What some people, including I, may have been missing about the Microsoft Skypedeal

Buried on page 97 of the Skype S-1 filing March 4, 2011 is the little tidbit of where Skype currently gets its revenue. 

Right now, Skype revenues are approximately $900 million per year.  The average revenue of $100 per paying customer represents around 9 million paying customers, which is nothing to write home about.   This revenue is virtually 100% from customers that use SkypeOut minutes (that is minutes of voice non-Skype termination).   Although not exactly representative, Vonage’s revenue for 2010 was approximately $890 million with an average $360 annual revenue per customer.

So, what is the difference?  More than 83% of Skype’s revenue is from sources outside of the USA.  This may be the target that Microsoft was actually looking to capture.  International customers are apparently trying to reduce their cost for international calls, using Skype as a mechanism.

Microsoft could be trying to exploit this in one of several ways (some of which have been discussed elsewhere).  Here are a couple of ideas:

• Drive international Xbox sales and Xbox-Live:  My kids use Xbox-Live to chat with their friends.  Being able to impulse call their friends’ phone numbers when they are not online will drive up the number of Xbox-Live points purchased.
• Continue the Services Push: Use Skype drive into the international audio, video, and Web conferencing business.  Make this seamless on mobile devices, Xbox, smart TVs, desktop, and Microsoft 365.
• Unified Communications: Push Skype as the best method to connect business communication systems to the public voice network (PSTN doesn’t seem to be the right acronym anymore) and integrate into mobile device directories.  The idea is that a company could contract with Skype for all international voice services in the countries where it operates without having to deal with multiple service providers.

All combined, Microsoft could use this to make a set of integrated international services.  By Skype for:

• Voice termination for a company’s VoIP environment, in virtually any country
• Audio and video conferencing, and Web collaboration
• Seamless directory services between corporate VoIP and employee mobile devices
• Expand the capabilities of Microsoft “Cloud”-based offering to tie communications with applications

However, even with the rosiest estimates of paying subscriber growth, Microsoft will lose billions of dollars simply because of the cost of money used to by Skype.  The upside is going to have to be pretty substantial to eventually recover this cost as well as the initial investment and additional investment in development, integration, and marketing.

On another topic, this is another analysis (albeit from Macworld) on the state of RIM and Blackberry is here.  It is very much consistent on my previous post on this issue.

Expansion, Poor Choices, and a Revolution in the Works: LTE

I am back one week from my company’s Enterprise Innovation Symposium (EIS 2011) cost hosted by Qwest Government Services, where we were treated to some extraordinary presentations of technology and discussions on a wide range of issues.

This and some public announcements this week spurred some additional thoughts from the WiMAX and LTE discussion of a few weeks ago.   Sometimes the early common wisdom (in this case WiMAX will rule) is incorrect and it is the next wave that captures the world by storm.  Another example (and one that I may take on in a future post) is why Palm was not able to leverage their early success in Personal Digital Assistance (PDAs) and lost the wireless PDA market to RIM (and of course now the rise of iOS and Android-based devices).  But as usual, I digress.

It is amazing that within just a few months, four seemingly separate items clearly identify the trend of wireless communications as well radical changes in usage, deployment, and new business concepts.

U.S. Cellular has announced a rapid deployment of LTE services nationwide.  One that will hit 25% of their customers by the end of the year.  This is another confirmation that major carriers such as Verizon Wireless see LTE as the technology choice.  Even Clearwire (being left in the dust) is now in LTE trials.

Another and less widely known venture, LigthSquared, is deploying a new nationwide LTE infrastructure augmented by a massive satellite (already on-orbit) that services as a big base station in the sky.  The goal is to provide complete nationwide coverage, even when out of range of a terrestrial cell tower.  With a wholesale marking model, I suspect that there will be some interesting mobile application and device vendors that may develop a business model of bundling wireless connectivity (can anyone say Kindle?).

Maybe the death knell for traditional Land Mobile Radio (LMR) systems is this article based around the FCC setting LTE as the standard for public safety networks.  A robust system of LTE base stations could provide a much more interoperable set of public safety voice and data networks.  New devices for first responders could integrate significantly more information, providing maps, building layouts, hazardous material identification, an even personal location information.

Finally, a product that got significant attention at EIS 2011 was the lightRadio™ device from Alcatel-Lucent Bell Laboratories.  The device fits in the palm of your hand and is a complete LTE base station.  Connected to an LTE infrastructure control “cloud” via Ethernet and an IP network, these devices can be placed virtually anywhere.  For public safety, they could be placed in buildings.  For neighborhoods, they could be placed in houses and apartments. For business use, they could be placed offices.  For rural connectivity, they could be placed on a farm (of course you got to get a data connection there as well!). 

Combined with WiFi capabilities (because sometimes you really need to have higher speeds) a mass produced version of this device could provide the next revolution in how wireless services are delivered and what it means to be a mobile service provider.  Can a business decide to buy their own lightRadio-like device and the bid-out to different mobile service providers the ability to connect to the company owned LTE wireless infrastructure?  We do that today when we buy our own WiFi devices and then select and Internet provider.  Is this the death knell (apparently I am stuck on this phrase), for hardwired phone services in businesses.  If you can deploy a dozen or so of these small devices in your building, why have desk tethered phones when the same device the employees are using outside of the office is their office phone as well?  This could be a substantial cost savings.

All this is staring to make sense to me.  However, it is going to take a lot (a lot, a lot) thinking to understand how Microsoft is going to get anything valuable out of their $8+ billion purchase of Skype.