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Skype on a cell phone.
Skype on a cell phone.

Skype files for IPO Add to ...

Since its 2003 launch, Skype SA has billed itself as a way to make free video and voice calls over the Internet to distant friends and family members on their computers.

By filing for an initial public offering Monday, the company has signalled it no longer wants to be thought of simply as a way to skirt long-distance phone charges, and will instead try to prove it can build a profitable business around advertisers and paying customers who want to use their mobile phones for low-cost long distance.

To do that, Skype will have to revamp its business model. Despite boasting 560 million registered users, just 124 million use the service each month on average, and less than 7 per cent (8.1 million) pay to do so, according to the IPO filing. The users that do - mobile and home phone customers - cough up a measly $12 (U.S.) a month on average.

Analysts say the biggest profit potential is in the rapidly expanding mobile market and increasing competition in the mature corporate-conference-call arena, but expanding in these areas requires new investments.

From that standpoint, the IPO makes sense, said Kevin Restivo, a senior analyst at International Data Corp., a technology and telecommunications advisory firm.

"Skype needs the recognition and the funds that an IPO will bring," he said, adding that its network must be enhanced in order to attract corporate customers. "Skype has been criticized in the past as being a technology that can't be relied upon."

Security is also a worry. Ronald Gruia, a technology analyst at Frost & Sullivan, said companies have publicly voiced concerns about hackers using Skype's data stream to break into their corporate networks. To limit those rumours, he thinks Skype needs an aggressive marketing campaign, which money raised from IPO could fund.

Both analysts agree that Skype is doing the right thing by targeting the mobile market. "Skype has been thought of and used on the desktop and that's clearly not where the growth is," Mr. Restivo said.

Unlike land lines, "on mobile, there's a little bit of money being made on long distance calls," Mr. Gruia said. For that reason, wireless providers were hesitant at first to adopt Skype's service because it eats into their hefty international rates. But some have come around because they realized customers would otherwise turn to Skype's computer-to-computer service.

On mobile phones, Skype earns a low long distance fee, while the wireless providers transmit the call through the data system that customers pay extra for each month. Some companies were hesitant to jump on the bandwagon, but both Verizon and AT&T now offer Skype apps.

As with corporate services, developing this market requires capital and going public is the easiest way to raise it because private equity investors have already maxed out their investments.

Last November, eBay sold a 70-per-cent stake in the business to a consortium of private equity investors and Skype's founders Niklas Zennstrom and Janus Friis for $2-billion. The private equity players, led by Silver Lake Partners and including the Canada Pension Plan Investment Board, now own 56 per cent of the company, while the founders own 14 per cent.

Through the IPO, these investors will try to cash in on a portion of their investment by selling into a tech market that has seen a hot quarterly earnings season. But in doing so, the company will have to explain why profit is down to $13.1-million in the first half of 2010 from $22.5-million a year ago, despite a 25-per-cent gain in revenue.

Skype must also convince potential investors that it can keep turning a profit, which worries Mr. Gruia. "Investors expect rising shares and dividends," he said, adding that they "tend to stifle creativity and innovation."

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