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Skype Readies for IPO: Can It Drive Revenue Growth?

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December 21, 2010

Skype Readies for IPO: Can It Drive Revenue Growth?

By Susan J. Campbell, TMCnet Contributing Editor

As popular as Skype has become for low-cost international communications, the seven-year-old company is still struggling on the financial front. According to a New York Times report, the company was sold to eBay, taken private, and is now seeking to complete the circle with an initial public offering.

Tony Bates (News - Alert), the company’s current chief exec, is looking for new ways to make money from its 124 million users, most of whom don’t pay anything to use the platform. It’s difficult to convince those “free” users to actually pay for their service, so Bates is looking at other opportunities, including possible new markets such as corporate phone systems and mobile devices.

The Luxembourg-based company recorded $406 million in revenue in the first six months of the year, an increase of 25 percent from the same period the year before. Net income was down 42 percent to $13 million.

The increase in revenue is the result of users making more paid calls – which is a good thing. This success is still modest, however, given that Skype (News - Alert) has enjoyed widespread adoption by consumers. The ongoing struggle for the company is that only 6.5 percent of its users pay to make calls from their computers to landline and mobile phones. The rest all call fellow Skype members – which makes the call free.

Charles Golvin, an analyst for Forrester Research, noted that the free users do have some value, but it is a challenge to convert them to paying customers. And, this element will weigh on any public offering. He believes investors will fail to be enthusiastic about owning a stock with dim prospects for revenue growth.

Skype filed its initial offering document in August, which means Bates is limited in what he can say about future products and the company’s financial performance. He did share, however, that Skype could offer more premium phone and video services in the future. He also mentioned the possibility of Skype embedding its service with other Web companies to accelerate growth.

Cell phone users have complained that Skype has been slow to release new products and has yet to make video chat available on mobile phones, except for one Nokia (News - Alert) handset.

Skype also has to deal with its own past and as it was formed as an alternative to traditional communications channels that charged outrageous fees for international calls. eBay (News - Alert) acquired the company for $2.5 billion five years ago in the hopes that it could leverage the platform to enable sellers and buyers to communicate. This strategy failed as sellers and buyers were content with e-mail.

For its part, Skype has partnered with Avaya to get a better piece of the corporate space and integration with mobile devices is likely on the way. But, will the company be able to introduce solutions that users will want and pay for? For shareholders, the answer better be yes.

Susan J. Campbell is a contributing editor for TMCnet and has also written for To read more of Susan’s articles, please visit her columnist page.

Edited by Tammy Wolf

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