Blog Post

Skype's Growth Starts to Slow

skyperevenueseBay (s EBAY) today turned in a lukewarm performance for the fourth quarter of 2008, posting sales of $2.04 billion vs. an average forecast of $2.12 billion. Earnings per share were a penny better than expected, at 40 cents a share. Amidst all this doom and gloom, it was nice to see Skype, their communications division, show some signs of growth. The big question now is: How long can Skype continue to grow — and keep bringing in much-needed revenues for its parent?

For the quarter, Skype:

  • had sales of $145 million for the quarter, up 26 percent year-over-year, but only $2 million higher than the prior quarter.
  • added 35 million new users to stand at more than 405 million registered users.
  • saw SkypeOut minutes go to 2.6 billion from 2.2 billion in the third quarter of 2008.
  • saw Skype-to-Skype minutes go to 20.5 billion from 16.5 billion in the third quarter of 2008.

But Skype’s growth is clearly slowing: Even though it sold an additional 400 million more minutes, it was able to get a mere $2 million in additional sales, which is a ridiculously tiny amount. In other words, it doesn’t matter how many new people it signs up to the network, or how many more SkypeOut minutes it sells, the opportunity to goose up Skype revenues is virtually non-existent. Now juxtapose this to Skype’s full-year 2008 numbers and you start to see that the trajectory of Skype’s growth is flattening. For the year, Skype posted:

  • sales of $546 million vs. $376.7 million.
  • per-subscriber, per-year revenues that declined to $1.35 from $1.36.
  • 8.4 billion SkypeOut minutes.
  • 65 billion Skype-to-Skype minutes.


With over 405 million registered users, that works out to about 160 minutes per user, per year, of free calling, and 21 minutes (approx.) of SkypeOut minutes. For 2007, Skype had 276 million registered users who were talking for about 44 billion minutes with each other for free; and the company posted 5.7 billion SkypeOut minutes. In other words, a 47 percent rise in the number of users generated a roughly 47 percent increase in usage of its free service. In 2007, Skype logged 20.65 Skypeout minutes per user, roughly flat with 2008. To get more SkypeOut revenues, the company just needs to keep finding more and more users — not an easy task. 

The only way they can overcome this flattening of the curve is by offering mobile Skype (Skype Lite), especially on fast-growing platforms such as the iPhone and the BlackBerry. But even that would be a temporary solution.

Skype grows because of its viral nature. Most people try and get their friends to download Skype so they can make free calls, a behavior unlikely to change. And once you have all your pals on the network, you don’t really need to use SkypeOut as much. Following my conversation with Josh Silverman, the scary-smart CEO of Skype, back in September 2008, I wondered if eBay should spin the company off into a standalone operator. Well, looks that that opportunity might have passed them by…at least for now.

47 Responses to “Skype's Growth Starts to Slow”

  1. Telecom is a massive, massive industry with very demonstrable willingness to pay so I have no doubt that Skype will be able to rapidly grow revenue even if it doesn’t have the sharpest management team.

  2. @Martin Kuhn

    I give you the point about the f/x impact but the point I am making is that the per user per year SkypeOut minute usage is essentially flat and that the company needs to find millions upon millions of new users to show kind of revenue growth the company has shown this year. In a sense they added about 130 million new registered users in 2008. What are the odds that they will replicate the same kind of growth.

    Which brings to my thesis that their growth is starting to flatten and now they need to figure some other revenue stream – what is that? I am sure the management team has something up their sleeve, but I don’t know.

  3. Beautiful Mind

    Om – I am curious

    20.5 billions minutes per Quarter for 405 millions users should translate into (20500/405)*4=202 Free minutes per year while 2.6 billions minutes per Quarter should translate into (2600/405)*4=25 Paid minutes per year.
    You are showing 160 and 21 respectively…

    I must have got something wrong?

  4. Why does everyone keep insisting that the skype acquisition deal was so one-sided?

    Growing in this market at that kind of scale and market penetration and doing $550M top-line seems pretty reasonably worth a ~5x revenue multiple which is about what they ended up paying.


  5. Skype Me Not

    For Skype to continue growing, it needs a genuine standalone multi-line ATA, so we can interface regular old-fashioned telephones, and it needs local number portability. No way am I going to buy a SkypeIn from their limited selection of DID’s (which aren’t local), and if I had to port out of Skype (say, if we have another 8/16), I would want to be able to port back in, which you can’t.

  6. Om,

    Thanks for your reply. Coming from a strong telco background, when I see ratios as you mentioned and the correlation that you were drawing (at least as an adverse indicator), the natural assumption was that the ratio of declining “billed” minutes to “non-billed” minutes was a bad thing. Yes, no where did you state that the free minutes costs Skype more. As to your question “Where is the money in 400M people connecting through your free application and services?” Ask Google. And again, Skype is probably emerging as the most cost-effective ways for people to call each other internationally using SkypeOut.

  7. The Issue with Skype Lite is that in a Skype Mobile to Skype Mobile call the terminating user pays using Skype credit to receive a call. With high Mobile terminating rates in Europe and elsewhere this will be a barrier to adoption.

  8. Skype needs to figure out how to get rid of some users. The SkypeOut revenue model depends on there being people without Skype to call out to. So, if they could drive some users back to using traditional phone, the users who remain would have more need for SkypeOut.

  9. Martin Kuhn

    Om – I think you miss an important point in your analysis. The Dollar exchange rate. A significant fraction of Skype-out minutes are charged in non-USD currencies. The USD has been on a roller-coaster ride over the last 24 months, specifically against the Euro/Pound Sterling, initially dropping to 1.60/2.09 and now rebounding to 1.30/1.37. While artificially ‘inflating’ the top line of Skype (as the Dollar declined), we are now seeing the reverse of that as the Dollar appreciates. The significance of this fact is footnoted in the latest EBAY financial .pdf on page 12

    The fact that Skype still shows top line growth, despite adverse currency movement and lousy economy, demonstrates to me the ‘Wall-Mart’ like advantage to thrive in a global downtown.

  10. Perry is spot on about the growth in Skypeout minutes being the most relevant metric to gauge growth. On that basis Skype has been accelerating for 4 quarters. In addition, it is important to note that on a forex adjusted basis the growth would have been greater on the revenue side. According to the ebay investor pres: “On an fx-neutral basis Skype rev accelerated 5 pts”

    Slide 12 on the pres associated with earnings:

  11. there new cadre web based voip players such ribbit and tringme and use sip ……….both of which use flash and have excellent API…guess more and business will use them for web to contact centre solution

  12. Om, I think your analysis may be a bit off here. My understanding is that the “free Skype” person-to-person minutes are peer-to-peer through Skype’s thick client app on each respective user’s PC. Thus, the ratio of “paid vs free” minutes you state seem to assume that Skype is incurring cost for the free minutes, when I believe the internet essentially bears the cost burden for the “free” minutes. The REAL measure is the increase of Paid minutes (SkypeOut minutes), which seemed to show a nice increase Q3 2008 to Q4 2008, even in a down-turn global economy, not to mention a 10% increase in their user base (who eventually will may well start “Skyping-out” as they become more familiar with the services offered). These seem to me to be the real measures here.

    • Perry

      There is no where do I suggest costs being incurred for free P2P calls though I would argue that they are paying people to keep associated infrastructure running. I would urge you to go and read the article again. Just because they showed an increase in SkypeOut minutes doesn’t mean they are doing great. If you sell more of the same thing but are able to charge less for it — that doesn’t necessarily means a good idea.

      Forget all that – they have 405 million people who can now skype for free. Where is the money in that.

  13. I used to use Skype exclusively for my business phone. Some technical issues prevented me from continuing with them as my business has grown. As a business, Skype worked great for one person. As I expanded to a few more, problems quickly came up. I actually wanted to scale my business with Skype as the telephony provider, but user management and account funding proved to be too problematic.

    I wound up deploying my own solution with Asterisk, an open source VOIP solution. I think that Skype could quickly build new revenue by deploying an Asterisk solution. Skype as a service, rather than a client/software solution, would allow businesses to sign on all of their employees at once.

    Skype would benefit because a single decision maker would deploy hundreds of new accounts at once, rather than the word of mouth paradigm which at best deploys a one-to-one decision-to-new-account ration. Skype would also sell a ton more Skype In and Skype Out minutes limiting their exposure to the free Skype-to-Skype minutes that generate no revenue for them.

  14. I haven’t yet found audio problems other than those suffered by friends stuck in the wonderful world of Windows. Our extended family uses Skype for years. Lots of video chat. No problems.

    Retail advertising for Skype has finally started in the United States. And the phenomenon of newbies noticing they have Skype pre-loaded on [some of] their new computers is having an effect.

    The Skype level of encryption vs. all the delights of NSA-preferred open source VOIP provides me with a critical reason for staying exactly where I am.

  15. Since Gmail added voice chat, my friends and I, who have our Gmail open always …no longer use Skype.

    Our experience using Skype where both participants used webcams or open mics always had lots of feedback and echo. Using Gmail voice chat we have now such audio issues using our webcams and open mics!

    I think they should create a web solution – one that allows their svc to be embedded into web services across the web (Yahoo Mail, Gmail widget, social networks, blogs, etc), as well better it’s audio quality.

  16. i think its good news the hype surrounding skype is turning down and its good new other open standard based voip /soft phone providers like gizmo , wengo also other xmpp (aka jabber aka gtalk ) based initiatives like lip jingle and over all good news for market , as one of authors of skype plugin api guide book …i can tell one thing that skype is totally closed protocol proprietary limiting what can really done with it (extensions )platform and in turn revenue stream ………i think soon voip will come embedded in browser it self …………maybe its right time for skype to open up protocol doing so more developers can find new uses of their platform/infrastructure and driving more revenue and users to platform

  17. Good observations. Another growth area for Skype is on the business side. According to Skype 30% of their customers base are businesses. This is why they are hiring a Sr. Product Manager for Business Applications and a corporate strategy guy for the Skype biz unit. Something is cooking here.
    Skype is got to be the largest service provider in the world with 400M “accounts”(or may be China Telecom).