Before getting started I would like to say that I have been a user of Skype from the very beginning, from way before I actually met and became partners with Janus and Niklas, that I think that Skype is a remarkable product that is way ahead of the competition. While not yet a highly profitable company Skype is heavily used around the world and has certainly been a gift to humanity. Now having sent my thank you note to its founders, let's talk business.
Most communication on Skype as we all know, is totally free, only occasional calls to non Skype parties are the ones that generate the $740 million revenue run rate that allows Skype to make a living. The rest is enormous amounts of minutes of communication that take place thanks to the amazing piece of software that is Skype. And the few minutes that are revenues are under threat from three main rivals.
The first one is called Facebook. While my friends inside Facebook have not disclosed anything confidential to me, I think it is obvious that Facebook will soon have its own Skype. And what's amazing about Facebook is that even though it produces mediocre to bad apps, everyone loves their convenience and uses them. Its pictures apps is mediocre in comparison to Flickr, its email pales in comparison to Gmail and its chat is way worse than that of Skype (no file attachments, no this, no that), still the growth of those apps in Facebook is explosive. So much so that while I have been in Skype since 2004 and Facebook since 2006 on a recent check I had around 30 people I knew on Skype and 144 on Facebook chat. When Facebook incorporates a Skype like product, how many people will go on using Skype?
Facebook is already hurting MSN big time. Moreover, Facebook is getting so big that soon there will be no Facebook Out. The threat that was Skype's threat, namely how do you make money if everyone is on Skype and there is no need for Skype Out, is now being transferred to Facebook. But the thing is that Facebook, another gift to humanity, has a different business model, advertising, and they could really hurt Skype.
The second threat to Skype is flat rate pricing from telcos around the world. Why would anyone use Skype Out if they have an all you can eat tariff on their phone? And all you can eat tariffs are more and more frequent. In Europe all ADSL plans come with flat rates to all fixed lines, and in USA flat plans to fixed and mobile plans are more and more common. There are also community plans like calling anyone on AT&T for free that turns AT&T mobile into a Skype. It is remarkable that these plans are available to visitors such as myself and my family. We are six and when we go to USA everyone gets a phone with an AT&T card and we all call each other for free on prepaid! And telcos have one big advantage and that is that you don't need a computer to make a phone call.
The third threat is Google Voice. Google Voice is interesting because it came out of the Google Talk fiasco and it shows how relentless Google is when it gets its mind set on something (disclosure: Google is also an investor in Fon). What Google Voice is doing with the free phone calls attacks the very livelihood of Skype and that is Skype Out. And the integration with Gmail and Gmail contacts is amazing. Skype is weak at that, it has no email. Google first copied Skype with Gtalk and it took off but not really. Google Voice is the second derivative of the Skype attack, and is going well. The $50 million acquisition of Grand Central that resulted in Google Voice stands up there with the acquisition of Keyhole that resulted in Google Maps as two of the best M&A moves of Google so far.
So considering that Skype is under attack from Facebook, the largest telcos in the world and Google how can it be a good business to buy Skype?
Well the key here for the new investors in Skype is not whether Skype will rule the world but whether it will be worth more than what the investors paid for it. And after giving you the cons here are some arguments and strategies in favor of the acquisition.
Skype is simple. Michael Arrington and all of Silicon Valley may find Google Voice amazing but is the average global citizen ready to use it? Massively use it? You download Skype, you find your friends on Skype, you talk. And if you don't find them you Skype out. And when you talk you can also do video. I love video calls on Skype. I used to use them for people I really cared about, relatives, close friends. Now I even do business calls on video with Skype. It just gives you more of a sense of what is going through the other person's mind. And Skype is the leader on video quality. So simplicity plus video may be a good way to beat flat plans from telcos and avoid being Tivoed. If the video services can migrate to mobile phones Skype is on to something.
Skype can include advertising. If Gmail reads your emails and places ads why can´t Skype do the same thing on their chat or even their voice channels? How far are we from systems that listen to what you say and just as you finish saying "let's go to Ibiza for the weekend" they start showing you cheap flights to Ibiza. Gmail proved that if you give people a great service they don't care if you spy on them. That could be an enormous revenue source. So far Google has been kind to Skype even including it in the Google pack. Maybe a Google deal for advertising is in the making.
Skype can conquer the business world. Facebook is not the only community in the world, there is LinkedIn, Xing (disclosure: I was an investor in Xing) and other more business minded networks. Those "business types" work best with Skype. I believe that as Facebook squeezes everybody in its quest to Microsoft the world (Mark Zuckerberg told me that Microsoft is his model) a few "Apples" will emerge. Skype could be one of them. Apple has a tiny fraction of the PC market, Dell dwarfs it in revenues. But Apple dominates the over $1000 PC segment and dwarfs Dell in market cap. Skype could position itself as the communicator of choice for businesses. And that has tremendous value.
Bottom line, the jury is still out. I have no doubt that Skype now has tremendous brain power. But it will need it all to succeed. Good luck Janus, Niklas and Marc!