My investors at Fon include most of the people and companies that were involved in the recent sale of Skype. At Fon we have eBay, Janus Friis and Niklas Zennstrom personally as investors and board members, Mike Volpi personally as an investor and board member, Danny Rimer as a board member and Index Ventures as an investor, and Marc Andreessen as an investor. So for me to talk about Skype after the recent dispute for the control of this company could be dangerous. But there´s no need to be concerned. This post is not about my opinions on what just happened at Skype as those are irrelevant here. Personally I think that Janus, Niklas, Mike, Danny and Marc are all awesome guys, amazing investors and board members. So what I will speak about is how I see the future of Skype and the dangers it may face and the opportunities it may have.
Before getting started I would like to say that I have been a user of Skype from the very beginning, from way before I actually met and became partners with Janus and Niklas, that I think that Skype is a remarkable product that is way ahead of the competition and that while not yet a highly profitable company, Skype has certainly been a gift to humanity. Now having sent my thank you note, let’s talk business.
Most communication on Skype as we all know, is totally free, only occasional calls to non Skype parties are the ones that generate the $740 million revenue run rate that allows Skype to make a living. The rest is love. And those revenues are under threat from three rivals.
The first one is called Facebook. While my friends inside Facebook have not disclosed anything to me, I think it is obvious that Facebook will soon have its own Skype. And what´s amazing about Facebook is that even though its pictures apps is mediocre in comparison to Flickr, its email pales in comparison to Gmail and its chat is way worse than that of Skype (no file attachments, no this, no this no that), the growth of those apps in Facebook is explosive. While I have been in Skype since 2004, on a recent check I had around 30 people I knew on Skype and 144 on Facebook chat. When Facebook incorporates a Skype like product, how many people will go on using Skype? Facebook is getting so big that soon there will be no Facebook Out. The threat that was Skype’s threat, namely how do you make money if everyone is on Skype and there is no Skype Out, is now being transferred to Facebook. But the thing is that Facebook, another gift to humanity, has a different business model, advertising, and they could really hurt Skype.
The second threat to Skype is flat rate pricing from telcos around the world. Why would anyone use Skype Out if they have an all you can eat tariff on their phone? And all you can eat tariffs are more and more frequent. In Europe all ADSL plans come with flat rates to all fixed lines, and in USA flat plans to fixed and mobile plans are more and more common. There are also community plans like calling anyone on AT&T for free that turns AT&T mobile into a Skype. It is remarkable that these plans are available to visitors such as myself and my family. We are six and when we go to USA everyone gets a phone with an AT&T card and we all call each other for free on prepaid! And telcos have one big advantage and that is that you don’t need a computer to make a phone call 🙂
The third threat is Google Voice. Google voice is interesting because it came out of the Google Talk fiasco and it shows how relentless Google is when it gets its mind set on something (disclosure Google is also an investor in Fon). What Google Voice is doing with the free phone calls attacks the very livelihood of Skype and that is Skype out. And the integration with Gmail and Gmail contacts is amazing. Skype is weak at that, it has no email. Google first copied Skype with Gtalk and it took off but not really. Google Voice is the second derivative of the Skype attack, and is going well. The $50 million acquisition of Grand Central that resulted in Google Voice stands up there with the acquisition of Keyhole that resulted in Google Earth as two of the best M&A moves of Google so far.
So considering that Skype is under attack from Facebook, the largest telcos in the world and Google how can it be a good business to buy Skype?
Well the key here for the new investors in Skype is not whether Skype will rule the world but whether it will be worth more than what the investors paid for it. And after giving you the cons here are some arguments and strategies in favor of the acquisition.
Skype is simple. Michael Arrington and all of Silicon Valley may find Google Voice amazing but is the average global citizen ready to use it? Massively use it? You download Skype, you find your friends on Skype, you talk. And if you don’t find them you Skype out. And when you talk you can also do video. I LOVE video calls on Skype. I used to use them for people I really cared about, relatives, close friends. Now I even do business calls on video with Skype. It just gives you more of a sense of what is going through the other person´s mind. And Skype is the leader on video quality. So simplicity plus video may be a good way to beat flat plans from telcos and avoid being Tivoed. If the video services can migrate to mobile phones Skype is on to something.
Skype can include advertising. If Gmail reads your emails and places ads why can´t Skype do the same thing on their chat or even their voice channels? How far are we from systems that listen to what you say and just as you finish saying “let´s go to Ibiza for the weekend” they start showing you cheap flights to Ibiza. Gmail proved that if you give people a great service they don’t care if you spy on them. That could be an enormous revenue source. So far Google has been kind to Skype even including it in the Google pack. Maybe a Google deal for advertising is in the making.
Facebook is not the only community in the world, there is Linked In, Xing and other business networks. Those “business types” work best with Skype. I believe that as Facebook squeezes everybody in its quest to Microsoft the world (Mark Zuckerberg told me that Microsoft is his model) a few Apples will emerge. Skype could be one of them. Apple has a tiny fraction of the PC market, Dell dwarfs it in revenues. But Apple dominates the over $1000 PC segment. Skype could position itself as the communicator of choice for businesses. And that has tremendous value.
Germany is Europe’s largest economy and a key market for FON. People in Germany love FON and the Fonero community there is very active. However, FON’s WiFi footprint in Germany is smaller than in other European countries, like the UK and France, where our Telco partners have helped us grow. Fon´s partnership with E-Plus, is about to change that. Today FON is announcing a partnership with the E-Plus group in Germany. With more than 18 million subscribers and annual revenues of 3.2 billion Euros, the E-Plus group is Germany’s third largest mobile operator. E-Plus is part of KPN group and is considered an innovator in the German mobile Telco market. E-Plus will help the FON community grow in Germany with a planned series of joint activities starting this year. For example, E-Plus will install Foneras in more than 300 E-Plus stores in prime locations throughout Germany. Together, FON and E-plus will target cafes and other public places where we will install FON Spots as part of the “City FON” initiative – similar to the “Chueca WiFi” and “Shoreditch” density projects in Spain and England. E-Plus will promote FON to their 18 Million subscribers and will help us to encourage them to become Foneros. E-Plus customers who register for the collaboration will be eligible for discounts on Foneras and will get free trial access to the FON WiFi network and once they installed their Fon routers they will be able to roam the world for free connecting to other Foneros.
The FON E-Plus partnership is great for two reasons. E-Plus has great marketing power that will increase FON awareness and help the German FON community grow faster. E-Plus is the first pure mobile operator to partner with FON. Initially journalists and bloggers had argued that Fon would be stopped by fixed and mobile operators. Some of these experts confused Fon with a P2P telco network. But the difference here is that while P2P networks destroy value for the music labels, Fon increases value to telcos. How? Well, as our partnership with BT, known as BTfon, and others have shown, Fon generates value both for consumers and telcos. For consumers the proposition is clear, you share some extra, limited, bandwidth at home in a secure way with a second SSID or WiFi signal, and in return you roam the world for free. For fixed telcos, Fon increases customer loyalty, reduces churn, reduces customer acquisition costs. Fon enabled fixed operators can also resist price decreases as their customers have WiFi at home and everywhere else.
Now, for mobile operators, the one big benefit of Fon is reduced capex (investment in the network). 3G is a phenomenal service because of its coverage and frankly no matter how many hotspots we put, Fon will never compete with 3G in terms of coverage. So customers who want to have Internet in a car or to find it no matter where they are will always have to use 3G. But when there is WiFi, there are now tons of mobile phones that have a WiFi option, including the iPhone, Nokias, Samsungs, HTCs and others. And use of WiFi is advantageous to operators because: customers are happy with the speeds, they pay their monthly service anyway and they don´t use the much costlier 3G infrastructure. 3G is great for operators for voice and light data. But when people start downloading 300MB movies and TV series to watch in their mobile devices, operators either have to charge for that bandwidth making movies expensive, or prefer that people use WiFi. Moreover, some of the most popular gadgets in the world, such as the Nintendo DS, the PSP and so on, only come with WiFi. In this way, E-Plus can now service its customers on all of their connected devices.
All in all, this proves a point I have been making for a long time. FON and Mobile Telcos make great partners. WiFi is a complement to 3G. Moreover, we are very excited that this announcement coincides with the launch of the Fonera 2.0. The Fonera 2.0 has just been introduced in Germany (not yet in the UK) and it is a router that not only gives you free roaming but also manages your transfers to the Internet. Fonera 2.0 on its own sends your videos to Youtube, your pictures to Flickr, downloads your files from Rapidshare or Megaupload, or Bittorrent (disclosure this app is working poorly at the moment) and it is especially good for converting 3G signal from HSDPA modules to WiFi.
If you would like to interview me about this announcement please use the contact form of this blog and I will be happy to answer questions.