For sale: unwanted telecoms business, only slightly used. Ebay will not be auctioning Skype, though; rather an initial public offering is planned for the communications business in 2010. Announcing the decision so far ahead perhaps waves a “buy it now” sign at any interested parties yet to step forward, but at least logic has finally prevailed – online auctions and voice over internet protocol (Voip) are not natural bedfellows.
So how much is Skype worth? Ebay paid $3.1bn in 2005, but has since written down the carrying value on its balance sheet to $1.85bn. The company ambitiously aims to double last year's revenues of $550m (just $1.70 per user) by 2011. Assuming it can maintain the operating margin at 21 per cent, before stock-based compensation and overheads, typical multiples for online companies would suggest a valuation range from $1.5bn to $2.3bn.
However, the difficulty with assessing Skype's prospects is that it risks falling victim to its own success. Once a user has dowloaded the Voip software, Skype's costs are almost non-existent for calls made within the network. The user's machine and internet connection do the work. Unfortunately, there are no revenues involved either. Skype makes money when a user calls outside the network, or when it confiscates a user's credit balance after six months of inactivity – hardly a sustainable revenue source. It seems likely that callers will encourage out-of-network contacts to switch to free Skyping, particularly as its popularity grows. Meanwhile, the price of phone calls moves inevitably lower as competition proliferates and telecoms operators offer bundled calling and broadband packages.