Internet & Technology
Big Companies Said To Eye VoIP's Skype, But Questions Linger
BY REINHARDT KRAUSE
INVESTOR'S BUSINESS DAILY
Posted 9/8/2005
As competition mounts, Internet phone company Skype appears set to cash in on a communications revolution that has yet to deliver financial success to most of its pioneers.
Several media outlets on Thursday reported that online giant eBay (EBAY) is in talks to buy privately held Skype Technologies for as much as $2 billion to $5 billion. Both companies declined to comment.
And last month, reports surfaced that Vonage is about to file for an initial public stock offering to raise hundreds of millions of dollars. Vonage has declined to comment.
Yet, such phone services, usually called VoIP for voice over Internet protocol, remain a largely unknown business. It's likely neither Skype, Vonage nor any other VoIP startup is making any money. Plus, these startups face competition not only from much larger traditional phone companies, but also from cable companies that have rapidly moved into the phone business.
"At the end of the day, pure-play VoIP companies really don't have a sustainable business model," said Ragu Gurumurthy, an analyst at consulting firm Adventis. "They don't have a differentiated product. Voice is becoming a commodity."
For consumers, though, VoIP mostly lowers costs vs. traditional circuit-switched service. That's sparked a fast rise in VoIP subscribers.
Skype is a pioneer in PC-to-PC Internet voice service. And eBay reportedly isn't alone in eyeing the company. News Corp., (NWS) Google, (GOOG) Microsoft (MSFT) and Yahoo (YHOO) are among companies reportedly said to have shown interest in the last year or so.
Those Skype reports are unconfirmed, but the interest in Internet voice services is well-known.
In August, Google rolled out an Internet calling product similar to Skype's. Like Skype, Google Talk works over personal computers. Both are free for computer-to-computer calls, but Skype charges a fee if calls connect to standard phones.
Other startups, such as Vonage, specialize in making VoIP calls work over standard phones.
But Vonage and tiny Skype face big hurdles competing against telecom heavyweights. Luxembourg-based Skype might be better off in the arms of a bigger company, some observers say.
"EBay, Google, Yahoo — all these guys are in the business of bringing people to their Web site and giving them some incremental value, whatever people need," said Gurumurthy. "Strategically, it might make sense for eBay. But how loyal is Skype's customer base? That's a big factor in its value."
Some VoIP startups already have sold out, at unknown prices.
Microsoft on Aug. 30 bought San Francisco-based Teleo. Its software lets users make calls from PCs to regular phones. Merging Teleo with Microsoft's MSN messenger product would give Microsoft a Skype-type VoIP service, analysts say.
Last year, Yahoo bought Dialpad Communications, which provides PC-to-PC calling.
Wall Street hasn't judged most other VoIP startups highly. Shares in Packet 8 and Net2Phone (NTOP) got a boost Thursday from the eBay-Skype reports, but still trade in single digits. Packet 8 shares rose 5% Thursday to just above 2. Net2Phone rose 1.2% to 1.75.
Skype, started two years ago by file-sharing Kazaa founders Niklas Zennstrom and Janus Friis, says more than 52 million users have downloaded its software.
But traditional phone companies seem more worried about competition from cable TV companies than PC-based services like Skype's. Time Warner Cable says it'll end 2005 with more than 1 million phone customers, up from 220,000 a year earlier. Some analysts say the entry of cable TV firms into the phone business could crimp Vonage's U.S. growth.
"I don't think in the long run — and I'm not talking about anybody in particular — that PC-to-PC communications is going to survive," said Bob Ingalls, president of the retail market group for Verizon Communications. (VZ) "Telephones are more widely available."
He added, though, that PC-based VoIP calling may be popular within a family or group of friends. He compared PC-based VoIP low costs as similar to "family and friends" long-distance plans offered by MCI (MCIP) a few years ago.
Indeed, analysts say VoIP's rise could slow if traditional phone companies steeply cut the price of calls over standard phone lines.
But cuts would have to be steep. Vonage charges $25 for unlimited VoIP calling. Some startup rivals charge even less. Vonage has said it plans to be profitable in 2006. But analysts say its marketing costs are soaring |
