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Optical/IP

Is Skype Worth $3B?

Reports of a Skype Technologies SA sale have permeated VOIP circles in recent days, and the $3 billion price tag being bandied about reminds some of headier days (see Skype Rules North American VOIP).

Several reports say that Skype is ready to sell out, and that meetings took place in Europe last month in which Rupert Murdoch’s News Corp. tried to buy the VOIP company. Rumors also persist that the firm has hired Morgan Stanley to manage the matchmaking and to help raise funds.

Does the $3 billion figure reflect the value of the company? Light Reading asked some VOIP industry sources and found that, while Skype impresses, the fact that it could command a $3 billion price caused a little backbiting (see VOIP Subscriber Numbers Soar).

“That seems like a lot of money for a customer base that doesn’t generate revenue,” sniffs Nuvio Corp. CEO Jason Talley. Kansas-based Nuvio provides a consumer VOIP service similar to Vonage.

Talley says Skype’s pay services are not used by the majority of its users (see Skype Lowers Call Costs). “Most of them are just using it as an audio instant messenger, so is $3 billion the right price to pay for that? If that is the price, then I’m certainly excited about the valuations that companies like Nuvio and Vonage might bring."

Vonage’s Jeffery Citron declined to weigh in on the issue (see Vonage Raises Another $200M). Vonage has distanced itself from direct comparisons to Skype, saying that Vonage intends to be a regulatory-compliant replacement for standard phone service, where Skype is a “second service.”

The reputed Skype valuation brought back memories of late 90s “irrational exuberance” for 8x8 Inc. (Nasdaq: EGHT) CEO Bryan Martin, too. “If market caps are defined by number of subscribers, then we're back in the good old days,” he says.

“There was a time back in '99 where you were worth a million for every engineer you had working for you, and you had to just go out and hire to get your valuation up. I think that you could make the argument that a similarly ridiculous metric is being applied here."

Others closer to the peer-to-peer world were not so surprised at the Skype valuation. “I think it’s reasonable that they would be valued at above a billion -- I don’t know if $3 billion is the right number," says one Skype competitor.

Many believe companies like Vonage and Skype must be valued based on the size of their user base far more than on their VOIP technology.

“That’s a pretty wild number -- I was a little surprised,” says Bart Schachter of Bay Area VC Blueprint Ventures. “But it is hard to think of another property with as international a reach as Skype has; it has more international reach than EBay and probably more than Google (Nasdaq: GOOG) -- it’s truly an international phenomenon."

Skype was founded by 39-year-old Niklas Zennstrom and 29-year-old Janus Friis, also the founders of the popular file sharing application KaZaA. The Skype application has been downloaded 147 million times, according to the company’s Website.

— Mark Sullivan, Reporter, Light Reading

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Balet 12/5/2012 | 3:05:55 AM
re: Is Skype Worth $3B? The quality of connection sucks even when I am calling from the fast line.
The paid international minutes are more expensive than many US calling cards, especially with currency transfer from $ to euro.
Their customer service is less than amature.

...and someone wants to pay billions for that??
We are back to the bubble time. I am going to buy all those crappy dotcoms now!
inet2024 12/5/2012 | 3:05:53 AM
re: Is Skype Worth $3B? I find it very interesting that people who purport to be 'leaders' and 'visionaries' in the VoIP industry make statements like we're a 'replacement for standard phone service, where Skype is a second service'. Wake up! What do you think Skype or Gizmo or Wavigo for that matter are? Of course secondary service today, but look to tomorrow - a land with no landlines (in fact it is happening today). Vonage is positioning themselves as a replacement for a dying technology - landline phones - and replacing it with - you guessed it, landline phones - go figure. It is no wonder that Vonage, trying to build a dinosaur of a telco, has had to raise some $400M to attract the few customers they have - look at their customer acquisition costs, will they compete? And Nuvio comments on Skype users generating no revenue. Well, according to Skype, they have somewhere near 2M paying customers, each of which has to pay at least $15 which equates to $30M in the first 6 months of 2005 alone - and most have probably spent $30 on average, so the revenue would look more like $60M for 6 months. Sure that is not $500M annual revenue, and using a valuation multiplier of 6x would generate $3B, but it is significant. In addition, Skype claims to have 40M users - now we all know that number is most likely the total number of users that ever registered, and is therefore somewhat misleading, and given the fact that at any given time there is no more than 3M users online, indicates that the real user base is more likely 10M. BUT, 10M is still extremely significant.
So, back to the point, it is precisely companies like Skype, Wavigo and Gizmo that are not only telecommunications companies, they are THE communications companies of the future and as such command a premium. $3B ... hmmm ... still not sure but you do get millions of customers, revenue and a future - and remember, valuation is only what someone thnks it is worth or is willing to pay.
alok_tripathi 12/5/2012 | 3:05:48 AM
re: Is Skype Worth $3B? Skype business model is flawed. They cannot generate a lot of revenue as most of the Skype users are lured by "free" calls and Skype relies on it's revenues for Skypein/out - the users for which are minimal (some may try it once or twice , but thats it )
BigBrother 12/5/2012 | 3:05:47 AM
re: Is Skype Worth $3B? I am sure they can do better with quality of service by introducing some kind of tiering if you are willing to pay the additional money. Remember there is no free lunches unless you are working for Skype when they get their 3B.
DZED 12/5/2012 | 3:05:43 AM
re: Is Skype Worth $3B? Do these VOIP services have any real value?
They seem to have no IP, hence easily copied. Also a new supplier could get in without any real capital cost.
eda 12/5/2012 | 3:05:38 AM
re: Is Skype Worth $3B? lol Why don't you code a VOIP app., since you think it can be easily copied? It is obvious you have no idea what does it take to code one, hence you have no idea what are you talking about! And if you want to hire engineers who could do it, good luck.
falsecut 12/5/2012 | 3:05:26 AM
re: Is Skype Worth $3B? The big question is what is the long term revenue stream worth. So according to inet2024, "somewhere near 2M paying customers, each of which has to pay at least $15 which equates to $30M in the first 6 months of 2005 alone - and most have probably spent $30 on average, so the revenue would look more like $60M for 6 months." Let's assume that this is true. That's $120M in revenue a year. Let's also assume a decent profit margin, since we'll say that they have low fixed cost and lower marketing costs than say Vonage. So let's assign them a 20% net margin (and that's a good margin, especially if we assume it's net; consider that GE, considered a well run company, is at 11.47%). That's $26M per year in profit. You pay $3B for this company and your return on investment is 0.87%. Current return on a 10 year US T-note is 4.227% In order to match the return on a 10 year T-note, which is the risk free rate, you must increase sales revenue, while holding margins at least the same, about 4.85 times. In other words, revenues would have to rise to $583M just to match the riskless rate of a T-note.

Now, it's hard to take a really good look at Skype's underlying valuations because they are a private firm and don't post their earnings or other financials. But if you want to make a 10% return on your invested capital, the $3B spoken of, then you need to increase revenue by 1500% to $1.5B, and that 20% margin nets you the required $300M to earn the 10% on your $3B investment.

inet2024 continues: "...it is precisely companies like Skype, Wavigo and Gizmo that are not only telecommunications companies, they are THE communications companies of the future and as such command a premium. $3B ... hmmm ... still not sure but you do get millions of customers, revenue and a future - and remember, valuation is only what someone thnks it is worth or is willing to pay." Well, they may be the future indeed, but I think that paying 25 times sales is a bit rich. There is no risk premium built into the proposed purchase price, and you have to phenomenally increase sales just to match a riskless investment. So maybe this is the Microsoft of the future. But in order to build revenues to this level, it requires some real optimism. I may miss the boat, but I'll sit this IPO out I think.
PO 12/5/2012 | 3:05:25 AM
re: Is Skype Worth $3B? There seem to be plenty of folks who have figured out how to run a VoIP app. The fact that Skype apparently run a proprietary and closed technology doesn't give them an advantage. To be sure, Skype have had plenty of media types doing their marketing for them, but without an interconnection story, who is calling them tomorrow's network?

The alternatives are plentiful, and easy to use.

I can't include more than a small fraction of relevant references, so I'll select a few more or less at random:
http://www.cs.columbia.edu/sip...
http://www.asterisk.org/
http://www.freeworlddialup.com...
eda 12/5/2012 | 3:05:23 AM
re: Is Skype Worth $3B? falsecut's post sounds like trader/Vonage analysis. Vonage raised $400M got some 600,000 customers in period of 2+ years. Vonage investors must be cryiing already. It seems so far the traders/fund managers of Vonage were better in trading afterall.
falsecut 12/5/2012 | 3:05:19 AM
re: Is Skype Worth $3B? 600,000 customers, if worth $300/yr ($25 a month? sounds reasonable) is $180M revenue per year. If you make 10% of that revenue as bottom line profit you get $18M. That riskless T-note is $16.88M a year on $400M.

It baffles me why any venture capitalist would ever get taken into this kind of deal.
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