Monday, April 18, 2005

Is Sky the Limit for Skype?

Is it time for the telecom industry to adapt to new times? Luxembourg based Skype is leading the voice over IP (VoIP) revolution of the telecom industry. Since releasing its first product in July 2004, 30 million subscribers have signed on to Skype, and growth rates today are as high as 160,000 users a day and growing. According to a CNET article, analysts expect Skype to have from 140 to 245 million users by 2008. Verizon alone will lose $2.6 BN in annual revenue in 2008 due to lost long distance call volume to VoIP. Unfortunately, Skype’s competitive position is tenuous at best. The brightest minds at AOL, Yahoo!, Google, and Microsoft are working furiously to create a competing product to capture Skype’s share of the fast growing VoIP market.
The cost to call Australia, Russia, or Brazil from the US via Skype is literally free beyond a PC, a broadband Internet connection, and the time it takes to download Skype’s software from the web. The free software is based on a peer-to-peer technology (i.e., PC-to-PC) without the intervention of servers connecting calls. This technology requires no large investments in physical server infrastructure. Skype’s current cost advantage is further strengthened in that the VoIP market is currently unregulated and, more importantly, un-taxed. From a cost and scale standpoint, there are hardly any limits to Skype’s growth. Whereas traditional telecom firms invest over $700 dollars per acquired user, Skype invests minimally in marketing: growth comes from word-of-mouth buzz. And what a buzz Skype has created. Consumers and businesses love the free charge for basic PC-to-PC communication, superior quality, and ease of installation requiring no additional hardware.
Skype generates revenue – estimated between $13 MM to $50 MM USD in 2005 – by offering a mix of free and paid services. Recently introduced SkypeIn and SkypeOut products charge users to send and receive phone calls from fixed phone lines and cell phones. Other value-added services such as voice mail can be purchased for small licensing fees. Similar to Apple’s iPod, the business model encourages an industry to grow around Skype’s technology, where Skype charges a commission for revenues obtained from using their software. The VoIP industry is focusing on creative ways to integrate functions over single devices. For example, top cellular manufacturing companies such as Motorola have started to release models with built-in Skype technology, and Siemens has introduced a cordless phone that frees users from PC-connected headsets and microphones.
Beyond product expansion, future growth will stem from cannibalizing traditional telecom usage worldwide. VoIP growth is positively correlated with the expansion of broadband access over the world. For instance, the expansion of broadband wireless Internet technologies will facilitate telephone access to rural areas of developing countries via Wi-Fi towers without incurring the high infrastructure costs of installing antennas, wiring, and last-mile cabling associated with traditional telecom.
If Skype’s product and competitive position sounds too good to be true, then you share the same concerns we do about Skype’s long-term viability. Their first-mover status and superior product relative to competitors has created momentum, but the VoIP market has extremely low technological, marketing, and cost entry barriers. The software used by Skype, though the best currently available in the market, can be easily replicated by any of the top rivals such as Google, Microsoft, and Yahoo! These competitors already have an extensive base of registered users which can be attracted to integrated solutions to their current offerings of e-mail, IM, and group services. Additionally, the physical infrastructure of the Internet is largely provided by large carriers such as Comcast and SBC in the US, which are also taking big steps in order to enter the VoIP market. Besides the threat of well-financed and sophisticated competitors, in the future Skype could also face governmental intervention focused on regulating and taxing the market. Congress has considered asserting FCC oversight onto VoIP for taxation and intelligence, i.e., wire-tapping, purposes.
So what’s next for the fledgling VoIP provider? In the short run, Skype will continue to focus on expanding their service worldwide through their low-cost business model versus the big telecom companies, with increasing attention to profitability. Nevertheless, Skype will face the reality of large competitors entering this market soon enough; AOL rolled out a VoIP service this past March. Further, the more Skype depends upon premium add-on services for growth and profitability, the more they will need to invest in infrastructure and operating expenses such as customer service (currently provided by website FAQs) and sales and marketing overhead. We believe in the long run, Skype’s most attractive option would be to partner or be acquired by a top-tier company such as software firms Google, Yahoo! or Microsoft, a cable firm like Comcast, or a telecom company such as SBC.
Skype is financed by private equity funds, and these investors would likely jump to monetize their investment. Moreover, Skype needs capital muscle to keep growing and political clout on Capital Hill to effectively lobby Congress against imposing new regulation and taxation. Google seems to be best match to acquire a company like Skype in order to complement their current product offering. Microsoft and Yahoo! already have strong initiatives around the VoIP market including partnerships with telecoms that would render a Skype acquisition unattractive. Google is in the middle of a rapid growth phase where they are trying to increase their market share against Yahoo! and Microsoft. Their customer base has not been introduced to any Google-solution offering voice functionalities, and Skype perfectly matches with their strategy to offer customers diverse communication services related to their search engine capabilities. Skype brings to the table cutting edge VoIP technology, a growing base of 30 million plus subscribers, and a phenomenal track record of attracting and maintaining consumer loyalty. It’s time for Skype to go the way of most innovative technology firms today: get acquired and assimilated into one of the big three US tech giants.

Atencio, Michels, & Sorenson


Blogger Mind Valley said...

Not sure I buy your argument. If what you say is true, why did Google not sell out to Yahoo!, AOL, or Microsoft? I think Skype stands a very good chance to do very well in this segment.

2:37 AM  
Blogger Lacy Brown said...

work you do .. Thanks for taking the time to discuss this, I feel strongly about it and love learning more on this topic.
Skype Technical Help

2:07 AM  

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