Internet Outsider

As Skype Fiddles, Competitors Crank Up

As Skype continues its dreamy foray into social networking, local search, expert services, and web surfing (Stumble Upon), other online communications companies are cranking up to focus on...online communications.  According to BusinessWeek, for example, Skype-partner Intel has just helped pump $20 million into Skype-competitor Jajah--which, unlike Skype, offers the convenience of making calls using regular telephones.

Skype's lead in PC-based VOIP is safe for now--no less a competitor than Yahoo launched a competing service a while back and has been met with a collective yawn--but the company's seeming desire to focus on anything but telephony is making it vulnerable. Taking down the traditional telco industry will yield a massive pot of gold for whoever ends up doing it. There are still plenty of problems to solve before this happens, however, and none of them involve local search. (Hat tip to Jason Jones).

Skype and Yahoo To Launch Mobile Network?

Jason Jones: Business Week says "industry insiders" report that Skype may partner with Yahoo to develop a mobile network.  I imagine this would be a hybrid 3G/Wifi/VOIP network.  Skype could combine its enormous VOIP user base and with Yahoo Messenger's large user base to up-sell wireless phone and broadband service. They could effectively bypass the broadband providers to connect directly to some of their end users.

Yahoo typically tries to be a neutral force with its partners but this development would put it in direct competition with its broadband partners. So wouldn't Yahoo!'s partners be pissed? Maybe Yahoo would make this move because they think their broadband partnership contracts are at risk?  Maybe they would do it because they could partially insulate themselves from the network neutrality quality of service issue. 

More broadly, the industry's messaging partnerships continue to get even more confusing--and ineffective.  Google and Earthlink have joined forced to launch municipal wifi networks.  Microsoft and Yahoo announced an instant messenger interoperability partnership in October 2005 and then Google and AOL announced a similar partnership in December 2005.  Will any of these partnerships ever launch? I continue to believe that the IM and VOIP clients are one in the same. 

Skype has remained uncommitted to the YHOO/MSFT camp or the GOOG/AOL camp, and is therefore in a strong negotiating position.    If Skype chooses to work with Yahoo on this project, it effectively aligns with Yahoo and Microsoft and deepens its relationship with Yahoo.  Skype's existing partnership agreements already agrees that Yahoo will sell Ebay inventory, Yahoo will use PayPal, and Ebay will include Yahoo features in its toolbar.  In addition, Yahoo Messenger and Skype already have a partnership to work on 'click-to-call' functionality. 

Updated Skype Financial Model

Keeping the model experiment alive...

Skype's growth in Q1 was solid, but nothing to crow about.  Year-over-year revenue growth slowed from 166% in Q4 to 123% in Q1.  User growth was also solid-but-decelerating, up 107% year over year.

All in, the picture looks worse than it did last quarter.  Skype now appears to be on track to do just under $400 million in revenue this year, down from about a $435 million trajectory last quarter. 

No surprise, therefore, that Skype announced two mostly unrelated and unimpressive new-product initiatives last quarter: Skype Find and Skype Prime.

Skype Financial Model

Source Calls Skype Post "Dumb"; Says Co "Turning Profitable"

Got a frustrated note from a source who had several interesting things to say about Skype...in response to yesterday's post (in which I questioned two new product announcements and the company's future). 

The most interesting point?  Skype is "turning profitable."  The source is in a position to know, but if anyone else can confirm this, I'd be grateful.

The source also had this to say about Skype Find, the new service that allows you to post and access local restaurant/product reviews: 

Maybe reviews haven't got so popular cause no one has done it right.  As far as I'm concerned I don't care about someone in the midwest's opinion.  I care about what my friends and personal relatives have for best places to shop and eat.   So now that skype provides this I can get rid of all the crap content and trust my friends.

I'm still skeptical of the new products, especially of the monetize-yourself expert marketplace (SkypePrime), but I'll keep an open mind. 

SkypeFind + SkypePrime = Skype is Desperate

In a move that says more about the revenue potential of its core business than any numbers reported to date, Skype announced the launch of two new products that have little to do with the core service and are already widely available elsewhere: local product reviews and a monetize-yourself expert network directory. 

This strategy, of course, mimics the one that resulted in eBay buying Skype in the first place ("Core business decelerating?  Quick, acquire a fast-growing company in a completely unrelated business and then think of a way to explain it!").  Just because there is precedent for this strategy doesn't mean it's a good one.

The local restaurant/product/etc review business is a tough nut to crack, and companies with far more resources than Skype's have found it slow going.  Keen and other companies, meanwhile, have been at the telephone-expert opportunity for years, and they haven't hit the jackpot. 

If Skype didn't have another business to run, none of this would matter.  But it does.  And this Skype user, at least, can think of a hundred things that Skype could do to improve its basic service before it rushes off to compete with Google, Yahoo, Ingenio, and others in un-related businesses.  (Such as?  Such as this wicked-cool one-number-forever service offered by GrandCentral)

So then why would Skype do this?  Perhaps because, as its skeptics have long suggested, it is finding VOIP revenue hard to generate.  The last batch of numbers made it look as though things were fine, but today's announcements suggest that they aren't.

Analyzing Skype

eBay has now owned Skype for more than four full quarters.  How's that little $4 billion flyer doing?

Answer: Pretty well, actually.  Not amazing, not terrible.  Pretty well.

eBay doesn't release much Skype information, but we can still get a good snapshot:

• After decelerating through Q2 last year, both revenue and user-growth are now reaccelerating. 

• If the current growth trajectory remains stable, the company should do $400-$500 million in revenue in 2007 (which would put the purchase price below 10X revenue--a far cry from the outrageous binge-buy that many commentators described).  I still think eBay was the wrong company to buy Skype and that the "synergy" story management cooked up to explain it was a joke, but the price is looking more reasonable all the time.

• Monthly revenue per user is gradually increasing and now stands at about $0.13.

Want to see for yourself?  Fiddle with the future projections?  Then check out this free model, courtesy of Internet Outsider (now published on Google Docs and Spreadsheets).  See the second page, labeled "key," for an explanation of how the model works and instructions on how to change the assumptions. 

Skype Financial Model

(I've always been curious whether such models would be of general interest...I'm about to find out.  I was also curious about Google Docs and Spreadsheets.  Verdict?  Easy upload.  Lost some formatting, and the absence of a "cell contents" window is annoying, but overall pretty simple.)

ADDENDUM: This is the first time I've used Google Docs & Spreadsheets.   I'm not sure whether this allows anyone to use it (change assumptions, etc.).  Can someone please try signing into Google to see?  You'll have to click "edit" in the lower righthand corner, then sign in.  The ideal arrangement would be to allow every user to save his or her own copy and then manipulate that one, so the assumptions in the base model don't change.  Anyone know how to set that up?

eBay to Buy FedEx and Verizon?

So eBay has finally begun integrating Skype into its U.S. business, thus demonstrating the "synergy" used to justify the $4 billion acquisition.  The revelatory 1+1=>2 application?  eBay sellers can now add a "SkypeMe" button to their auctions!  Next week, perhaps, eBay will announce that it is buying Verizon and FedEx so sellers can add "Call Me!" and "Mail Me!" buttons, too.

Make no mistake: I love Skype, and I think eBay's stock is worth more because of it.  I just wish Yahoo had bought the company instead of eBay--because a tight integration with Yahoo Mail and Messenger would actually have created some real synergy.  I also don't necessarily think eBay will screw Skype up.  But I wish eBay would stop hurting its cred by trumpeting "synergy" that would have been just as easy to implement had the company not shelled out $4 billion. 

Microsoft to Buy eBay? Bold... But Futile

The NY Post reports that Microsoft and eBay have been having merger discussions, and that, ironically, the talks have cooled of late because lawyers are concerned about anti-trust issues.  Suffice it to say that if such a deal were blocked because of monopoly concerns, regulators would merely be demonstrating an astounding inability to grasp current market dynamics.

But more to the point--Is an eBay-MSN merger a good idea?  In a word, no.  It's a bold idea, certainly, one that illustrates Microsoft's seriousness about making MSN more than an also-ran.   But eBay doesn't need a portal draped on top of it, especially the third-ranked portal, and owning eBay won't save MSN.  The entity would have a fighting chance as a stand-alone company, but Microsoft seems determined to keep strangling its Internet division by keeping all its businesses all under the same roof.  As a result, post-merger, eBay's talent would rapidly depart for greener and less-humongous pastures.  And as Microsoft struggled to integrate, staff, and manage a huge new business it knows nothing about, Google and Amazon would get a dream opportunity to chip away at the eBay seller base.

The most complementary assets Microsoft would gain in such a merger would be PayPal and Skype.  Alas, unless the company intends to spin-off eBay's marketplace business, this seems an awfully expensive way to get them.

Concept Grades:

Boldness, Vision, Ambition, etc.: A-

Chance of Practical Success: C-

Yahoo-eBay Shotgun Wedding

Yes, fine, the Yahoo-eBay alliance is a "win win."  Amid all the delirious cheering, though, it seems worth noting that it's also a "Because we're getting our butts kicked." 

What I wonder:

1. Now that they are thick as thieves, could eBay be persuaded to flip Skype to Yahoo?  I haven't heard diddly about Yahoo Messenger for Voice, and Skype is still going gangbusters.  I don't care what eBay says--Skype would still be much better off merged with the Yahoo communications suite than the eBay commerce and payment platforms--and as a Yahoo mail and Skype customer, I'd like everything in a single package.
2. Could Jeff Bezos ever be convinced to put himself out to pasture and sell Amazon to eBay?  The two companies are pretty much in the same business now, and eBay would benefit greatly from Amazon's design, distribution, and merchandizing expertise.  With its limited cash flow, Amazon is severely constrained in the Google-inspired investment arms-race, and one wonders how long it can keep up. 

Disclosure:  I own both eBay and Yahoo.  And Amazon, for that matter.

eBay's New Pony: Skype

Sub-Head: Wall Street Misses Forest for Trees

A typical eBay quarter: solid numbers, sandbagged guidance, unavoidable deceleration leading to gradual multiple compression, marketplace and payment businesses that are changing the world.  And then there's that new business, Skype, the acquisition that made everyone think Whitman & Co. had finally gone nuts.

I still think the wrong company bought Skype--in my opinion, Yahoo! should have ponied up, and, because it didn't, now runs the risk of being as much a force in VOIP as it is in auctions.  This said, it's time to forget about lost opportunities and jerry-rigged "synergy" stories and focus on the fact that, as a stand-alone business, Skype is kicking ass.

Since September, average concurrent users have doubled, from 3 million to 6 million.  Average daily sign-ups have increased to 220,000 per day (closing in on 2 million a week--2 million a week!).  The company is rapidly rolling out new products, getting closer to the point where using it will become not only less expensive but more convenient (Skype is now my primary business phone number; a real back-end business voicemail system, I hope, won't be too many quarters away).  Revenue--yes, revenue--grew more than 40% sequentially, from $25 million to $35 million. 

Assuming a reasonable rate of deceleration (which isn't a given), Skype could do close to $200 million in revenue this year and $500 million next.  $500 million is meaningful, even in this league.  And assuming, say, $150 million of that revenue drops to the bottom line, eBay would have picked up the company for 15x-30x earnings--not a fire sale,  but still a bargain.  And remember that we're not talking about some niche market here.  We're talking about the global market for voice.  If Skype's Google- and eBay-like growth trajectory held, $150 million of profit would be only the beginning.   

So, while the Street obsesses about the horror of a minor interface goof (a switchover from auctions to stores, which apparently temporarily whacked revenue), and forgets that, thanks to the re-sandbagged guidance, expectations for the rest of the year are now so low that the company could fall over them, think about this: eBay is now ideally positioned to benefit from decades-long generational trends in not just two massive global markets (retailing and payments) but a third (voice).  Could they screw this up?  Of course.  But for about 30x free cash flow, this risk would seem to be priced in.

Reminder: I own a small chunk of eBay (which, despite my anti-trading philosophy, I am thinking of increasing), and this isn't investment advice.