Crunch Time Coming for Skype in 2011

Carl Weinschenk

As Skype's initial public offering nears, the question remains whether the company can turn its huge profile-which was mainly built on giving away services to consumers-to a successful business model.

 

The New York Times has a long feature on the company. The "hook"-the focal point from which the rest of the piece flows-is the plans of Tony Bates, the company's new CEO.

 

The financial picture seems to track with an organization that gives a lot away: The company has 124 million users. It recorded $406 million in revenue in the first half of 2010, but had net income of only $13 million, which is less than Cliff Lee will be paid each year to throw perfect curveballs for the Phillies.

 

Calls between Skype end points are free, and constitute a huge portion of the company's business. The problem is that only 6.5 percent of Skype users make calls to mobile phones and landlines. These are not free and are the way in which the company generates revenue.

 

Skype, through a partnership announced this fall with Avaya, is trying to gain a foothold in the enterprise. It also is trying to partner with wireless carriers. The story looks at a success with Verizon and troubles with AT&T. A quote in the Times story from Charles Golvin, an analyst for Forrester Research, sums up the fundamental nature of the problem the company's almost-free model presents:

I find it hard to understand why an investor would feel enthusiastic about owning that stock when the prospects for revenue growth are dim ... They may be growing revenue, but it's not like it's growing to billions of dollars.

Skype's initiatives, including its outreach to the business community, have an improvised feel. It seems as if the company is casting about for a model that generates enough revenue, rather than executing on a well-established plan toward that end. The bottom line question is pretty simple-and pretty daunting: Will Skype be able to translate its free VoIP service into something that firmly establishes itself as a successfully publicly traded company, even if that service is fundamentally different than the business it runs today?

 

The good news for Skype is that the telecommunications sector is changing so rapidly that there will be opportunities to do creative things. For instance, the morphing of unified communications into unified communications and collaboration-the sinking of voice communications within collaborative applications instead of adjacent to them-seems to be fertile ground for an organization with Skype's wide reach and sophisticated infrastructure.

 

However it unfolds, it is clear that the fate of Skype-the IPO and beyond-will be one of the most interesting stories of early 2011.



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