When I moved from academia to a (public company) technology business over 30 years I ago I had a VP-level supervisor who would always talk about the need to keep margins up. "Why?", I would ask. "What's so important about margns?" "Because that's all there really is to keep a business growing: Revenues minus operating costs."
Alec Saunders has published an excellent post on margins in the VoIP business: Reading Between the Margins: Vonage vs. Skype.
Look out! Aswath's talkin' business. Vonage, that is...
Riffing on Cynthia Brumfeld's analysis of the revised Vonage S1, and the iotum / Phonegnome announcement, Aswath concludes that reduced churn and increased revenues are the keys to success for VoIP providers. Moreover (and thank you for the kind words Aswath), new applications are the way to deliver those revenues. Hear hear!
The real issue is margin, not revenue.
Once again, the real issue is margin, not revenue.
Alec then goes on to do an excellent analysis of Skype revenues (rapdily increasing ARPU, ultra low costs of significant customer aquisition) and to do a comparison with Vonage's potential margins. With their infrastructure taken into account Skype comes in with revenue of $0.80 per month per hard core user with $2 million annual cost (acquisition and operating) while Vonage, based on the S-1 numbers, probably has revenues of $27.70 per subscriber per month with $8.70 operating cost leading to a loss of $167 million annually and 25% customer churn.
Alec then comes to the conclusion:
Let's do a little thought experiment. Let's assume that Vonage continues to add subscribers at their current rate, and Skype does also. By the end of 2006, Skype should be approaching 150 million subscribers. Vonage, should be at about 2.5 million. Let's also assume that Skype's revenues continue to grow at the same rate they have recently. Q4 of this year should be a $100 million quarter for Skype. Vonage, with 2.5 million subscribers should have about $208 million in revenue. If the trend holds true, then Vonage should see losses of approximately $125 million on that $208 million. And what will Skype's loss be?
Ebay is forecasting that Skype will be profitable in Q4 of this year.
The real issue is margin.
All the more reason for Skype to be looking for revenue generation application partners such as iotum.
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