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The Sunday Morning Post-Why Is Skype Putting IPO on Hold?

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First the Wall Street Journal reported Skype may be putting their planned $100 million dollar or greater IPO on hold. Then out came TechCrunch with more fuel for the fire.

So while I think the slowdown has everything to do with figuring out how to make money, not just gain more users and some looming regulatory concerns. Stating the obvious about the key challenge at Skype today is to get the users currently on Skype to start paying Skype for outbound calls and inbound numbers. two services which Skype basically sells separately, or treats as two different transactions as their way to wiggle around the regulators. That two part segmentation approach keeps Skype from saying "we're a phone company" in many countries, but since it also doesn't really pass the duck test, any more than Vonage didn't back in the early days of VoIP marketing. Thus the how do you make money question, or really how do you make more money, and regulatory encroachment are questions the new CEO, Tony Bates has to tackle.

Those regulatory challenges will continue to swing over Skype's head, as they currently sell calling minutes separate from receiving phone numbers approach removes the burden from them having to pay into the Universal Services Fund, something that takes a reported 14.1 percent of telco's revenue here in the USA which has to be one of Skype's larger markets globally. This becomes a financial concern.

The core challenge is the conversion of people to start "paying" vs. making calls to one another for free. The conundrum is thus in getting more people on Skype, who not only make Skype to Skype calls, but Skype to the PSTN or Mobile networks. Given Skype to Skype calls are free, the more people who sign up for Skype, the less people you need to call by a paid call. In essence, the more people they get to make Skype calls the more they eat up their own market.

The second issue is getting those people to "pay" for things, like multi-party video, something Skype is making noise about as a revenue stream. As someone who helped tell the same kind of story for SightSpeed, prior to their exit to Logitech in a down market, selling multi-party video to the public isn't easy. Thus when you take GigaOm's Simon Mackie's perspective on video conferencing, and the recent Forrester report, one has to think that Skype's current approach to selling where the money isn't ready to buy what they have to sell, which is their pursuit of the Enterprise as THE market vs. trying to own the small business sector which is already much more ripe for disruption, is at the crux of the real issue. In this arena Skype marketing has been almost invisible other than through PR which drives a lot of attention through the influencer channels, but which isn't backed up by the advertising and promotion necessary to be taken seriously by the enterprise. In essence Skype doesn't pay into the USF any more than they pay into the advertising channel. Those costs, plus the costs of being a public company begin to eat away at profits.

So, as a company that is challenged by customer acquisition, having the weight of some 700-800 employees around the globe, marketing expense, software updates, engineering (Skype likely employs over 400 engineers by now) all requires a lot of cash, or in startup parlance, contributes to a lot of cash burn each month. Even with revenues approaching a billion dollars a year and with 8.1 percent of the users now paying (I pay for Skype Unlimited) the costs keep going up for Skype as they add more people to keep the business growing and operating.

Next is the focus on where the growth will come from. Rightfully so, Skype has a focus on the enterprise as their cash cow in the future. But the route to the enterprise customer is not one that happens as fast as adding a single user, or even a small business. Those decisions are made in a second. Enterprise decisions are made over years The Enterprise decision take longer than small business decision to buy/switch because of many different reasons, most of which deal with the culture of the company being asked to switch or buy. That means the sales cycle is measured in many months and multiple years, as in fiscal years. Miss the budget cycle, and you miss next year.

The small business market and the SMB sectors move much faster and wanta to compete upmarket, and thus is more primed and ready for Skype as their carrier of choice than the slower to decide Enterprise customer market. That is the yet another hudle Skype needs to overcome, because as the cable operators begin to broaden their reach into the small business market with offers like what I've seen with Cox and Cablevision, the cost of calling keeps getting smaller, while the services they offer using SIP based architectures, the same SIP standards that Skype is using for Skype For Business/Skype Connect, means the value proposition of being more efficient in calling gets whittled away.

Cheaper calling isn't a business model any longer, and with companies like Google offering "Free" via GoogleVoice and companies like client Truphone, Viber and Rebtel offering free on-net calling between their own members, one has to realize that companies will give away minutes to get the international long distance market, a market that Skype has been growing each year with, but which has become a big target for everyone else now as their way to attract customers too.

The next hurdle Tony Bates has to solve is the almost hidden from the outside world of the revolving door of executives in key hires since the SilverLake led LBO that took Skype outside of eBay's foolish grasp. Skype has now gone through two Engineering leads in as many years and likely has a new one coming in. One was ex-Sun, the other ex-Yahoo, neither lasted. The hiring they have done in the SilverLake era, David Gurle, head of their Enterprise play is ex Microsoft and Thompson Reuters, Tony Bates, CEO is ex Cisco, further suggesting that Enterprise envy is at the heart of all Skype's business moves coming from the board level, and has become a company that requires a far different wax job on the car, than the kind you get at the drive through. Internally, teams have been rejiggered, and reshuffled, with some people in the UK given the option of moving elsewhere (as in the USA) or moving on. These shifting of bodies and recruitment of new blood thus has the unsettling effect of plans being stalled, or worse, tossed out the window, all under the guise (i.e. spin) of broader "strategic" goals that are being sold up to or by the board of directors, or down to the line personnel. 

Taken as a whole of the sum of their parts, Tony Bates' decision as CEO to slow down the IPO is the only decision he could have made. He's walked in just four months or so ago to a company that has at least four operating spheres of influence (USA, UK, Luxembourg, Estonia) some of which suffer from a big case of NIH (not invented here) syndrome, a marketing issue of conversion from free to paid, partner products and programs that don't add many new paying users, an SEC S-1 that has led to lawyers, in addition to the investors and the board having a very deep reach into how the company was being run. He has an under marketed company, that needs to play ball a whole different way to compete against the proven Enterprise sales organizations, with longer standing relationships with the customer segment they're pursuing, and he's got to make the right hires to not be judged like his predecessor.

I would go one step further, and suggest that the IPO should go on a longer term hold, and while the investors may want an exit, or some liquidity for the company, that the IPO and the requisite filings are only making it harder, not easier for the company to be the nimble, growth oriented entity they were enroute to. In my book, staying private, gaining market share, putting in management team stability and delivering new services better than anyone else, all of which were Skype's stock in trade for many years are really what Bates is looking to accomplis. By pushing the IPO back he's now buying time to get the company back to its disruptive roots while navigating the regulatory minefields thrown up by the investor and technology worlds that are around him as an IPO candidate.

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There is also the issue of "What do we do with Qik?" on the table.


I think one of the issues Skype is facing with their model of free Skype-to-Skype calls and paid Skype-to-POTS calls is that the sound quality of the Skype-to-POTS calls is so poor compared to the Skype-to-Skype calls (and sometimes even compared to POTS-to-POTS). When I first signed up for a Skype subscription, lured by the competitive rates and hoping for the crisp-clear quality that I was used to with Skype, I was so disappointed that I have never used Skype for calling to regular phones again.

Now they have come up with a great new multi-party video conferencing service which they rightly want to monetise, but their subscription model is simply ridiculous. I think the daily rate of 4 euros is insane compared to the monthly subscription which costs 6,90 euro. This model simply feels dodgy.

Combined with the redesigned interface of Skype 5 which is a monstrosity, my sentiments about Skype are not too positive at the moment. That is a shame because I have always been a big fan of Skype.

Let's hope that one day they will start focussing on the corporate market and bring us Grand Central (now Google Voice)-like features which I am sure will be a success.


Great analysis Andy....I am also wondering if the core value proposition is diluting. I may have more on a future post on TruVoIPBuzz, but as consumers get more savvy, they are free to use SIP clients with any other VoIP provider (which may work out cheaper). Several other providers (including Vonage that you have indicated) have much better plans as compared to Skype.

Their other product, group video calling is also not competitive anymore. There are credible alternatives.

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