Why Skype Can Play Hard to Get


By Olga Kharif Another week, another report that Skype's in talks to sell itself. In the past month, the Web-calling dynamo has been linked with Internet portal Yahoo (YHOO) and media powerhouse News Corp. (NWS). This time, say The Wall Street Journal and New York Post, Skype may be snapped up by online auctioneer eBay (EBAY).

It's not hard to see why some bankers and company executives would encourage the tie-up. Skype handles an estimated 36% of all over-the-Web calls in the U.S., according to surveys by network-equipment maker Sandvine.

By acquiring Skype, eBay could set itself apart by exclusively offering Skype's low-cost voice services to customers, says Jon Arnold, of Web-calling consultant Jon Arnold Assoc. Skype's trademark computer-to-computer calling would let eBay's buyers talk directly with sellers, and customers could also use the technology to take part in auctions live, calling out bids vocally.

What's more, says Legg Mason Wood Walker's Scott Devitt, eBay also may have grander ambitions than remaining an online marketplace. He reckons the deal would help eBay offer services that could pluck customers from Web giants such as Google (GOOG) and Yahoo (YHOO), which are pursuing their own Net-phone plans.

"SECOND FIDDLE." Yet unless Skype is faced with an offer it can't refuse -- The New York Post says the price tag could swell to $5 billion -- matchmakers may want to curb their enthusiasm over an eBay-Skype pairing. Skype's owners and customers may be better served if the company remains independent.

Ever since Skype burst onto the scene two years ago, its founders, Niklas Zennstrom and Janus Friis, have said they envision an all-encompassing communications provider, operating around the world on any number of networks (see BW Online, 9/9/05, "Skype's Next Moves").

"We're building Skype to be a great company," Friis told BusinessWeek Online recently, declining to comment on whether the outfit is up for sale. The remarks suggest Friis doesn't see Skype being rolled into another business anytime soon. At eBay, Skype "would be a second fiddle [to the site's trademark auction software], as eBay is already successful and profitable," says Arnold. "Skype would be on the outside, looking in."

GLOBAL CONNECTIONS. A host of recent announcements also point to Skype's grander plans. On Sept. 8, it said it will let any content provider offer free or paid services to Skype's 52 million users. That's likely to fuel an explosion of new applications and content.

Skype had already opened up its code so developers of various video and other services can incorporate the service into their applications. "We're developing a great ecosystem, in which people are building products and businesses on top of Skype," says Friis.

This month, the company announced an expansion of its efforts in China and said it's partnering with Germany's third-largest mobile operator, E-Plus, to make Skype available to that carrier's customers. In August, Skype began working with Intel (INTC), the world's largest maker of semiconductors, to weave Skype technology into a line of chip software due next year.

Some of Skype's biggest investors also say they would rather it stay single. "Skype is the telecommunications platform for the world," says Tim Draper, whose venture firm, Draper Fisher Jurvetson, is a Skype investor. "Naturally, there will be a lot of companies that would like to acquire Skype," says Draper, whose firm has funded the likes of Chinese search engine (and recent blockbuster IPO) Baidu (BIDU). "Since the company has so much potential, I would like to see it remain independent."

BIG COMPETITION. Clearly, Skype will need extra cash to stay on its breakneck growth path. Today, it's funding expansion mainly with its paid SkypeOut service, which lets users make low-cost calls from their PCs to regular phone numbers. But only 5% of Skype's 52 million users have signed up for SkypeOut, says Friis.

That may not suffice, as competition in the Web-calling market gathers steam. Yahoo, with a market capitalization nearing $50 billion, recently rolled out an upgrade to its Instant Messenger (IM) service, allowing for better voice calling between PCs. Search engine Google, with a market value of more than $80 billion, just introduced GoogleTalk, an IM service with voice capabilities. And Microsoft (MSFT), with a market capitalization of almost $290 billion, is aggressively pushing into this market. In August, it acquired Web calling startup Teleo.

Skype's newest batch of services, including SkypeOut, will bring it increasingly into competition with traditional telephone and cable outfits. Taking on the likes of SBC Communications (SBC), Time Warner Cable (TWX), and Cablevision (CVC) is a daunting task.

YAHOO CALLING. And while Skype is still said to have the best-quality, easiest-to-use service, its rivals could start catching up soon. Already, Yahoo, which in June acquired Web-calling startup Dialpad, is working on future upgrades that could make voice a part of almost all the portal's applications, says Brad Garlinghouse, Yahoo's vice-president of communications products.

A user could, for instance, find the nearest pizza joint through Yahoo search, then place a verbal order directly from the Web page. "We think about voice being an omnipresent part of the Yahoo experience," says Garlinghouse.

Still, a sale to another company wouldn't be the only way to build a war chest. A partnership, a limited investment, or an IPO could make a lot more sense. Skype might also want to seek an investment from Apple (AAPL), says Arnold. "Steve Jobs and Niklas Zennstrom are very similar kinds of people: mavericks and visionaries, popular among the Internet generation," he says.

IPO-READY? As it happens, Apple's flagship product, the iPod digital music player, is about to start competing head-to-head with cell phones that have music-playing capabilities. While Apple is collaborating with handset maker Motorola (MOT) on a cell phone that downloads songs from Apple's iTunes service, it might later make sense for Apple to add phone capabilities to the iPod. Skype's cell-phone technology could be instrumental in allowing Apple to take that extra step.

Alternatively, Skype might want to go public. The U.S. IPO market is stronger than it has been in years, says Michael Moe, CEO of investment bank ThinkEquity Partners. And investors seem to be particularly drawn to Net-phone-related offerings. If Vonage, another Web calling player, has a successful IPO in the next few months, that could encourage Skype to go public as well, says Tom Taulli, an analyst with investment bank Instream Partners.

An IPO would allow Skype to remain independent while financing its expansion (it's adding 150,000 new users a day, says Friis). And if Skype doesn't want to bother with regulations imposed on a U.S.-listed company, the Luxembourg-based company could go public on, say, the London Stock Exchange, says Taulli.

"It's one of the most amazing businesses that I ever saw," says Taulli. "They make so much money without marketing." That -- along with an IPO -- may be all Skype needs. Kharif is a reporter for BusinessWeek Online based in Portland, Ore.

with Andy Reinhardt in Paris and Rob Hof in San Mateo


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