We also have 45,000 developers innovating and within a week of the iPhone launching, we had an application running on it that we didn't even know about. A developer is building a business around it. These types of innovations tend to follow the classic disruption principles more closely.

We're providing a forum to bubble-up ideas. We have a skunk works in-house. We're creating lightweight, cross-functional teams. We're giving the teams the freedom to focus on the right user experience and then worry about monetization. If we ask for too firm a business case up front, they'll never get out of the gate. We give them the space and energy to move aggressively and we use user adoption as the metrics in the early days. We talk and listen to customers, but for this kind of innovation, customers don't always know what they want. No one would have asked for a widget, but when they saw it they liked it. There's a real balance between being customer-driven and going with your intuitions. We also put the right people on the team - not everyone can do this kind of innovation. We are acting like internal venture capitalists with our resources. We give them just enough to get to the next round. We also know when to cut them off or keep them going. Finally, we involve people from the core business in these ideas, but not too early in the process. People in the core business typically want to kill these things when there's a tight quarter.

Finally, I'll touch on the last form of innovation. These are the new disruptive innovations. Meg has a controversial hypothesis that I'll share: it's really hard for large companies to do fundamentally new disruptive things, so the best way to tap and access relevant new disruptive things is through acquisition. We've built a process where we have our strategy teams constantly looking externally for opportunities. We have a lookout team whose job is to call on venture capitalists, new companies, and scan the environment. We meet once a quarter and this team comes in with the five companies, ideas or technologies that are really disruptive and have a potential for a positive impact on our business.

Our philosophy of acquisition includes the need to take some focused, limited risk. We do the appropriate due diligence but we put it in context. We are not a prisoner to a discounted cash flow because we understand the potential acquisition as a disruptive risk. But we also need to understand whether the disruptive company can join ours and be a success.

Here are three examples. PayPal is the first. It is a part of eBay and helped us solve a need for a disruptive approach. In the early days, PayPal got about 10 percent of eBay's listings. We thought we could do it ourselves at the time. We formed our own payment system called BillPoint. We hired an ex-banker to run it and tried to roll it out. It failed miserably. The former banker that eBay hired to run it used a traditional banking mindset. The PayPal team-who had nothing to lose-was more fundamentally disruptive and took more risk through that period of time. They felt the hunger of VC risk and attracted a pretty killer team. So eBay faced up to the facts, bought PayPal and integrated it.

There has been a lot of discussion over the last several years since we bought Skype. We saw the fastest growing web property in history, and a very disruptive player tackling a huge unsolved need-human global communications. We knew that communication was key to e-commerce but we weren't sure how we would integrate it. We thought that it was consistent with our focus on enabling person-to-person interaction, though. We saw the potential for synergies. We bought Skype and made a conscious decision to not overwhelm it. We didn't put eBay on the Skype client. We wanted to let a young, disruptive technology keep disrupting and keep its viral growth. So we allowed it to keep a rich, simple experience and keep growing. Coming up, Skype will release version 4.0 early next year that provides a nice entrée to begin pulling some of eBay's content and PayPal's services into Skype.

The final example has a much smaller scale: StumbleUpon. It's a social search or discovery search company that we bought early this year. It had twelve engineers when we bought it. Our lookout team thought it was very interesting-the user metrics suggested that they had it right. We think there could be some interesting potential to using social search on eBay or bringing social search into the Skype community. We're protecting it and letting it grow and virally adopt before we force it to integrate into other businesses.

Between these different types of innovation can be found the same types of disruptive principles, whether it's in the core, around the core or looking for new ideas altogether. We are blessed that our founding principles are very disruptive, and they're deeply integrated into our DNA. We understand and respect disruptive entrepreneurs. They serve as role models for us each day. We knew early on that you can't run from disruption. Online classifieds is one example of that. Good ideas can come from anywhere. One of the dangers of living in a disruptive company is that you believe you have the wisdom and you start thinking inside out, as if you know better than everybody else. We need to make sure we don't fall into that trap. We can't be limited by traditional market research techniques, but have a blend of outside and inside. Finally, there's no silver bullet approach to innovation. The right way to drive innovation in a core business is different from how you treat it in a new twelve person technology that just has a lot of potential.

Clay Christensen: Thanks John. By the way, being tall is not an honor to aspire to-hitting doorways and such [laughter]. Six-six is just optimal. Beyond that there are diminishing returns.

I have four thoughts that occurred to me. First, eBay is a classic illustration of the wisdom of not trying to cram a disruptive enabler into head-on competition in the established market. During the Internet bubble, a very large proportion of the Internet-based businesses that popped were trying to compete head-on with established companies that were bricks and mortar. The Internet-based businesses that really won were the ones who were competing against non-consumption. Little by little, the idea of someone unloading their collectibles advanced to selling and buying cars. But eBay didn't start by attacking cars from the beginning.

Toward the end of your presentation you said that there are other ways of assessing the value of a company, especially in acquisition. I have a portfolio of stocks that we run in Boston. It's an idiot-simple decision algorithm: if disruptive, buy; once it hits the top of the market, scale back. The reason why the portfolio works so well-our return for the last five years at a compounded annual rate has been 36 percent-is that Wall Street's traditional metrics of financial analysis systematically underestimate how big the disruptive competitors will become. Because of that, the disruptors keep surprising Wall Street on the upside. That's why Legg Mason has tried to incorporate this thinking into their investment strategies. A lot of people look at the acquisition of PayPal and Skype and think that eBay overpaid by a huge margin. On the basis of traditional metrics, they're right. I bet that history shows that you got a bargain. So instead of relying on traditional metrics, you look to see if a company fits the pattern of disruptive success. This is very wise and can sometimes lead you to conclude that you can buy the business model cheaper than you can build it.

The way you manage the acquisitions is also great. For many acquiring companies, there's a fatal fork in the road. After they have the product developed and it's ready to make the transition into adulthood, the senior management asks this question: "Well we bought this thing; where are we going to stick it?" They look around their established business units for the one that looks like the best fit and put it there. But if it doesn't fit the business model, it just languishes. Instead, eBay has allowed the disruptive idea to remain as its own thing. Then, instead of trying to force itself on the new disruption, you allow the disruption to reach into the established core. This can really build an exciting growth business.

The last note is a thought about Skype and PayPal. Even though people think I'm an expert at technological innovation, my own instinct for technology was frozen in place in 1982. I didn't start using Skype until last year. I carry these headsets around everywhere I go because it's an extraordinary, high quality way to make phone calls from anywhere in the world. Whenever a new approach substitutes for an old approach, if you plot the percentage of the market that the new approach has over time, it always follows an S-curve. Sometimes the curve is very steep and sometimes it's shallow. It takes a while for things to get formalized and understood, and then the world flips on it really fast. The problem is that the established players will look at the new stuff and see that it accounts for only two or three percent of the market and they'll extrapolate it out in a linear way, concluding that it won't be big for a long time. They take the "wait and see" approach and then the world flips on them fast and they get killed. Digital photography was down there on the flat part of the curve for about eight years and then the world really flipped fast.

So how do you know if the world is going to flip on you next year or in ten years? There actually is a way to know. Plot a ratio of the new idea's percentage of the market divided by the old idea's percentage of the market and plot the result on a logarithmic scale. The behavior of the ratio of market percentage always follows a straight line. The mathematics of calculating the ratio and using a logarithmic scale linearizes the S-curve. The slope of that line is generally apparent when the new industry is only three or four years old. Sometimes it's a steep line and sometimes it's shallow. You can look out and see when the idea will hit 25 percent of the market or 50 percent of the market. I would bet that Skype is still down on the flat part of the curve, but if you do this calculation you'll see that the world is going to flip at a perilously rapid rate. People don't really understand how big a business Skype is likely to become. The same goes for PayPal disrupting credit cards as online retailing disrupts bricks and mortar retailing.

John: Those are great comments. In PayPal, we're seeing that growth off-eBay. The thing that will really unlock Skype is mobile. People are willing to carry their headphones around to log in on a desktop but when you can use a mobile device to access free calling and all the data and video around it, that's the next inflection point.

Can I ask you a question?

Clay: If it's easy [laughter].

John: One of the interesting challenges is the management skills required from the early disruption to the next stage and finally to the top stage. When is it time to have the disruptor move on and have other people take the reins?

Clay: There have been a lot of studies that show that entrepreneurs are no different than the average person based on their traits and characteristics. This is because the vast majority of entrepreneurial businesses are gas stations and supermarkets that are not innovative in creating new markets. We just finished a study looking at the entrepreneurs who started the disruptive companies and their brains really are wired differently. It's a type of intelligence that's very different. You should never call anyone smart or dumb because there are eight different types of intelligence. Most of us are smart in a couple and we're fools in a couple. These innovators have a type of intelligence that sees patterns in things. Most of the rest of us don't see the relationships. They have an observational instinct to watch what somebody has done and the skepticism to ask, "I wonder why they did that?" In other words, they're looking for the job behind the action. Almost all of them had a parent or grandparent who at home never farmed out the repair of things that were broken. They had an instinct for wondering how things worked. Once they understood how something worked, they could fix it themselves. When they were little kids, helping their parent or grandparent, they developed an instinct to wonder how the world works and a confidence that they could fix it. I don't think they're born this way but by the time they're eighteen, the synapses in their brain are wired that way. But most of them are not intelligent in the kind of detail you need to scale a business.

Question: I'm very comfortable buying items through eBay, but some who are not comfortable are afraid of fraudulent things that could happen to them. What does eBay do to address fraud and how do you get people like that to be comfortable using your service?

John: This is a critical priority for us. Fraud is quite small on eBay. But the feeling that the experience might be risky is a real phenomenon. Here's what we're doing about it. If you pay with PayPal, you're protected up to $2,000. We're taking the financial risk out of the equation. That still doesn't make up for not having a good experience. I talked earlier about the notion of a level playing field. We were interpreting the playing field as treating a good seller the same as a bad seller or someone who was a little sloppy in their shipping. We just released feedback 2.0 which asks for your feedback. You can rate sellers blindly on shipping, handling and other things. Now we can use these criteria in our search features. We've also cracked down on counterfeits. We're far more aggressive about rewarding good sellers and helping them be the ones our buyers have access to. Our buyers are realizing that it not only is safer, but feels safer.

Question: How do you protect or compete against other similar disruptive technologies?

John: I've learned a lot by watching the folks at Skype. When we first bought it, there was Google Talk, Yahoo, Microsoft-all the IM providers were offering their own voice product. A lot of people were saying that it was a commodity. What Skype has done is not worry about it. Don't look back. Look forward. Get better. Skype has dramatically extended its lead in VoIP and they're thinking about how to continue improving on this rich, simple experience. The same thing goes for PayPal. You have to pay attention to what's going on around you, but you have to stay focused on getting better and continuing to disrupt in the space.

Question: As a manager of a large public company, you've been rewarded enormously with PayPal but-at least temporarily-the market weighs very heavily on you with regards to Skype. How do you manage the influence that the stock market's short-term view brings to bear on these innovations?

John: This is where it helps to have disruption in your DNA. There's no one in eBay who's questioning Skype. The market may be putting no value on it, but people inside see what great potential it has. We need to continue to grow, develop and build it. The same thing happened with PayPal two years ago.

Question: How do you manage the number of ideas that get funded and decide what should be killed?

John: This is where our Disruptive Innovations Team comes in. Everyone knows where to take their new ideas. We have a skunk works contest that happens twice a year. Of all the ideas that come in, we fund twenty-five to build working prototypes. We talk about "prototypes, not PowerPoints." We'll have a fair where all of our employees come to see the prototypes. It's the "wisdom of crowds" phenomenon. It's usually quite clear which ones you fund. Some of my favorite innovations are the ones that I never knew about or approved. The Facebook widget happened before anyone asked them to do it. Part of our strength is breeding this innovative entrepreneurialism and having a platform that's flexible.

Question: What about PayPal becoming regulated in cross-border transactions? When you look at the eBay model, are there regulatory pressures?

John: Actually the authorities love PayPal for cross-border because you know who the sender and receiver are. It's a classic case. At first blush, they're threatening to the incumbents, who then go to the regulators, who try to shut it down using fear, uncertainty and doubt. That happened with eBay and the retailers, with PayPal and the banks and with Skype and the Telcos. What the regulators often find when they look into this is (1) the power of the people. People love it and are using it. (2) These technologies often can be even safer than some of the existing technologies. For PayPal on cross border trade, there's a bank account on both sides or a credit card on both sides. There is more security and comfort and confidence with PayPal than with many other traditional banking mechanisms where it's a one-way exchange of funds.

Legg Mason Capital Management ("LMCM") is comprised of (i) Legg Mason Capital Management, Inc., and (ii) LMM LLC.

The comments, opinions and any forward predictions presented about any particular security, the economy or "the market" are based on the analysis of the speaker. These are not necessarily the opinion of, and should not be construed as a recommendation on the part of Legg Mason Capital Management or any of its affiliates.


Your use of this website signifies that you agree to our Terms and Conditions of Use.