GigaOM today reported on Vonage's latest results: new subscribers down, churn is up, ARPU is down, subscriber acquisition costs up.  All indicators going in the wrong direction; in fact, one could say that Vonage continues to dig its own hole (as predicted here and here).

Maybe Vonage's board could use Vonage's latest service announced yesterday: calling 811 for assistance in digging holes. Hat tip to Garrett Smith at VoIP Supply for digging up this story.

Questions this raises:

• Should not the FCC be developing e811 regulations? From the press release:
  • Note that 811 access depends on its availability within your area. States set their own timelines and procedures on when to call. In some states it is the law to call before you dig. Subscribers should check with their state and local governments for further information.
• Is there a Vonage VP who became totally confused when he heard about Digg.com as a "user driven social content website"?

But we'll all know when Skype is getting desperate - when they start stating: "Skype is not a telephony replacement service and cannot be used to dial 811 or other hole digging assistance phone numbers".

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One of the "joys" of being a US-controlled public company is that SEC requires the breakout of International from domestic sales. So today's 3rd quarter report from eBay provides some information that allows us to look at Skype registrations coming from the U.S.

With over double the registrations from two quarters ago, it certainly demonstrates that the free SkypeOut within North America is probably helping to build some traction but Skype remains essentially a non-US business with over 84% of registrants outside the US. This is corroborated when you compare the % revenue increase with the % user increase; certainly some of the difference can be attributed to absence of revenue for SkypeOut calls within US/Canada.

The results are even more impressive when you consider there has been very limited marketing of Skype within North America - Phil has noticed some media ads in the Bay Area; there are some Skype ads on the eBay website.

These results also reveal some other interesting information:

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By now you've read the BusinessWeek interview with Janus Friis and Om Malik's interview with Friis. The Venice Project is Friis and Zenstrom's video play. We still can't believe eBay let them build this outside of Skype. As I wrote in July, The Venice Project steals an opportunity from SkypeBay by not building video distribution into Skype's network. The whole point of Skypenomics was to bring eBay (c2c cash-for-atoms) into the intangibles economy.

21talks sees the problem when asking: "Does it mean that sharing TV content could be already available through Skype and its video functionality? At an average quality and requiring a small to medium size bandwidth. Is their next move to combine the Skype's, Kazaa's and Venice Project's networks to enhance the general quality of service of the service?" Sorry, but the few indications say no.

They are designing this new network to follow the money, fitting its rules and architecture to the special needs of the content producers and advertisers. I'm sure they won't have any problem lining up anchor tenants like television channels and movie archives for their DRM'd TV streaming network. If you want a taste of the TVP experience, sign up for a very limited Beta Test of the client.

I can only hope eBay owns a little of Baaima N.V., the Netherlands Antilles limited company doing business as The Venice Project.

Bill Campbell's post about Wall Street is baloney, of course. Kent says it well.

You state "Wall Street frowns on the eBay/Skype side of the partnership according to the New York Times." I read the article you linked ... it makes absolutely NO mention of the market's (i.e. Wall Street's) view of the Google/eBay/Skype collaboration.

The share prices are "factually" listed at the end of the article (without comment) ... as is customary. As for "doing the math," Google shares rose 2.0% and eBay shares rose 1.9%. The difference is statistically insignificant.

There may be a story here, but this article, and yesterday's share movement for Google and eBay, isn't it.

Investors didn't even notice the Skype side of the deal. Why would they? Any benefits won't affect eBay Inc. cash flow for years. Meanwhile, they had lots of other news to consider. For example, the advertising part of the deal, extending Google Inc.'s ad distribution onto eBay sites mirroring the previous Yahoo!-eBay arrangement, and the Google Office Suite that positions Google more clearly in opposition to Microsoft. Both bits of news would clearly have more immediate effect on valuation of the business.

As for the Click-to-Call service, there is both an opportunity and a risk. The opportunity is to create a form of paid advertising with greater merit than page views or even click throughs. Web advertisers find page views a less relevant metric than ever. But someone actually talking to a sales person, well, I have a pretty good chance of converting that lead into a customer. It's the difference between driving by a car dealership and walking in the door to speak to a hungry rep.

The risks are equally huge. Click-to-Call assumes:

1. Potential eBay and Google customers have compatible smartphone software or hardware. eBay is now rolling out Skype to its buyers and sellers, starting back in June at the eBay Live conference. But uptake by the U.S. and Canadian public is very slow. Meanwhile Microsoft, Yahoo!, AOL, AT&T, Earthlink, Comcast and others are promoting their own VoIP enabled messaging clients, fragmenting the market.
2. They are willing to use PCs to talk. This is a new behavior. You can't assume customers will change their behavior in ways you approve. What percent of Skype users try voice once and never use it again?
3. Sellers are able to buy the right leads. Talk isn't cheap and margins are thin. eBay started by sheltering sellers from buyers; transactions just happened. Now sellers compete for buyers, augmenting eBay's natural traffic with their own off-eBay advertising and promotional strategies. For c2c, sellers must segment online prospects by interest in specific products. They must also decide which prospects are worth talking to. This is an auction-by-auction calculation and so far there is too little information to make an informed choice, especially for high volume sellers.
4. Sellers are able to answer callers. Most sellers aren't ready to talk to dozens or hundreds of callers a week. Some will need to set up phone-oriented CRM software, hire people or a service, and develop new call center management skills. They will learn to be agreeable and available at their callers' convenience instead of their own. These are new competencies, not lightly adopted and prone to misstep.

These are not fast, sure, or cheap to fix. But they can be managed. eBay and Skype know the problems and have started to address them. Skype education programs for eBay buyers and sellers is a start.

eBay's click-to-call service is FUDware today, the variation of vaporware that spreads fear, uncertainty and doubt among potential rivals. Nothing new for those who follow eBay financial conference calls. To get a payoff on c2c, eBay and Google will need to execute on branding Skype in the US and making the unnatural act of using your PC as a phone an everyday affair.

In a press release issued this morning, Google and eBay announced an agreement which comprises "two primary components involving text-based advertising and "click-to-call" advertising functionality";.In the course of the press release there are several implications for Skype; however, let me draw attention to where Skype already has incorporated Google searches, namely, as an option in the search icon of the Skype Toolbar for Internet Explorer and Skype Toolbar for Firefox:

Other options in this Skype Toolbar's search element include Yahoo, Ask Jeeves, eBay and Shopping.com.

Lisa Leff at AP provides a good overview; combined with the press release we can see the following implications for Skype:

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From today's Form 10-K:

"Communications net revenues totaled $44 million in Q2-06, representing a 26% increase from the $35 million reported in Q1-06."

The trend: large but linear. Skype's net transaction revenues six months' ago were $24.8 million (q4-2005). Linear growth means Skype's viral spread is offset by switching to a rival or people just dropping out.

The number of Skype accounts is growing slower than revenue.

Registered Users -- Communications had a cumulative total of 113 million registered users at the end of Q2-06, representing a 20% increase from the 95 million in Q1-06. Communications registered users represent the number of unique user accounts created on Skype.

So Skype is picking up about 6 million accounts monthly, worldwide. Now any other new softphone would kill and get VC money for numbers like this. But Skype is shooting for 200 million accounts by year end. At this rate they'll only make 149 million.

How about U.S. growth? 86% of Skype's revenue remained international, down a hair from 87%. This just means that Skype's growth in the United States, the great untapped market, is matched elsewhere. Let's assume 86% of the new accounts are international, just like the revenue. This means Skype's been picking up 840,000 new US users per month. Big in absolute terms but small as a percent of all US people online or even eBay customers. The U.S. market will need a promotional shove to grow faster and catch up.

Do you think the North American challenge may have factored in promoting Henry Gomez, former eBay Chief Marketing Officer, to be Skype's CMO? Or in offering the promotion of free SkypeOut in Canada and the States until year end?

Technorati Tags: skype, ebayinc, ebay inc, financials, statistics

With the turbulent migration to VoIP occurring in 2006, it will be interesting to track usage and subscriber data to support the impact of VoIP and Voice 2.0 business models. A couple of items that appeared this week:

Skype vs Vonage in the UK: Heather Hopkins of Hitwise, an online Internet usage monitoring service, has reported on Skype, Bebo and Vonage -- Why Skype Visits are Through the Roof. Her chart that results from tracking visits to websites for each demonstrates how UK visits to Skype have climbed from ~1% of UK site visits in early February to 6.9% mid-May while Vonage has stagnated in the 0.8% range. And this happened in a market with no free SkypeOut! Score one for market penetration by a Voice 2.0 business model.

Earlier this week I reported on the $15 million funding of Bebo, a social network with 24 million members predominantly in the European market and Andrew Hansen's observation as to how Skype support was probably a factor in their financing success. Heather goes on in her post to report on how Bebo is responsible for over 50% of the upstream sources for visits to Skype. And this number has increased with a Bebo-Skype partnership tied into the launch of Skypecasts. A Voice 2.0 application driving adoption and market penetration in the social networking space.

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At the end of the second day of trading Vonage (VG) closed at $13.00 with over 11.3 million shares traded today; down 24.6% from the IPO price. There is some interesting and inisghtul commentary coming out:

Andy Abramson, VoIP Watch: My Thoughts on The Vonage IPO

So really, this reaction to the stock price is not a reflection of how VoIP will do, for VoIP, especially with new and different services coming on line every day that can only be delivered by IP will do very well in the hands of companies with real leadership and vision, not just a sales model that costs more to acquire the customer than will ever pay back.

No, this reaction is a show of no-confidence by Wall Street in the company, their leadership and their approach to business. Nothing more. Nothing less.

Jon Arnold was interviewed by ROBTV (a Canadian business channel); this link will work until May 31.  Jon points out that, whereas the legacy telco and cable competitors at least have a customer base to whom they can market a VoIP service, Vonage needs to recruit a customer base ... thus, the high marketing costs. Well worth a listen for an overview of Vonage and its positioning.

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This week sees two events that demonstrate funding of the VoIP-enabled space is alive and well.

Andrew Hansen comments on Benchmark Capital's $15M financing of Bebo, a social network with 24 million members in a space dominated by MySpace and Facebook:

I am pretty confident saying that Skype support was a major (allbeit not the only one) factor in their success. Skype is wildly popular in the EU/UK/EMEA due to high telephony costs. This is great news for the Skype ecosystem, funding is available for innovative and leading edge web applications such as Bebo, and EQO. The lesson learned here is a clear shot across the bow of other major Social networking sites - Skype support = users = traffic.

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I had some feedback at mesh earlier this week as the Skype announcement of free SkypeOut for calls within North America broke during the lunch break Monday. Others have now commented in both the blogosphere and traditional media; it is interesting to read their thoughts:

• Om Malik (who had just been a keynote Conversationalist at mesh Monday morning): SkypeOut.. Is It Really Free?
• Andy Kessler Will SkypeFree KO Vonage IPO?
• Alec Saunders: Pennies Dropping.... to Zero
• Jon Arnold: Skype - Free Outbound Calls - Good Deal Gets Better
• Andy Abramson (VoIP Watch): SkypeOut Now Free in USA and Canada
• Business Week (registration may be required): Skype Goes for Broke
• Light Reading: Skype Freebie is Defensive (Note; Jon Arnold was not at VON Europe as reported in this story; I can vouch that he was at mesh.)
• Globe and Mail, Mathew Ingram (a mesh Founder): Skype VoIP freebie could put Vonage on the ropes in which Skype Journal's Phil Wolff is quoted.

So the key follow-up questions are:

• Is this the death knell for the Vonage IPO? (or will we learn a new business model on how to operate on zero margin? been there; done that - see the paragraph "Another recollection" in this post on the early history of Internet browsers)
• Will it build Skype's North American user base significantly? (A key measure would be to see 175 to 200 million registrations worldwide by year end.)
• How and when will Skype/eBay leverage the resulting user base for additional revenue generating services and products?

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I'm looking forward to blogging the Conversations that develop from the sessions at mesh 2006 tomorrow and Tuesday. With featured Conversation Mentors such as Om Malik, Michael Geist, Steve Rubel and Paul Kedrosky there should evovle some interesing perspectives on how the a Web 2.0 world will evolve.

Mark is getting excited in preparing over the weekend, he says:

I couldn't help but think that we are a long way from a cold winter night a few months ago at the Paddock Tavern when someone raised the idea of putting on a conference. Little did we know what we were getting ourselves into! I'm looking forward to meshing as much as possible so if you see me wondering around, please introduce yourself.

As a media sponsor, Skype Journal will be reporting back daily with a particular focus on how Web 2.0/Voice 2.0 can be integrated into, impact and influence a public beyond the geeksphere.

There have been many questions about the valuation used by eBay to acquire Skype. Another player in the VoIP scene, Vonage, launched in October 2002 and has been building a highly marketed VoIP telephony service in the U.S., Canada and U.K. With a forthcoming IPO, their recent S-1 filing presents some numbers that can provide a benchmark measure against the eBay valuation of Skype. The analysis generates two key questions:

1. How can Vonage hope to increase its share value with margin pressures and customer valuation going against its business model?
2. Does Skype represent the new communications business model in the Web2.0/Voice 2.0/ Marketing 2.0 Age?

Vonage services typically offer a monthly subscription to call within North America (or U.K.) and incorporate a range of calling features such as voice mail and call waiting. They include the usual customer access portal via the web to manage the account and services. Their primary marketing messages is "Save 50% on your phone bill." While Skype is not a direct "legacy phone replacement" offering, it provides its own unique set of voice services. Skype not only replaces a significant subset of legacy phone services but also offers additional value-add through features such as audio conferencing, IM, file transfer and Skypecasts.

Mark Evans and others have been cautioning potential investors with respect to the forthcoming Vonage IPO. My primary question is "Where is the margin growth opportunity?". Looking at the S-1 along with some numbers we hear about Skype:

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Skype can attract more customers and slash vendor support costs if Skype can get their testing to live up to their installation certification criteria. Let me explain.

With the eBay acquisition, Skype has set up one enormous challenge for its shareholders: to earn out the $1.5 billion performance bonus associated with the acquisition. To quote the associated press release:

The maximum amount potentially payable under the performance-based earn-out is approximately €1.2 billion, or approximately $1.5 billion, ... with an expected payment date in 2008 or 2009. Skype shareholders were offered the choice between several consideration options for their shares. ... Shareholders representing the remaining 60% of the Skype shares chose to receive a reduced up-front payment in cash and eBay stock at the close plus potential future earn-out payments which are based on performance-based goals for active users, gross profit and revenue.

In order to earn this bonus, it requires that Skype be firing on all potential revenue generating cylinders: voice-to-PSTN services, premium services, hardware royalties, distribution channel opportunities and payment services.

Skype has been very proactive about its Skype Certification program with hardware vendors. Adoption of Skype Certified hardware can become a lucrative revenue stream not only from the hardware device royalties themselves but also for the ongoing Skype services revenue streams they would facilitate. But such a strategy only works if Skype and its associated Skype Certified products can be readily adopted by a much broader consumer and business segment than those currently using Skype through PC's.

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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.

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Skype buys talent, a little digital signal processing intellectual property, and maybe a way to differentiate themselves from or bargain with Global IP Sound.

"The company was founded on the vision that through the application of its advanced signal processing expertise, voice communications in the next generation mobile internet could be richer and more natural sounding than any telecommunications experience available today."

– About Jonathan Christensen, Camino Networks President and CEO on the Sweetwater Partners web site

Global IP Sound sued Sonorit and Camino in December 2005 alleging violation of GIPS trade secrets, breach of contract, breach of fiduciary duty, and unfair competition. A Skype representative said the parties were in mediation so this remains an open issue.

The news release follows...

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TOM Online Inc.

At the end of February, the Company had more than 9 mn registered TOM-Skype users, up from over 5.2 mn registered users at the end of October 2005. Mainland China is now Skype’s second largest market after the United States. The Company continues to work with Skype to co-develop more local features and services for the mainland China market as well as premium services over the TOM-Skype platform. It is hoped that some of the services will be commercially launched in the later part of 2006.

This may be the fastest growing sector for Skype around the world.

Surfing around:

• Sexy Skypenomics. VerbDate - "Where People Speak Before they Meet!" is Skype powered. Escalation of intimacy, from profile, to chat, to voice, to video. To real life. via A Zulu In Silicon Valley.
• Skypenomics ROI. Geoff Moore says Skype's job is to increase the value of eBay by more than 4% in Paper or Plastic? It Really Matters When Your Are Buying a Company.
• SkypeBay 1. Om catalogs eBay's pilots of SkypeMe buttons in different selling situations.
• SkypeBay 2. Rogelio Choy from eBay's Developers Program explains how Skype's recent entry to the SMB market is the first step towards a much larger revenue stream. I'm adding Rogelio to my feedreader.
• Gadget Envy: BigBerries drools over the BenQ P51 Treo killer. GPS, WiFi and Windows Mobile and ready for Skype.
• Potential Security Exploit: Two researchers from EADS Corporate Research Center (Philippe Biond and Fabrice Desclaux) gave a Black Hat Europe 2006 talk about Skype. Read their presentation in Acrobat. Grac