Skype IPO Confirms: There’s No Money to Be Made in Video Chat

There are who will look at Skype’s $100 million IPO filing and see it as good news for the nascent video chat market, as it signals the first time a major player in the space has gone public. But despite the fact that 40 percent of all calls made through its software are video chats, a look at its financials reveals that it doesn’t actually make any money from that service.

Skype reported revenues for the first half grew 25 percent over the previous year — from $324.8 million in the first six months of 2009 to $406.2 million in the first six months of 2010. But the vast majority of those revenues came from its SkypeOut offering, a low-cost, credit-based system for making calls from the Skype software to landline and mobile phones. While Skype has done a good job of getting people to use SkypeOut to make long distance and international calls at extremely low rates, it has yet to figure out a monetization plan for the fast-growing video chat segment of its business.

But monetization of Skype’s video chat users could ramp up soon. In its S-1 filing, it said it planned to diversify its revenue by adding new premium features, among other things. Skype recently began testing group video chat in a beta version of its software, with plans to make group chat a premium feature in the future.

It also hopes to increase adoption of its video chat and other tools for small- and medium-sized businesses that can’t afford high end video conferencing or telepresence equipment. With its Skype for Business offerings, it can offer those companies video chat and collaboration tools that are otherwise out of reach. And finally, Skype plans to increase advertising around its free offerings as a way to monetize those calls as well.

The problem for Skype has been that consumer video chat, while still a nascent market, has largely been offered for free. In addition to Skype, Google has made free video chat available to its email users through its Google Talk offering. And some IM clients — like MSN and Meebo — also offer free video chat as part of their software.

Not all video chat is free; Paltalk, for instance, is a profitable business built on a subscription video chat service. But Paltalk, too is making more of its services available for free, including a browser-based video chat service that allows up to 10 users to chat at a time. That will compete directly with Skype’s plans for a premium group chat offering in which only five members can chat at a time.

Skype will need to figure out how to monetize consumer video chat soon, as it is a large and growing part of the company’s business, and will at some point soon overtake the voice chat portion of Skype’s service. The good news is that Skype still has a robust business with SkypeOut. But as video chat catches on, it will need a better business model than free to make it work.

Related content on GigaOM Pro: Report: The Consumer Video Chat Market, 2010-2015 (subscription required)