Whither Skype?

Recently, there has been some degree of speculation in the blogosphere as well as the mainstream press about the future of Skype, given eBay’s disappointing profits in 2008.  The Industry Standard went so far as to predict that Google will acquire Skype by August 31, 2009.

Whether or not there is any truth to the rumor – and this Skype for sale rumor has come and gone several times before -  it does present us with a good opportunity to focus on Skype as a company.

The 2005 acquisition of Skype, founded in 2003 by Niklas Zennström and Janus Friis, by eBay for $2.6 billion was somewhat of a mismatch, yet it allowed Skype to flourish and innovate largely unimpeded. Today, Skype needs to continue to build its business and grow on the successes of last year but eBay may not be in a position to support that model going forward.  Indeed, eBay needs to get its own house in order and improve its financial picture.

As I wrote in my 2005 analysis of eBay’s acquisition of Skype, the purchase of Skype served notice to the telecommunications industry that voice was merely another service to be delivered in a data setting, and that the market for voice calling, as we know it today, was simply fading away.

EBay’s acquisition of Skype made little sense at the time (the company attempted to justify the acquisition by promising to use the service to connect buyers and sellers and it did indeed add Skype functionality to auction pages).  Today it makes even less sense for eBay to continue to hold onto the company and management might as well cash in if they find a willing buyer.

Meanwhile, Skype has become a global telecommunications giant, with 405 million users worldwide (a 47% increase from 2007).  In 2008, Skype accounted for 8% of the world’s international calling minutes.  Surprisingly, or perhaps not, 30% of Skype usage is for business purposes.  25% of Skype-to-Skype calls use video.  And in Q4 2008, Skype experienced a 61% increase in SkypeOut calls (a total of 2.6 billion minutes).

A new parent might be able to find new synergy with the company, which could be used to expand Skype’s current largely consumer base into the small- and medium-sized business market and beyond.

The fact that Skype has continued to grow as an entity despite the mismatch with eBay is a testament to the potential this market has.

EBay purchased Skype in 2005 because it could.  Google, the News Corporation, Microsoft, and Yahoo were all said to have had an interest in acquiring the company but eBay was willing to put up the most cash and, because of the differences in business models, was also willing to leave the company alone to continue to innovate (unlike the course of action that Google or Microsoft may have followed).

In theory, potential acquirers could include Verizon or AT&T, a move that would give one of these traditional telephony companies a gigantic push into 21st century consumer communications.  Microsoft or IBM might also be interested, the latter less so given the consumer nature of the business.  Cisco is yet another contender: they certainly have the cash and Skype’s core functionality aligns nicely with what Cisco is doing in multiple areas but Cisco may simply not be that interested in what is perceived largely as a consumer offering.  We can surely rule out Yahoo, which continues to be on Microsoft’s acquisition radar, and while Google has progressed with its own technology a land grab still might work for them and they have the cash to make the purchase.

Regardless of what transpires, I suspect that we will be hearing a lot more from Skype in the not-to-distant future.

Jonathan B. Spira is CEO and Chief Analyst at Basex.

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