Can sleeping giant Skype reinvent itself?

By Eric Auchard
September 1, 2009

eric_auchard_thumbnail2.jpg – Eric Auchard is a Reuters columnist. The opinions expressed are his own –

Do once-hot Internet start-ups who miss a date with destiny ever truly get a second chance? History says no, even for once-great names like Netscape, AOL and MySpace.

Skype hopes to be the exception. On Tuesday, a group led by top Internet financiers in Silicon Valley and Europe agreed to pay eBay $1.9 billion in cash for a 65 percent stake in the one-time web calling sensation.

The deal values Skype at a face-saving $2.75 billion, well above the $1.7 billion at which it has been valued on the ecommerce giant’s books. Ebay also stands to keep a 35 per cent stake in the company.

But that overlooks the humiliating $1.4 billion eBay has written off on the original deal. Four years ago, eBay promised to pay up to $4.3 billion for Skype, but it later scaled back the total payout. All told, it makes Skype one of the biggest value destroyers of any Internet merger since the last days of the dot.com era.

EBay’s justification for the Skype deal in 2005 was how its chat and calling services could serve as an online customer service platform connecting consumers directly into eBay merchants. That never happened.

Instead, product innovation slowed and business setbacks, such as a corporate ban on Skype’s network-hogging software inside companies, were allowed to fester, rather than becoming new business opportunities.

Pressure to justify the inflated acquisition price by wringing merger synergies out of the deal also proved a distraction. Into the void stepped newer Internet phenomena such as YouTube, Facebook and Twitter, all of which Skype might have displaced.

To be sure, 15 million users sign on every day to Skype for Web-based chats, phone conversations or video phone calls. Skype has registered nearly 500 million users worldwide since its founding in 2002.

Financially, it is still growing at levels that Web companies like Twitter can only dream about. Revenues of $551 million last year look on track to rise to $700 million in 2009, and the company has a goal of hitting $1 billion within two years. It has been profitable for several years, though Skype will not say by how much.

Skype-ready Nokia 810 Yet it will take more than this to justify the valuation put on it by its new owners that says Skype is worth more than four times expected 2009 revenue. This looks difficult as long as its primary business remains undercutting established telephone companies on international calls when those rates are rapidly heading towards zero.

The reality is that — outside of deals with renegade mobile operator 3 — Skype is considered a pariah by most of the world’s telephone operators. They hate how Skype’s free, or nearly free, calling services undercut prices for their own calling plans.

Despite these hurdles, Skype must find its way into the center of the growing convergence between phones and computers. To succeed, it must mount a challenge to the new communication market leaders — Apple and Google, and even companies such as Twitter.

Only then will Skype be able to claim it has defied the odds and become the company to beat once again.

13 comments

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skype is a very good tool for overseas travelers. I can call a phone in the US from Korea for pennies a minute. So much cheaper than a cell phone. Plus with many countries having faster internet services than the US connectivity does not seem to be a problem. Beyond that not sure what market skype serves.

Posted by mab | Report as abusive

I think more than 15 million users log in each day. At least that number do, as 15 million were CURRENTLY logged in last night, and right now (European nighttime) 10 million remain logged in. So I’d imagine it’s got to be more like 30-50 million users per day, and perhaps 100-200 million each week (since some will do regular calls once a week).

Posted by Nic | Report as abusive

My partner and I use skype regulary with families overseas. It is great – except sometimes the audio or the video might bread down. Once these minor issues are taken care of Skype will do very well. One also hopes that with all this “business and people spying” “Skype”, unlike others, will protect its users (and customers). This might make other companies look like stooges for “Homeland Security” destroying future leaders by embarrassing them, or hurting them. My partner’s email has been broken ito, her emails distorted, her email conversations listened to…all terrible. Lets hope Skype will not tolerate that, allow it or participate in that kind of nonsense. Go Skype with modification…

MS

MS

Posted by Dr. Mark | Report as abusive

Another challenge to Skype in business enterprises is the growth of unified communications solutions like Microsoft’s Office Communication Server. If a business can afford server infrastructure, it will probably want a secure VoIP solution that it can centrally manage. I use Skype myself, but I’m self-employed in a one-woman business. And indeed, it is a bit of a network hog–but far cheaper and more convenient than landlines or mobile phone service and with the added benefit of video.

Still, it seems that to thrive Skype needs to be more than just a good communication tool. You have the sense that many people want to learn how to use Twitter, Facebook, et al simply to be in step with the times. That case can’t be made for Skype.

Posted by Gabe | Report as abusive

Skype sure embarrasses the phone companies that gouge us for international calls. They have exposed the true cost.

I hope they do well, I use Skype as much as possible.

Posted by maverick | Report as abusive

Every great wave of innovation is preceded by a great advancement in communication. The Internet and Skype connected the world at a reasonable rate. Computer to Computer calls anywhere in the world are FREE.

I have been taking care of a single Russian woman and her son for 3 years. I talk to them every day. The VAST quantity of money I have saved with skype means that they live much better. They are thriving now, partially due to skype.

If skype were a person it would be one of the greatest heroes in history. No joke. This company deserves our respect and loyalty.

Posted by Brian P | Report as abusive

I sit at home in front of my computer each day working. Skype is the number one communication tool for myself and my colleagues who also sit working at their homes. Calls within the team are free and we have as many conversations between us as in an office environment. Skype keeps the cost of that kind of interaction to a minimum.

In fact, I also make calls to telephones from Skype which means that I can keep my headphones on all day and keep to one communication device (Skype). I also got myself a Skype phone number that puts calls straight through to my computer.

My family loves the video – especially mother and father who get to see their grand-daughter even though they are thousands of miles away.

Add to the mix the conference calling features, voice mail, and various plugins and you’ve truly got a perfect communication tool for home and business.

One assumes that Ebay and the Skype management team have considered and explored the gizillon options to monetize the Skype technology and its innate value. I would be hopeful that directed research was conducted with corporations and consumers alike. But since the service hasn’t really change for a long time, that research didn’t turn up anything significant that caused management to shift its offerings and value?

I wonder whether the right questions were asked, or insights looked for in the right places, or whether Skype took the well travel road instead of challenging Yahoo and Google?

Irregardless, the new owners must come in with total fresh eyes and ears and expand the revenue potential well beyond where it is today, else, the transaction will not create any additional value for its investors and frankly, for users.

Good luck to the new owners.

Skype should probably remove their “import my profile photo from MySpace” feature if they’re striving for relevance.

thats dumb

The missing killer app is the ability to receive text messages, at least by subscription and business accounts. This will complete the last piece of functionality needed to make it an option to use only Skype as a phone service.

Posted by Kirsten Rudolph | Report as abusive

My boyfriend is Deaf and Skype video gives us a way to talk to each other using sign language from anywhere in the wide world as long as we have access to a computer with internet connectivity. It also allows for the both of us to see all my family members and have a conversation; I can call my parents on the phone from California to Illinois, but my boyfriend sure can’t. It opens up a wonderful world of access to short and long distance communication for us.

Posted by Amanda | Report as abusive

WHAT “AXE” DOES THIS GUY HAVE TO GRIND WITH SKYPE…DON’T KNOCK PHENOMENAL SUCCESS..SKYPE’s A BEAUTIFUL THING!!!!
WHATS MORE IS THE PHONE COMPANIES HAVE HAD YEARS OF
“RIP OFF” RATES…SKYPE SIMPLY VERIFIED THEIR EXCESSES!!

Posted by HWH | Report as abusive