Skype Valuation: Why it Deserves to be High
I'm not a VC and I haven't studied the different valuation methods in any detail, so not sure what exactly would be the right price for Skype. But I do understand why Skype is so valuable. First, as I said previously, VoIP is a pretty big opportunity. Once it gets on a wireless device this sector would explode. Now, think about delivering location-aware advertising to that device and you'll begin to have some idea of the astounding amount of money that's to be made here. GoogleTalk isn't about click-to-call feature for local search, as Om Malik and others2 have been speculating. That's a silly idea. It's way too bigger than that. I'll discuss all this in more detail in my next post that I'm writing at the moment.
Back to Skype, the second and more obvious reason for the high valuation is its large subscriber base. Skype's 52 million users are over double the number of its closest competitor (AOL has about 23 million users, Yahoo 19 million and MSN 14 million) and remember, unlike the others, almost all of Skype's subscribers use the VoIP feature. Another important distinction for Skype is that its users are intensely loyal. Wherever I see Skype users, I get to hear about how wonderful it is3 and how much it has changed their life for the better. I'm sure this reputation is well deserved. Skype provides amazing value at no cost so no surprise that all the good experience Karma would lead to loyal subscribers.
So, Skype does deserve a high price even though, as I pointed out in the previous post, it has miserably failed to capitalise on the opportunity so far. However that's something that can be improved upon, the opportunity still remains immense and untapped. Now, whether Skype should be valued at three quarters of a billion, one and a half billion or even four billion, I'm not qualified to say. Since a lot of people seem to be interested in buying Skype and since the telcos haven't even started queuing up yet...shall we say: let the market decide?
Update 13-Sep: I was wrong! Ebay has announced the acquisition and there are more reasons for Skype's high valuation than the ones I cite in this post. See, my final analysis and comments on Skype's revenues, which are now public.
Notes and Links
1. Here are a couple of posts questioning Skype's valuation - one and two. I mention these in particular because they linked to my last post which explained why it makes sense for Ebay to buy Skype.
2. See Om Malik's post where he speculates that Google's VoIP plans are about a click-to-call feature on local search results that would lead to pay-per-call advertising.
3. Rashmi Sinha, entrepreneur and Skype fan, extolling The Wonders of Skype.