Why I Stopped Stumbling

Yesterday eBay (EBAY) announced that it was selling its StumbleUpon subsidiary to the original Founders for an undisclosed price.

When I first found StumbleUpon I became an immediate fan and downloaded the Stumble toolbar in 2006. I spent the next couple of years or so Stumbling throughout the nether recesses of the Internet. For me, StumbleUpon became my personalized art gallery and curiosity museum with millions of other Stumblers acting as curator. It was a lot of fun, bordering on addicting.

As a Canadian start-up in the social networking space, StumbleUpon began to attract interest from Investment Bankers sniffing out IPO fees by the end of 2006. It came as a moderate surprise that eBay (EBAY) offered $75 million to buy the Company outright in 2007.

From the beginning, the acquisition appeared to make little sense. There was not much alignment between Stumblers and eBay buyers and the StumbleUpon toolbar as recommendation engine seemed far too random to be leveraged commercially by Power Sellers. Maybe with a few tweaks, eBay management envisioned a social competitor to Google (GOOG). Whatever the monetization strategies forward were for eBay, it was background noise as I continued to Stumble, installing the toolbar on nearly every computer that I used regularly.

And then it happened. One fateful evening during the spring of 2008 I Stumbled and fell into a vicious malware trap that became an expensive nightmare which put my home network out of commission for nearly two weeks and cost several hundred dollars in real money to clean up the mess. The attack was clearly designed for StumbleUpon. As soon as the Stumble button was clicked, the browser was highjacked and the malware was loaded. The attacker had gamed the system so that the malware became a recommended site. How many other Stumblers were attacked?

I was furious that StumbleUpon, or eBay for that matter, would allow itself to be a security threat. I attempted to contact customer support at both eBay and StumbleUpon with no luck. I left lengthy emails explaining the exact conditions by which I was attacked. No response. I requested information regarding StumbleUpon security policy. Silence.

As my malware event unfolded I stopped Stumbling. And then I uninstalled the trail of Stumble toolbars that I left on unsuspecting computers. To me the Stumble toolbar was a gateway to malware. A security threat. Gone.

In my mind, eBay has spent a lot of capital buying technology that carries intrinsic security risk. The security risks associated with Skype are well known to the point where many in the VoIP telephony segment deride Skype as the "terrorist telephone network" due to its inherent lack of traceability. Paypal? I have an account that I do not use any more because I associate eBay with security risk. Paypal may be very safe, but due to my history with eBay I am not interested in risking my funds with any of its subsidiaries.

Maybe a response to my inquiries from eBay or from the StumbleUpon subsidiary would have eased my concerns about security and possibly saved me as a client. But nothing happened.

With Garrett Camp and his team now buying back StumbleUpon (likely at a fraction of its original purchase price), maybe the Company can regain its mojo as it unshackles from eBay. Maybe somebody there will finally call me back and ensure me that the Stumble button is no longer a security threat. In the meantime, I remain a retired Stumbler.

Web 1.0 Redux?

Recent positive earnings and outlooks from Amazon (AMZN-Q), Netflix (NFLX-Q), and Digital River (DRIV-Q) seems to have caught the market a little by surprise. Why has the old Web 1.0 e-commerce model experienced such a relative resurgence? And should investors buy, hold or sell in the sector?

The overall upward trend in online usage benefits from both demand-side and supply-side drivers. This alone should be seen as positive.

Demand Side
During the Holiday Season, it appears that consumers were less about shopping experience and more about buying utility. As well, higher unemployment and economic insecurity means fewer commuting trips and less destination travel, both of which typically generate more in-store shopping. Its a lot less fun trudging to the local Wal-Mart than it is to shop at Sak Fifth Avenue on the cancelled trip to New York. Furthermore, "deals" can be repeated online with less consumer hassle associated with parking and crowds.

As the economy worsens, we should see this trend strengthen because, well, it's happened before. In the early 1990s, Faith Popcorn rose to fame in part because she coined the term "cocooning", which described the trend of people staying at home more. In retrospect, this trend was due primarily to the recession, and once the economy returned to health, the niteclubs began to fill again. It's reasonable to suggest that 17 years later, people are likely to behave similarly. Netflix appears to be a clear beneficiary of this trend. During the early 1990s, the clear beneficiary was...Blockbuster (BBI-NYSE). Same trend, different delivery.

E-commerce is benefitting from maturity. In these uncertain times, e-commerce has been around for nearly 15 years, and most consumers have online buying experience. As well, the technology has greatly evolved to offer better perceived security, privacy and choice. Unlike in the past, there is consumer pull, which is far more cost effective.

Brand matters. Just like marketing budgets flow to Google (GOOG-Q), and IT services contracts flow to IBM (IBM-NYSE), e-commerce flows to "safe" dominant brands. This benefits Amazon directly. On the other hand, eBay (EBAY-Q) has experienced lingering service issues that has eroded some of its brand equity recently, which could be partially reflected in its poor Q4 performance.

Supply Side
Based on the transcripts of the various conference calls, it appears that retailers and manufacturers are rationalizing distribution channels, and moving towards highest efficiency, highest measureability. Increasingly, transactions are being moved online.

Benefiting Digital River directly, manufacturers and retailers are cutting more costs by outsourcing the online retail infrastructure. The Company has reported some impressive contract wins. Amazon has taken it further by outsourcing its excess infrastructure through its Elastic Cloud Computing (ECC) business, which grew year-over-year by over 30%.

During 2009, we should see more retailers rationalizing physical networks, while attempting to hold onto consumers via online marketing programs and more e-commerce activity. Multi-channel retailers with the most advanced online retailing capabilities should benefit most.

An area of increased investment is likely to be in the area of transaction efficiency. How can the discovery/decision/buy process be shortened? We should see more attempts at integrating transactions into marketing with more mobility. Look for more integration between affiliate marketing and e-commerce, possibly in the form of increased M&A during the year.

So are the stocks buy, hold or sell? It depends on the investment time horizon, but stocks like Amazon, and Digitial River, with clear hooks into the infrastructure are likely more appealing long-term than category plays such as Netflix where competition could become fierce fast. The stock has had a nice run since the fall and I would be taking profits. It may be a good time for Netflix to think about strategic acquisitions. eBay may find itself in the wilderness during this recession as it struggles to evolve its business model, mitigate some of the potential channel conflicts associated with its Power Sellers, regain consumer confidence, and figure out what to do with Skype. eBay may sit this one out.

I do not own any of the stocks mentioned above.