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Skype's Expensive User Base - BrainDump

Many companies have thought seriously about acquiring Skype, but eBay and the VOIP provider have made public plans to close a deal by the end of next year. The proposed deal has everyone scratching their heads in confusion. In this internet littered with stupid business ideas, will this one stand out for its questionable foresight and nonexistent synergy?

  1. After Skype Sells, Will eBay Suffer Buyer`s Remorse?
  2. Business Possibilities for eBay Auctions
  3. Skype for Outsourcing and Globalization
  4. Skype's Expensive User Base
  5. Making Sense of a 3 Stage Business Plan
By: Developer Shed
Rating: starstarstarstarstar / 10
September 19, 2005

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So eBay could make their own VOIP cheaper. Maybe eBay is paying for Skype’s user base and brand name. Well, aside from the Skype name being meaningless to an average consumer when compared to eBay’s name, the user base probably won’t be a rewarding factor either. eBay says that they have 100 million subscribers. Skype claims 54 million registered users, and is growing by the thousands daily. That’s a lot, but how well would the user bases combine?

First of all, the user bases are largely separated geographically. “Almost half of the users of Skype live in Europe and a further quarter live in Asia. Only an eighth of them are in North America where eBay has its biggest chunk of users.” (Source) eBay could try to bring American buyers and sellers to Skype service, but this gives them no more advantage than starting their own VOIP service from scratch. It’s doubtful that the Skype user base overseas would care to start using eBay because the service switched hands. How can eBay make a person in Germany, who is looking for a cheap phone, want to browse auction pages for things mostly being sold in America?

I’ll give a little credit to a few current Skypers liking the outsourcing possibilities of SkypeIn. People in some places could make money by offering a help/call line like I mentioned before. But how many current Skype members feel like being entrepreneurs? Additionally, entire outsourced call centers do not rely on a current user base, because they are set up by recruiters and not users.

But I haven’t even gotten to the real trouble. The simple fact is that the Skype business model is not designed to be a revenue churning machine. Sure, things can change. However, the very business that attracted 54 million users is primarily a free business. I download a program, and you download a program, and we talk for free. Niklas Zennström, one of Skype’s co-founders, says, “We don't count on all our users being paying customers. We count on only a few being paying customers."

How true this is. It’s free for those 54 million people to talk, if they call other Skypers. Earlier this month, Zennström bragged to Swedish Business Weekly of having 2 million customers who pay for Skype services. This represents less than 4% of the user base. Doesn’t this mean 96% are hanging around because it’s free?

That tiny piece of the pie includes many who signed up for Skype just to call themselves or their buddies and say, “Hey dude, I’m talking to you on the internet! Rock on!” Those users will tire of the novelty rather rapidly, go back to their free-long-distance cell phone plans, and not refill their Skype points. If Skype has more than 1 million active users, I would honestly be amazed. Even though a hundred thousand people sign up daily, most of them are not putting down any money for SkypeOut and SkypeIn. I'm not saying Skype is a bad service, but eBay is definitely not buying a revenue-providing user base.

To try to make sense of this, I will grant for a moment that Skype has 2 million paying and active customers (which, frankly, is ridiculous). And for the moment, I will pretend that Skype continues to grow and has 3 million die-hard customers by the time of the acquisition next year. Using this purely hypothetical figure, eBay is paying $1,433 for each one. At the current SkypeOut rate of 2 cents per minute, each currently paying user will need to talk for 71,650 minutes to pay for themselves. Personally, it would take me 12 years to use that many minutes on my cell phone.

In reality, forces are working against Skype. Those signing up for the novelty will disappear. Newer and cheaper VOIP services are already beginning to fragment the market and steal users willing to pay. Some Skype customers will be unhappy with value added Skype services and stop paying. Worst of all, Skype's dedicated users will pay less and less as their friends sign up for Skype. The friends will not need to use SkypeIn and SkypeOut to contact each other anymore; this means an expanding user base could create a lower percentage of customers and decrease how much each customer pays. If VOIP takes a bigger role in the marketplace and we see more Skype phones (maybe some Skype cell phones), this could easily tip the scales back to Skype's favor.

>>> More BrainDump Articles          >>> More By Developer Shed

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