Skype cried foul with the FCC last week. It formally asked the commission to force mobile operators to "open up" and allow hardware and software created by third parties to connect to their networks. The VoIP company wants the FCC to apply "Carterfone" rules to the mobile operator industry. These rules were enacted in the 1960s to force the POTS industry to allow devices other than those provided by old Ma Bell to connect to the network.
The filing is interesting timing considering owner eBay's revelation last month that it is taking longer than anticipated to generate a financial return from Skype, which eBay acquired in October 2005 for $2.6 billion in cash and shares. eBay's fourth-quarter results revealed that Skype fell short of the revenues it predicted at the time of the 2005 purchase. Skype's 2006 revenues were $195 million against the $200 million anticipated by now. At 171 million subscribers, Skype brought eBay 39 cents per subscriber. In comparison, eBay's marketplace business, which boasts 220 million subscribers, brought in net revenue of $1.24 billion, or $5.64 per subscriber. Speculation is that Skype didn't reach its first set of performance-based goals, resulting in missed payments, or so-called earn-outs.
eBay CEO Meg Whitman said during the company's quarterly conference call last month that while Skype is growing well in terms of user and adoption rates, the monetization efforts the company outlined at the time of Skype's acquisition weren't developing as fast as the company had hoped.
Analysts note that it's difficult for VoIP companies to rake in the revenues. Both Vonage and Skype are signing up customers but aren't fairing well when it comes to economies of scale, which is hurting revenues and profit growth. They have to get creative or risk succumbing to other companies that can offer VoIP as a part of a suite of services.
Whitman indicated that Skype is looking at new ways to monetize, which includes introducing a service that enables Skype users to send SMS to mobile phones. She also said that subscription-based pricing, already offered in the U.S. and Canada, should further push up revenues when launched elsewhere.
Efforts to monetize so far haven't yielded many results. The business segment has been a major focus for Skype since March 2006, but analysts note that the powerful global brand has made little headway as a preferred communications tool in the corporate market. Meanwhile Skype has not been able to team up with major operators like Vodafone to include Skype on handsets--although it scored its first handset deal with Hutchison's 3. In the U.S., Skype claims it has been rebuffed by mobile operators for the last two years.
Certainly mobile wireless represents the next great frontier for Skype--the ability to leverage millions more users and get creative about bundling services and applications. So its answer to get at this potentially lucrative market, at least in the U.S., is asking the FCC to force operators to open up their networks.
The filing is premature, however, given the fact that it appears operators are softening to the idea of third parties connecting to their networks, or at least turning a blind eye to it. Smartphones with Internet browsers can already connect to Skype, Slingbox or any website with streaming video. Sprint Nextel, which is rolling out 1xEV-DO Rev. A, recently said it won't try to block users from downloading handset clients from Skype or any other VoIP company to make VoIP calls that bypass the traditional mobile network. Verizon Wireless is the operator that is most dead set against any third party applications on the network, sending disconnect letters to users who violate its usage policies.
Just last month, Skype itself said it believed the mobile-phone world isn't ready for a general solution that can be downloaded to any mobile phone because data plans are still too costly. The last thing Skype wants is a situation where it advertises that Skype is free but end users are socked with a huge data bill at the end of the month. We aren't seeing an indication that operators are ready to dramatically reduce broadband pricing either.
Finally, there are technical and commercial hurdles to VoIP clients on mobile phones. Both opponents and proponents concede that technical issues relating to how networks pass on IP addresses of mobile users have not been fully resolved. Emergency phone service and "always on" connectivity are also big issues, since staying online takes up valuable capacity on mobile networks.
It's clear Skype is under some financial pressure to increase revenues and improve profitability, but trying to force a market to open up before it's ready looks to be a non-starter for mobile VoIP. Maybe Skype figures the fight will be drawn out long enough and produce some nice publicity to encourage mobile customers to rise up and make their demands. -Lynnette
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