Is Skype a Sleeping Giant?

Skype is a true success story, founded just seven years ago in 2003 by Scandinavian entrepreneurs Niklas Zennstromand and Janus Friis. In 2005 they sold the company to eBay for $1.9B in cash. eBay kept the company growing and in November, 2009 sold Skype to a private consortium, valued at $2.75 Billion with Zennstrom and Friis as part of the consortium (eBay still holding about 30%). By mid 2010, there were over 500 million registered Skype users. They’re now planning to go public.

Initially, Skype was primarily used to place international calls for free to other Skype users or to landlines at reduced rates that were on a par with a calling card. It really caught on for connecting with family and friends living abroad. Over the years, Skype has been building steadily on its products and for going after business, including mobile users. Skype has been very aggressive going after the smartphone market and have clients for the iPhone, Blackberry OS, Linux, Android and Symbian platforms.

In addition to mobile Internet calling, Skype on mobile devices enables people to chat with their contacts around the world using Skype Instant Messaging (IM), and share their availability through ‘Skype presence’. Contacts will be automatically synchronized between the mobile device and the PC.

Skype has said that 40 percent of the 95 billion minutes of calls on its network in the first half of 2010 involved video and the quality of a video call, at least using the latest version of Skype's software is very good. And a call, voice or video, between Skype users is free. Video calling is going to be a very exciting and competitive market as virtually all the new tablets coming to market are offering cameras for this purpose. It’s interesting that Skype has been public in their competitive posturing, noting that as Google had acquired Global IP Solutions, Skype sees Google as competitors.

The company is also focusing on mainstream business with the recent Avaya and Skype strategic agreement for business communications and collaboration solution. In the first phase of the agreement, Avaya customers in the U.S. market will have access to Skype Connect™, a product which adds Skype calling to IP-based enterprise communications systems, providing a Session Initiation Protocol (SIP) communications channel between Avaya communications systems and Skype.

So there’s a lot of business happening! The company is also busy working on their forthcoming IPO prospectus. The one negative here is that Skype is considered "free" and this will be less of an enticement for investors. The company uses broadband connections between people's PCs to carry calls, making its money by selling add-on services such as calls to landlines and mobile phones, voicemail, and call forwarding for businesses. Skype's average ARPU in the first half of 2010 was $0.54 and investors are going to want a great revenue story to give up their money. Any rabbits in the hat?

Bottom line, in my humble opinion, I see Skype as a formidable contender both in the business services and mobile marketplace. It’s the sleeping giant- there’s great upside potential.