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By
John Wilson
Earlier this month, the VoIP provider Skype announced plans to move forward with an IPO tentatively valued at nearly one billion dollars. The offering, which was initially announced in August, won’t materialize until 2011, despite investor hopes that the company would be ready to go public before the end of the year. Skype is best known for its software that provides a variety of voice and video calling services, at no- or low-cost, over the Internet. Of course, as Skype does not possess its own network infrastructure, these calls are all carried between the service’s users by whatever pipes are available; traditionally over a land-line broadband provider, but more recently over mobile broadband as well. Skype’s filing with the SEC reveals several interesting facts about the company, not least of which is the fact that the company brought in $406.2 million in the first half of 2010 alone. But more interesting than that, the filing also lays out potential pitfalls before and after the IPO, not just for Skype, but for many OTT (over-the-top) providers.
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The real problem for Skype is finding and sustaining revenue streams |
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outpacing paying users, even if its
usage growth does not — puts Skype
on the hook if something happens to
swing paying users’ conversion and
usage rates in the other direction.”
Adding to Skype’s worries is the fact
that 86% of its 2009 revenue came
from just one product, SkypeOut, which
allows users to call traditional land-line
and mobile phones from their computer.
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Revenue Streams
The real problem for Skype, and any
company providing low-cost OTT
services, is finding and sustaining
revenue streams. This problem only
intensifies after an IPO; investors
usually like to see a return on their
investment. Skype’s current business
model is what is referred to as
“freemium”; a model where a large
user base which only accesses free
content or services is supported by a
much smaller population of paying
customers. Companies operating on
the freemium model want to keep their
conversion rate, that is people
switching from free to paid services, as
high as possible. According Taylor Buley
of Forbes magazine, “conventional
wisdom has it that a business needs a
conversion rate between 5% and 10%
in order for a viable business model.
With 7% of its active users as paying
customers, Skype lands itself squarely
within that range.” But later in the
same article, Buley warns that “the
ballooning non-paying user base — a
group whose relative percentage is
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OTT providers like Skype are constantly on the lookout for new revenue streams. One way that Skype is attempting to diversify is by placing its software on new platforms and networks, mainly through software development for smartphones and mobile-broadband networks. But as Skype recently found out, new streams can bring their own headaches.
Cutting Deals with Network Providers: A double Edged Sword
OTT providers can expect long
development cycles due to hardware
manufacturers’ and network providers’
squeamishness at allowing competitors
into their sandbox. The Skype software
has been available on the Apple iPhone
since March of 2009, but the phone
had originally launched in 2007 and it
was not until July of 2010 that the
software was allowed to make calls
over AT&T’s mobile 3G network. Neither
Apple (who receives money from AT&T
for every iPhone contract) nor AT&T
themselves were too excited at the
prospect of allowing Skype to compete
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