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Skype to get independence - for better or worse

Source: Reuters - Thu 12th Nov 2009

Now that eBay has vaulted a major hurdle in its efforts to sell Skype, the Web telephony service must prove it can make it on its own.

Since its founding six years ago, Skype has built up a roster of more than 520 million registered customers who use the free Web service for voice, video or text communication. In just the last quarter, it added 40 million users.

Still, Skype is facing some challenges. One problem is growing competition from other high-profile services, including Google Inc's Google Voice.

Another, perhaps larger, issue is that consumers are increasingly using mobile phones rather than landlines for communication. For Skype, mostly used on desktop computers, this means it must quickly make inroads into mobile.

But if Skype is to stay relevant, it will have to do so without the backing of corporate parent eBay Inc, which is selling a large stake in the service to a group of private investors. A lawsuit that threatened to sink the deal was settled on Friday.

Behind the deal is the idea that eBay can return to its central business - an online auction and payment service - without being distracted by managing a telephone service.

Skype, meanwhile, will not have to answer to a corporate parent, one that may have different strategic goals, and can therefore concentrate on its own growth prospects.

"It puts you in a different mindset" said Marc Andreessen, a co-founder of investment firm Andreessen Horowitz, which will hold a stake in Skype once the deal closes. 

As an independent company, "there's no need to deliver any specific revenue or earnings number in a particular quarter. It's a pure focus on the long term" he said in an interview.

Andreessen pinpointed mobile as a key growth area and cited the launch of a Skype application for devices such as Apple Inc's iPhone as a prime example of its efforts there.

But there are some doubts about its prospects in mobile. Forrester Research analyst Charles Golvin contends the Skype application is unlikely to appeal broadly to consumers so long as they must open a separate application every time they want to use the service.

What Skype needs to significantly expand in mobile, he said, is approval from telecommunications network operators to integrate its service more tightly with the cellphone's main voice dialing feature.

The challenge will be getting operators to agree to such integration, as it could hurt their revenue.

"That is the impediment to making their deals" Golvin said. "That impediment is there irrespective of whether they're independent or owned by eBay... It's a business model challenge."

Nielsen analyst Roger Entner said that independence from eBay means that Skype could choose to spend more on marketing its service to help attract more customers. But aside from this Entner said: "It really doesn't make a difference."

Entner sees the private investors looking for another buyer for the company as soon as they can.

"Venture capital and private equity companies are not in there for the long haul. What's now happening is that the search is starting for the real buyer" he said. 

Before Friday, it appeared the current deal could be doomed - or at least face long delays.

After eBay announced a plan to sell 65 percent of Skype for $1.9 billion in September, Skype's founders threw a wrench into the works by suing eBay and a group private investors that planned to buy into the service. The dispute related to technology licensing.

Under the settlement, the founders, Niklas Zennstrom and Janus Friis, will contribute software and a capital investment in exchange for a 14 percent stake in Skype. Investors Silver Lake, Andreessen Horowitz and the Canada Pension Plan Investment Board will hold 56 percent of Skype and eBay will retain the rest. The deal values Skype at $2.75 billion.

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