Skype's Untapped Promise – And Facebook's


Skype’s new owners — Silver Lake Partners, Marc Andreessen, and company — are getting a company valued at $2.75 billion (according to former owner eBay) with 405 million users. That’s $6.79 per registered user, and a little over five times Skype’s 2008 revenue of $511 million. Skype grew by 44% in 2008. So did the sale — in which eBay retains a 35% stake in the company — come cheap or dear?

My guess is that the buyers got a good deal because the human voice is our most fundamental communication medium. Global average revenue per user per year (ARPU) used to be in the range of $50-80, so Skype is paying about 1/10th the ARPU for the registered user. So what? Well, given that the phone (including data over the phone) is unquestionably the fastest growing part of the consumer electronics market, and will be so for the foreseeable future, it seems to me the investors are buying a cheap option on the most disruptive, and fastest growing part of the entire telecommunications market. Communications is the killer app of almost every technology — from telegraphy to email.

For many companies operating internationally Skype is a no-brainer, with calls costing a fraction of the cell phone, local PTT, or hotel rates. It also obviates the need for country-specific international calling cards. Some countries have blocked Skype, and there are potential security concerns, but these are manageable issues. Over time, I am certain that Skype will continue to grab market share for international calls.

Furthermore, because Skype terminates on phones — and people are accustomed to paying for phone calls, especially international ones — and due to the fact that international phone call pricing is a still a ridiculous patchwork of usually outrageous tariffs, Skype will continue to grow. Not only are Skype’s prices lower, they are simpler. They also have a video call service which some companies are starting to use for long distance coordination. (If Google Voice also takes off, it will help develop the market that much faster.) Finally, Skype has designed the software to work well with Asterisk, which is the Linux of the telephony market.

If you think of Skype more abstractly, they are a company with a great peer-to-peer infrastructure, a robust database of people and their communication devices, and a global footprint. In addition to voice, they’ve got video. They can be, simultaneously, a global multi-media company, a person-to-person communication company, and a file-sharing company. They almost always make money when someone reaches out to the very “end” of the network by connecting to a cell phone. That audience, access and growth is worth at least $6.79 per user. From this point of view, perhaps Facebook — which has still to find its killer app for revenue — should have bought them. If Facebook were like Gillette — which markets razors but collects revenue on the blades that go with them — the giant “social razor” that Facebook has built might be monetized by the “blade” of phone revenue.

Facebook, with its 400 million-plus members, could have created a real-time voice component allowing for the connection of people by voice as well as by “face.” There have been many people who have noted that the phone idea of “one person calling another” is an anachronism. But in fact, the party line — which was shared by a number of households — was present long before the single-person-to-single-person phone call. As Diamond Fellow David Reed has pointed out in the Harvard Business Review before, networks that allow people to self-organize provide all the power of the point-to-point network, and lots of new options. Facebook allows all the facility of email, and a lot more. It could have done the same for voice, and become one of the world’s biggest phone companies overnight.


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