Skype Files For IPO, Only 6 Percent Of Users Pay

Skype’s proposed initial public offering may offer a bit of insight on the future of international voice revenue. According to TeleGeography, Skype represents about 13 percent of global long distance traffic.

As of June 30, Skype was averaging 124 million users a month, with only 8.1 million of those paying users (out of a total of 560 million registered users). So 6.5 percent of Skype users are paying for services.

As a rough calculation, free Skype minutes of use therefore represent about 12 percent of global traffic. If the ratio of paid to non-paid use does not change, and if Skype keeps growing, the percentage of non-paid international calling, texting and video sessions will keep growing as well.

Paying Skype users, however, pay an average of $96 a year. Skype’s strategy is to keep growing its overall number of users and convert more of them to paying customers.

At least for the moment, most international trafiic represents a revenue stream for some service providers. But the percentage of non-paid traffic seems bound to increase. At the same time, the average revenue any single session represents likely will keep falling.

This implies that voice revenues will get cheaper, on a per-minute basis, while more traffic will move to the "free" category.

Skype revenues for the first six months of 2010 were $406 million, with a net income of $13 million. But a big portion of that was from interest income. That is a three percent net margin, overall.

Its income from operations was only $1.4 million for the six months, though margins on that business are 51 percent.

Skype Files For IPO, Only 6 Percent Of Users Pay

Did Skype Rip $143 Billion a Year Out of Global Voice Revenue?

Skype CEO Josh Silverman offered a few statistics at Communicasia about how disruption works. Today, 12 percent of the world’s international calling minutes are on Skype, and Skype users spend seven to eight minutes of "free" calling for each minute that is a "paid" minute of use.

Skype’s on-net international traffic (between two Skype users) grew 51 percent in 2008, and is projected to have grow 63 percent in 2009, to 54 billion minutes (TeleGeography has not yet published 2009 figures).

Already the world average retail price of an international call is under one-fifth of the $1.20 per minute price of 15 years ago, says Telegeography. Which leads to an interesting exercise.

Assume for the sake of argument that an "average" international long distance call today costs 22 cents a minute.

Assume that, over the last 15 years, competition alone would have driven average prices down by 50 percent, so that the average price of an international call dropped to 60 cents a minute, even without further price pressure from Skype and other IP voice providers.

Then assume the "Skype effect" (overall pricing impact caused by Skype and other VoIP providers) is 38 cents a minute, the difference between the "natural" decrease to 60 cents a minute and current 22-cent rates arguably lower because of Skype and other VoIP providers.

Using those assumptions, the global telecom industry now "loses" $142.9 billion a year in revenue because of overall lower rates caused by VoIP competition, even assuming that Skype market share is simply a shift of some traffic and revenue ($11.9 billion imputed value) from the incumbent providers to a "new" competitor.

It's just an exercise, as it is impossible to determine precisely how much lower prices would have affected demand, in the absence of the impact of VoIP on average calling prices, or how much prices would have fallen for other reasons.

The point is that disruption can create an "okay" business out of a "really good" business, looked at from the standpoint of an attacking provider. If a firm has zero market share, then creating a business worth nearly $1 billion in annual revenues is not a bad thing.

Obviously we are dealing here with "imputed" revenue, not actual revenue, since Skype doesn't today make anywhere near 22 cents a minute, on average, across all of its traffic. Indeed, seven to eight times more zero-revenue calls are made, compared to "paid" minutes of use.

The overall impact is quite a bit more dramatic on legacy providers, though obviously good for buyers and users of trans-border voice service. Losing some amount of market share is not the most-important impact. The bigger issue is the overall decline in average prices per minute.

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Skype Traffic Grows 63%

International long distance traffic growth has slowed, while Skype traffic is accelerating, says Stephan Beckert, TeleGeography strategy VP.

Over the past 25 years, international call volume from telephones has grown at a compounded annual rate of 15 percent. In the past two years, however, international telephone traffic annual growth has slowed to only eight percent. To be sure, growth rates always slow for any product or service that has attained high penetration, simply because any additional growth is compared to a larger base of existing users.

There have been some recession-related changes, though overall demand obviously has remained strong. Traffic to Mexico, the world’s largest calling destination, declined four percent in 2008, and aggregate traffic to Central America declined five percent, for example.

While international telephone traffic growth has slowed, Skype’s traffic has soared. Skype’s on-net international traffic (between two Skype users) grew 51 percent in 2008, and is projected to grow 63 percent in 2009, to 54 billion minutes.

"The volume of traffic routed via Skype is tremendous," said Beckert. "Skype is now the largest provider of cross border communications in the world, by far."

Telecom Italia Sparkle, iBasis Activate First All-IP Bilateral Operational

iBasis and Telecom Italia Sparkle have migrated all their bilateral traffic between Italy and the Netherlands to IP, using i3 Forum specifications. "We are pretty sure this is the first all-IP bilateral agreement," Chris Ward, iBasis senior director says.

All traffic over the connection uses iBasis premium voice service, with quality of service guarantees.

"I already sense some real energy about what we are doing, where there is greater access to the full range of resources at KPN," says Ward, because of the recent acquisition of all of iBasis by KPN.

Right now iBasis represents about seven percent of KPN revenue, but KPN obviously expects that to grow significantly. In part, that optimism results from a change in iBasis strategy of late.

"We have been very focused on margin growth over the past couple of years," says Ward. "But revenue growth is now more important."

KPN's corporate resources will play a part, but also KPN's status as a "member" of the global carrier club. To the extent that financial stability and resources are an important requirement for carrier business partners, the new ownership structure should prove reassuring.

But the iBasis core strategy hasn't changed. It wants to be a leading provider of global voice operation outsourcing for carriers who frankly have many other priorities and might prefer to focus on customers and products with 30-percent profit margins rather than the four percent to seven percent margins international long distance now provides.

"You can't be Neiman Marcus and Wal-Mart all at the same time," says Ward. "You have to choose."

As carriers migrate traffic to IP, we are a natural partner for outsourced international voice operations, says Ward."It doesn't make sense to run international long distance, for most people, unless you are a specialist."

"It's sort of like email, in a way," he says. "Don't devote resources to it, if you can avoid it."

Newspaper, Long Distance: Same Story

The market value of the American newspaper publishers entering 2008 as independent, publicly traded companies has fallen by $23 billion, or 42 percent, since the end 2004, the year before the wheels started coming off the industry, says Allen Mutter, managing partner at Tapit Partners.

The change is akin to similar changes happening in the global telecom business. Some legacy products are in irreversible decline, be that newspapers, wired access lines used for voice, dial-up Internet access or expensive, high-margin stand-alone long distance.

That doesn't mean people aren't "calling," or "reading" or "communicating." But products built on those activities are assuming new form. Newspapers won't disappear tomorrow.

As long distance prices have been in continual descent for decades, so newspaper readership and revenues will simply drift lower. The issue that must be faced is a transition of the assets to new formats and services.

Newspapers are both media--content creators--and a distribution format. Distribution clearly is changing more than the value of content creation. Voice is both an application and a driver of "access lines" or distribution. In both the newspaper and voice cases, the applications remain important. The distribution is becoming less relevant.

The issue is when a tipping point is reached, and decline becomes a problem executives no longer can manage. Something might be happening in the newspaper area, in that regard. One can fairly safely say the voice tipping point already has been reached, in many respects.

Nearly half the slide in the market capitalization of newspaper stocks came in 2007, when the shares lost a collective $11 billion, or 26 percent, of their value, Mutter notes. Newspapers lost nearly as much value last year as they did in the two prior years put together.

Call Centers, Leaky PBX, Grey Markets

There are lots of reasons entities set up call centers: sell products; answer questions; technical support; fund raising; set up appointments.

Or, in some cases, to create not-quite-legal terminations for international long distance. Sometimes known as "leaky PBX" operations, the motivation for doing so is money. Significant amounts of money.

By some estimates, 30 percent or more of inbound global calls to Indian numbers are terminated outside the carrier-to-carrier settlements regime.

Estimates of traffic that skirts the settlements regime range upwards of 3.5 billion minutes a year or $150 million to $300 milliion a month that otherwise would have been earned by a licensed carrier.

In recent years, global carriers have paid Rs 5.50 in termination charges to an Indian domestic telephone company. In a leaky PBX or "grey market" operation, a service provider launders the traffic, making it look like a local call, avoiding the termination charges. This saves the global carrier about half what it otherwise would have paid. And the local termination network gains revenue because it makes money from the higher volume of traffic it gains.

The most popular grey market routes serve mobile phone traffic in high-cost termination markets. And that's where the call centers come in.

Grey routes often are created by call centers, as VoIP in some markets is legal when it is IP-based endpoint to endpoint. Until the laws change, and as India market mobile penetration climbs, so will the grey market.

International Long Distance: Merger Wave Coming

Look for a wave of mergers and outsourcing in the international long distance business in 2008. The issue is that voice traffic growth is slowing sharply after decades of rapid growth. That means more volume is needed to keep a business cash flow positive or profitable. Not every global carrier will be able to attain that level of scale, so executives are going to have to consider buying wholesale capacity and abandoning operation of their own networks.

That, of course, is a business opportunity for wholesalers with the ability to handle a large amount of additional traffic.

International voice traffic grew approximately 15 percent annually, from less than 18 billion minutes in 1986 to just under 300 billion in 2006. But international calls grew only 10 percent in 2006, and signs point to continued sluggish growth in 2007.

Skype and other computer-based voice services are a key reason for the slowdown. "Skype only accounts for a small share of international calls, but the volume was enough to cut global growth in half," says TeleGeography analyst Stephan Beckert.