Skype does not get the respect it deserves, because eBay not only publicly admitted to overpaying for it but is making a mess of its core business. Another reason may be that Skype flies in the face of conventional Valley wisdom that says it has to be all about social media. Or maybe the fact that Skype came from Europe, and we all know that Europeans are just lunch-eating dilettantes. Whatever the reason, a company that has $500 million in revenue, is profitable and growing, and has a shot at becoming the largest player in what is now a $2 trillion (yes, "t" for trillion) market, should get more respect.
In ten years time we may look at Skype in the same way we look at Amazon and Google, as a huge built-to-last company, for these ten reasons:
- It has revenue, about $500 million in 2008. Ahem, only in the strange world of Web 2.0 is that considered remarkable. I love using Twitter, but without sustainable revenue their future has to be in question.
- It is profitable. We're talking "high-teen margins," according to eBay's CEO at the Accel Symposium. That does put it in a different league. It means they can survive the harshest of economic climates. If Facebook is having to raise money in these markets their model must be fundamentally flawed, which means their time as an independent company may be limited. To control your own destiny, you need to be profitable.
- Skype's growth is accelerating in a tough market. Skype is publicly talking about growth rates of 30% to 40%. That's not bad in an economy where flat is the new 30%. Skype has the perfect recession pitch: cut costs now! This shows in its most recent numbers. In the last quarter, Donahoe told us that Skype-to-Skype grew 73% and Skype Out grew 63%.
- Disruptive technology. Disruptive technology is an over-hyped term, but in this case it really fits. Skype's peer to peer technology enables them to dramatically under-price the competition and still make money. New users don't cost much money - compare that with Facebook and YouTube. Even better, each new user that comes on improves the service for others - the core P2P proposition.
- Viral marketing. Skype is the perfect viral business. I have lost count of the number of people I have told about Skype, for the simple reason that I want to communicate better/cheaper with them. Many of them are doing the same.
- Massive market with vulnerable incumbents. $2 trillion is a lot of money. That is the size of the global telecom market. As to vulnerable, how many people feel so loyal to their telephone company that they won't switch to get lower prices? Yes, when Skype dominates the market it won't be worth $2 trillion any more. Even if it is worth 25% of that, say $500 billion, that is OK for the dominant player. Faced with the Skype threat, incumbents have a horrible innovator's dilemma. To really match Skype will destroy their current business even faster.
- Just wait until it bites into those cell phone bills. Skype on mobile phones - really native Skype you can use for free wherever there is WiFi - has been possible technically for some time. This has been held back by the mobile operator's head lock on the device manufacturers. At some point the dam will break. Consumers pent up anger over nickle and diming cell phone bills will ensure that a real alternative will be welcomed.
- Skype is totally mainstream. This is not about being hip or early adopter. Just show the video conversation to anybody with loved ones in distant places. You will see the surprise and amazement that makes it seem like magic.
- It is a sticky service. Google still gets my business because they are better than the alternatives. But switching to an alternative will be totally simple. When somebody suggests using something other than Skype, I resist. I have my contacts in there, know exactly how it works and have integrated some external tools. Skype can continually add new features to make the experience better as our hunger for communication is pretty well limitless.
- Skype can do an IPO. For anyone younger than 30, we should probably spell that out: Initial Public Offering. We keep being told that the IPO market is moribund because of Sarbanes-Oxley. Baloney! The IPO market is moribund because we have lacked profitable high-growth companies that move into huge markets.
My prediction is that as soon as market conditions improve, eBay will sell Skype through an IPO. Their shareholders will pressure them to do so. There is no synergy logic in being part of eBay. The value of Skype is obscured by the problems in eBay's core business. The Skype IPO can be early in the market recovery, as their story resonates so well in a recession (markets usually recover well before the economy recovers).
Who else can take the title "biggest winner from the Web 2.0 era"?
- Google: not really Web 2.0, though; born in 1999.
- YouTube: still losing money, no clear monetization model, and video-serving costs are substantial. It is hard to imagine YouTube as an independent company
- Facebook: how long can the great hope remain the great hope? At some point, it has to demonstrate a sustainable revenue model and some profit. It still doesn't have a native revenue model that makes sense to both users and advertisers.
- Twitter: see above.
- Salesforce.com: not really Web 2.0 either; born in 1999. More revenue than Skype today, but smaller addressable market.