As Skype prepares for an initial public offering, the VoIP poster child needs to find a way to satisfy both shareholders, accustomed to profits, and customers, accustomed to a free-ride.

Skype’s recent U-turn, in which a customer outcry appears to have prompted it to abandon plans to charge for Skype-to-Skype calls made over mobile networks, highlights the problems it faces balancing the demands of these two constituencies.

Although many of its customers never pay a dime to use its services, eBay’s sale of the Luxembourg-based company in November 2009 valued it at US$2.75 billion. If its new owners are going to make a handsome return, it is going to have to become more commercial and risk alienating some of its customers. In its IPO filing to the Securities and Exchange Commission, Skype says, as of 30 June, it had US$728 million of debt outstanding, while its net income in the first half of 2010 was a modest US$13 million.

In theory, Skype’s low-cost base means it could be highly profitable. Skype says in its filing that its “highly scalable peer-to-peer software architecture gives us a significant cost advantage compared to conventional communications networks because it utilizes our users’ existing Internet connections and does not require us to build or maintain a physical communications network. As a result, we can add new users and provide them with a wide range of communications tools at minimal incremental cost to us, allowing us to offer many of our products for free.”

Indeed, free voice, video and text services have helped Skype accumulate 124 million users worldwide. But investors, reading the forthcoming IPO prospectus, won’t want to see the word “free” used too often. Skype’s average ARPU in the first half of 2010 was a paltry US$0.54, which is a big challenge or an opportunity, depending on your point of view.

Today, Skype’s primary source of revenues is it SkypeOut product, which charges customers a relatively small per minute fee to call conventional fixed and mobile lines. Skype believes it can generate more revenue by getting more people to use SkypeOut, while also introducing other premium products, such as group video calling, which is now supported by a “beta” version of the Skype 5.0 for Windows client. Skype is also aiming to generate a greater proportion of its revenues from advertising and licensing, while further tapping the business market with more targeted products.

 

Making mobile VoIP pay

Long a PC-based phenomenon, Skype has upped its game in the mobile sphere in the past 12 months, notably forging a strategic partnership with Verizon Wireless, which has resulted in the giant US mobile operator pushing its services. Although strangely some smartphones (such as my Nexus One) still can’t use Skype, the VoIP provider says there are now Skype clients for the iPhone, Blackberry OS, Linux, Android and Symbian platforms.

But Skype’s mobile push is in danger of being undermined by the re-emergence of tiered data tariffs for smartphones, which, unlike flat-rate plans, create an element of uncertainty for consumers and could deter them from using VoIP services that could devour large chunks of their monthly data allowances. In a blog post last month, Skype cited these new tiered tariffs as one of the reasons it dropped it plans to charge a supplement for calls over 3G networks.

On a more positive note, Skype has a strong brand, which is associated with ease-of-use, great value and, increasingly, video calling – Skype has said that 40 percent of the 95 billion minutes of calls on its network in the first half of 2010 involved video. Getting consumers to finally make video calls is an impressive achievement, but potential investors will be asking how they are going to benefit from Skype’s lead in this field. Consumers or business people on a video call are probably going to be looking at the person they are talking to, rather than clicking on adverts.

Another headache for Skype is competition from Google and its growing arsenal of Internet-based communications services. In its SEC filing, Skype notes that “Google has recently acquired Global IP Solutions, which has developed a real-time audio and video-over-Internet technology similar to ours. Google may use this technology to compete against us.” Indeed, Skype’s ability to charge for services could be limited by Google’s default modus operandi, which is to make its consumer services free to generate more traffic for its core Internet advertising business.

In sum, Skype is reaching a pivotal moment in its development. And, in my humble opinion, it is going to be very tough for the long-standing champion of free telecommunications to make the transformation from the most popular kid in the playground into a successful and financially-independent adult.

David Pringle

 

This article was first published on the GSMA’s Mobile World Live portal. David moderates discussion forums on the site and is a freelance media and investor relations consultant.

The editorial views expressed in this article are solely those of the author(s) and will not necessarily reflect the views of the GSMA, its Members or Associate Members