Is IPO plan just pie in the Skype?

Indebted, (mostly) loss-making phone company with dubious model wants to sell shares. Anyone interested?

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Last Updated: 03 Nov 2010

All the talk maybe of a double-dip, but internet telecoms company Skype clearly has no such hang-ups: it's just filed to go public in the US, planning to raise up to $100m (£65m) by selling the shares still in the hands of Bay. But Skype won't get a smooth ride. Given that it hasn't made a profit for four of the last five years, there are still doubts about the viability of its business model. And there are various other potential spanners in the works too, including a (slightly ridiculous) challenge to its trademark from BSkyB. So it doesn't exactly look like the most tempting prospect for investors...
 
It’s perhaps not surprising that a company offering a free service has yet to make a profit. On the other hand, its user-base is growing: this year, its number of registered users has grown by 40% to 560m. Skype’s hope is that once those users have been impressed by the service, they'll be persuaded to cough up for extras (while computer-to-computer calls are free, it charges a flat rate for calls to land-lines and mobile phones across the world). So far, just 8.1m of its users pay – but that, too, is up 23% up on last year. And it’s not like Skype necessarily needs huge numbers – its model is predicated on a small percentage of paying users supporting the thousands of non-paying users.
 
Unfortunately, the numbers aren't stacking up yet. Although it made a slim $13m profit in the first half of 2010, it's been loss-making for most of its life - while its debts still stand at over $700m. eBay bought it in 2005, but ended up selling it to VC firm Silver Lake partners last year after admitting it ‘lacked synergy’ with its core business (i.e. it couldn't work out any way of making money from it). Even Skype’s management doesn’t seem particularly confident: ‘We may incur net losses again and cannot assure you that we will be profitable in the future or that, if we are, we will be able to maintain profitability,’ it said as part of the filing. At least they’re honest, we suppose...
 
There are also a couple of other potential complications, not least a rather bizarre challenge to Skype’s trademark by BSkyB, which appears to think anyone who wants to trademark any word containing the word ‘sky’ should pay it license fees. Seems a stretch to us – and considering Skype has already defeated BSkyB in Switzerland, Turkey and Brazil, it's less of a worry. More of a threat may be an ongoing wrangle with the US government over call termination fees Skype may or may not have charged to an Iranian telecoms provider, thereby flouting trade sanctions; Skype has already acknowledged that it may end up being liable for some pretty hefty fines.

So given all of the above, not to mention all the uncertainty in the markets at the moment, it's a bit surprising that Skype is choosing to float now. Some analysts suggest it may be a ruse to attract another strategic investor (who's more willing to play the long game than public markets tend to be). Or perhaps it's just testament to the positive outlook in Silicon Valley - the view that the Skype’s the limit. (We’re here all night).

In today's bulletin:
Slowdown in big ticket sales points to more economic gloom
Shareholders buzzing as International Power seals French connection
Is IPO plan just pie in the Skype?
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