Skype is generating the expected noise ahead of its IPO, with a number of reports both positive and negative. Its prospectus is already a half-year old, and the IPO should be expected sometime in 2011. However, uncertainty over its business model is still generating headaches: the number of users continues to grow strongly, but the proportion of paying customers remains tiny. Mid-2010 Skype had 560 million users, of which we estimate around 90 million could be considered active. Of those, 8 million were paying customers, that is, users with a SkypeOut account (for SkypeOut or Skype Access for hotspot access) and/or a Skype phone number (Online Number). While Skype remains an over-the-top player to be reckoned with, the question is whether the company can keep going over the long term. A recent estimate from Standard & Poor's put Skype’s revenues over the 12 months to September 2010 at USD 830 million, with a net profit of USD 170 million.
We summarise some of the important developments of recent weeks.
Traffic and network:
- At peak moments, 25 million simultaneous users.
- Skype achieved a 24.7 percent share of international voice traffic in 2010, up from 12 percent in 2009 and 8 percent in 2008 (source: Telegeography).
- Some 40 percent of Skype calls are video calls.
- Skype suffered a major service outage in December, prompting the company to make changes in its network (which led to a lawsuit from Gradient Enterprises, which claims that it has a patent on the technology used as a remedy). The cause of the disruption was reportedly a bug in one of Skype’s software clients.
- China is looking to block Skype (and other VoIP providers) in order to protect its incumbent operators. It’s unclear if this will be enforced.
Technology, clients and distribution:
- Skype is acquiring Qik for USD 150 million. Qik is a provider of mobile video streaming for all the important mobile operating systems (Android, iOS, Symbian, BlackBerry OS, Windows Mobile) and has 5 million users.
- Skype launched group video calls as a paid service (EUR 3.50 euro per day or EUR 6 per month), with customer support provided over a live chat service.
- The clients for various mobile operating systems (Android, BlackBerry, Symbian) have been updated and optimized for different smartphones (HTC, Motorola, Samsung, LG, BlackBerry, Nokia).
- Skype for iPhone with Video was launched, and Verizon Wireless is working on delivering video calls with Skype for Android handsets on its LTE network. The first client was downloaded 4 million times in the first 24 hours and had 1 million video calls.
- Sony and Vizio are adding the Skype client to their TVs and Blu-ray players.
- Verizon Wireless is offering Skype on a number of it smartphones.
It’s clear Skype has built a strong position on the market, especially in international. It’s continuous work on additional clients and partnerships expands its reach, and Skype may be able to put video calls definitely on the map. However, the problem remains whether customers are willing to pay for such services. Other providers are also launching video calling, and termination rates are falling across the world. This increases competition with traditional telephony and cuts into Skype’s revenues. SkypeOut is merely an arbitrage play, where the company buys minutes slightly cheaper than it sells them to end-users. This means Skype has to go in search of new revenue sources, such as the group video calls mentioned above, even if this appears to be a small addressable market. On the way to the IPO, more such services are to come.
