September 10, 2005

Skype Valuation: Why it Deserves to be High

There's been a lot of talk recently1 about how much Google/ News Corp/ Ebay/ [insert name of the latest corporation rumored to be buying Skype] should be paying for the acquisition.

I'm not a VC and I haven't studied the different valuation methods in any detail, so not sure what exactly would be the right price for Skype. But I do understand why Skype is so valuable. First, as I said previously, VoIP is a pretty big opportunity. Once it gets on a wireless device this sector would explode. Now, think about delivering location-aware advertising to that device and you'll begin to have some idea of the astounding amount of money that's to be made here. GoogleTalk isn't about click-to-call feature for local search, as Om Malik and others2 have been speculating. That's a silly idea. It's way too bigger than that. I'll discuss all this in more detail in my next post that I'm writing at the moment.

Back to Skype, the second and more obvious reason for the high valuation is its large subscriber base. Skype's 52 million users are over double the number of its closest competitor (AOL has about 23 million users, Yahoo 19 million and MSN 14 million) and remember, unlike the others, almost all of Skype's subscribers use the VoIP feature. Another important distinction for Skype is that its users are intensely loyal. Wherever I see Skype users, I get to hear about how wonderful it is3 and how much it has changed their life for the better. I'm sure this reputation is well deserved. Skype provides amazing value at no cost so no surprise that all the good experience Karma would lead to loyal subscribers.

So, Skype does deserve a high price even though, as I pointed out in the previous post, it has miserably failed to capitalise on the opportunity so far. However that's something that can be improved upon, the opportunity still remains immense and untapped. Now, whether Skype should be valued at three quarters of a billion, one and a half billion or even four billion, I'm not qualified to say. Since a lot of people seem to be interested in buying Skype and since the telcos haven't even started queuing up yet...shall we say: let the market decide?

Update 13-Sep: I was wrong! Ebay has announced the acquisition and there are more reasons for Skype's high valuation than the ones I cite in this post. See, my final analysis and comments on Skype's revenues, which are now public.

Notes and Links
1. Here are a couple of posts questioning Skype's valuation - one and two. I mention these in particular because they linked to my last post which explained why it makes sense for Ebay to buy Skype.
2. See Om Malik's post where he speculates that Google's VoIP plans are about a click-to-call feature on local search results that would lead to pay-per-call advertising.
3. Rashmi Sinha, entrepreneur and Skype fan, extolling The Wonders of Skype.

5 Comments so far      

Anonymous Anonymous:

You have one very big false assumption in your post: 52 million users. Curious where you got that from. Most of the evidence I've seen suggests it's much closer to 5 million, at best. Go log into Skype and tell me how many users are on now. It's usually around 2 million.

I'd also question how loyal Skype users really are. Your small sample may not be particularly accurate. In fact, the quick rise of Skype suggests to me exactly the opposite. These people are willing to jump ship at "the next best thing" when it comes along. The whole thing seems reminiscent of ICQ.

12 September 2005 at 06:45:00 GMT+5:30 link  
Anonymous Anonymous:

Uh, your subscriber numbers for AOL, Y!, and MS are US only. This is a global market and MSN is huge outside of the US.

12 September 2005 at 11:27:00 GMT+5:30 link  
Blogger Manu Sharma:

Anon#1 - Re Skype's subscriber base. This is a widely reported number. Until about a few weeks back the number being reported was around 47 million but in more recent interviews, Skype founders have said that release of Google Talk has actually increased Skype downloads as a result of the attention it is receiving in the media. The latest number is 52 million (subscription only article) users.

This is a huge number considering that Skype has never spent a penny on advertising. It's obvious that Skype has been phenomenally popular among its users.

Anon#2 - Re AOL, Yahoo and MSN subscribers. The figures I mention are subscribers of their respective messenger services. The total number of subscribers of each service is much higher.

12 September 2005 at 14:46:00 GMT+5:30 link  
Anonymous Anonymous:

I just don't see $2.6B making sense for 54M customers... surely a brand-new VoIP brand could be built by investing $10M into the tech and then giving everyone that used it $10 of free calls out to the PSTN each month for the first year! It would be $1B cheaper *plus* build a business that encouraged more use of the PSTN interface (hence, more likely to actually make your investment back at some point).

14 September 2005 at 00:12:00 GMT+5:30 link  
Blogger Manu Sharma:

Yes, a lot can be done with Skype to encourage more people to adopt it for PSTN calls. I think the answer lies in micropayments... which is why the marriage with Ebay (and so, paypal) makes sense from Skype's point of view as well.

16 September 2005 at 14:17:00 GMT+5:30 link  

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