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For years, Internet calling service Skype has been trying to land its popular software where its customers are yakking most: on their mobile phones.
After repeated experiments aimed at getting consumers to use Skype for cell phones, the eBay (EBAY) unit may have a winner. On Mar. 31, the company will release a version of Skype for Apple's (AAPL) iPhone and iPod touch, as was previously speculated in the blog GigaOm.
The deal would put Skype's service in the hands of millions of potential new customers and give its 400 million current users new ways of logging more airtime. Skype will be available for free downloading from Apple's iTunes App Store the same day.
The announcement, which precedes the CTIA wireless communications trade show in Las Vegas Apr. 1-3, is part of a push by eBay to land Skype on a panoply of smart phones and other mobile devices. Skype's users have been clamoring for an iPhone version for months. Now the question for eBay investors is whether the foray into mobile calling will generate enough revenue to boost Skype's sagging value as eBay dresses the unit up for sale. Google (GOOG) and Microsoft (MSFT) are potential suitors, according to Wall Street analysts.
Wringing the highest possible valuation from Skype is important for eBay, whose overall growth has slowed and whose stock is badly underperforming the Nasdaq Composite Index.
If eBay sold Skype today, the business could fetch $1.5 billion to $2 billion, says mergers and acquisitions and initial public offerings expert Tom Taulli, who founded BizEquity, which estimates the value of small companies. That's far less than the $2.6 billion eBay paid for it in 2005. But Skype could be worth as much as $5 billion within two years—if it can exhibit stellar sales growth, Taulli says.
Lately, Skype's results have been earthbound. Fourth-quarter sales of $145 million were up just 1.3% sequentially, even though registered users increased 10%. That's because more subscribers are using the service's free calling features that don't pay Skype a dime. Jeff Lindsay, an analyst with Sanford C. Bernstein, who says Skype could be worth $3 billion if eBay sold it, expects the unit's revenues to grow by only 11% in 2010, down from 16.3% growth in 2009. The slowdown will happen even as the number of Skype users doubles, he predicts. Numbers like that make Web calling "not a very attractive business," says Lindsay.
Enter the iPhone. Skype's new software will let users of the service call and instant message with each other, free from their Apple phones. But Skype will charge users for Internet-enabled calls to landline and mobile numbers of people who aren't Skype users—presumably a significant portion of airtime.
Wireless versions of Skype are only one facet of unit President Josh Silverman's plan to spur growth. The company plans eventually to launch its service everywhere users may log on to the Internet, including phones, televisions, cars, and their work PCs, says Chief Operating Officer Scott Durchslag. "I see [Skype] as a Ferrari that's only firing some of its cylinders," he says.
It wasn't supposed to take this long for eBay to tune the engine. The online auction company bought Skype so buyers and sellers on site could chat in real time about products and bid. But Skype failed to become an integral part of eBay and the company has had to write off nearly $1 billion of its Skype investment.
The outlook for Skype darkened a bit more in March, when Google introduced a rival Web-calling service. "Google Voice offers many of the features that users pay for in Skype, but at a lower rate," Bernstein analyst Lindsay wrote in a Mar. 16 report. "This unexpected development puts eBay's projected revenues of $1 billion for Skype by 2011 at risk."
EBay declined to comment on whether it plans to sell Skype. But speculation about a future sale gathered momentum in January, when CEO John Donahoe told financial analysts during a conference call that the unit would make a "great standalone business." The more Skype can do to expand now, the better suited it will be for a sale or initial share offering down the road when markets rebound, according to analysts and former Skype executives.
To pump up its value, Skype has been in a dealmaking frenzy of late. In February, it announced that Nokia (NOK), the world's largest cell-phone maker, will start loading Skype software onto its most advanced mobile phones. In January, Skype became available on Google's Android operating system and phones that run it, including T-Mobile's (DT) G1.
Skype also has big plans for a new class of handhelds called "mobile Internet devices" being pushed by Intel (INTC) and others. Consultant ABI Research expects 86 million Linux-powered MIDs to ship by 2013. "We think this [application] could be what makes or breaks the category," says COO Durchslag.
Finally, Skype is working to secure agreements with additional wireless operators following a successful deal with Hong Kong conglomerate Hutchison Whampoa. That company's carrier properties have sold more than 500,000 of a device called the Skypephone that features Skype's software. Nearly 80% of Skypephone subscribers are new Hutchison customers, according to Durchslag. Those numbers should ease negotiations with other carriers, he says.
Mobile devices account for an increasing number of Internet-enabled voice calls. The number of people placing calls through the Web via mobile phones is expected to reach 100 million worldwide by 2011, from 7 million in 2007. according to ON World, an industry consultant in San Diego. Skype wants a piece of the pie.
"We are not a newborn anymore," Durchslag says. "We are entering adolescence with a new leadership, being able to forge economic terms that can work for both [Skype and carriers]." Much like today's teens, it seems, Skype can't live without mobile phones.
Kharif is a senior writer for BusinessWeek.com in Portland, Ore.