|Facebook could add up to $800 million to its revenue by launching a Skype copy!
By doing so, Facebook could disrupt the mobile industry even more.
With over 1 billion users, Facebook is the world’s largest communications provider. It’s a platform where people communicate by voice, text and data. At $175 billion it has a larger market cap that any mobile operator, save for China Mobile or Vodafone.
While Facebook offered $19 billion for OTT provider WhatsApp, four times this amount is lost by the mobile industry worldwide every year as users switch to OTT services. Facebook could take this disruption further by entering the VoIP market. Strand Cosult sees VoIP as part of Facebook’s natural evolution, and further, that Skype could be one of the first victims of Facebook’s entry to the VoIP market. If you can talk to friends in Facebook, why would you need to use Skype?
In the 10 years since its founding, Skype created nothing less than a paradigm shift in the market for international voice traffic, and it associated customers to a very disruptive price: free. A number of international calling players, both MNVO and VoIP players, entered the market after Skype. Lyca Mobile and Lebara Mobile are two MVNO examples. The net effect of these upstarts was that they forced network operators to lower prices for fixed line and mobile international calls in order to compete.
Google Talk and MSN were the VoIP entrants, but Skype prevailed as the clear winner. Microsoft, unable to compete with Skype in VoIP, acquired the company in May 2011 for $8.5 billion, a price that was many times Skype’s revenue and a premium for Skype’s unique market position. It is important to note that having the most users does not mean having the most revenue. Skype does not necessarily collect the cash flow it disrupts. Microsoft does not disclose the revenue of Skype, but it's likely that the service is a loss leader for the company. But there is no doubt that Skype lowers long distance prices across the board.
Skype published its numbers in March 2011 before its scuttled IPO attempt. Revenue was $860 million for the year ended 2010. There were 668 million users, 18% of which were active users, and 8.8 million paying users. With 124 million active users, Skype made less revenue than the annual operating profit of many mobile operators. It is worth noting that an operator with 124 million subscribers would make many billions of dollars, but Skype made less than $1 billion. Such is the nature of disruptive technology.
Technologies such as VoIP offer global connectivity at a fraction of the cost that operators offer for the same voice coverage today. Operators’ higher price reflects their ongoing multibillion dollar investment in global digital infrastructure, without which Skype could not exist. Skype, and Facebook for that matter, do not invest in infrastructure, but they are over the top (OTT) technology platforms that rely on the provision of digital infrastructure. They are essentially free riders on the network that competes with mobile operators for communication services.
To be sure, Skype’s revenue is nothing to sneeze at, especially for an internet company struggling to show a profit on advertising revenue. Facebook is scrambling to please investors, and $300 million-$800 million from VoIP would be welcome on the income statement. At Strand Consult we think not of the question of whether Facebook will enter the VoIP market, but rather whether Facebook succeed where Google and Microsoft have failed. Indeed Facebook has more likelihood than any platform to be the Skype killer.
Facebook is close to crossing the 1 billion mark with users, and half of them use their mobile phone to connect to the platform. For many users, Facebook is already the place to communicate with friends and family, so VoIP would be a welcome addition. And unlike Skype, Facebook provides a ready phone book from the beginning. Indeed, with pictures, video, news and the other features of its social network, Facebook offers a richer experience than any of its competitors.
Facebook has a vision that its platform will evolve into augmented reality and become completely integrated into the user’s life, embedded not just on every screen (TV, pc, mobile and tablet), but in every product and location. Adding VoIP capability is next logical step for Facebook to achieve this vision, and Facebook could manage the technical and resource requirements in a matter of months.
It is not a stretch to suggest that Facebook could at least match Skype’s revenues. The premium model of Skype has proved more profitable per user than Facebook’s advertising model. Skype’s paying users spend an average of approximately $100 per year on Skype Out and other services. Facebook’s advertiser revenue when apportioned for users in the Europe and North America (where it gets almost all of its advertising) is less than $10/user. Facebook already has the payment and collection facility developed for its multiplayer games, so it would be no problem to charge individual users for VoIP services
Our analysis shows that Facebook could have a remarkable potential in the area of VoIP. It could create a communication experience far richer than what is available today. If Skype is a black and white film, then Facebook’s VoIP would be a 3-D interactive movie.
Operators have already absorbed the impact of Skype, but Facebook is another story. Facebook has already proven a clear and present danger to SMS revenue. VoIP is the next logical step and perhaps an MVNO thereafter. With each step, Facebook encroaches on operators’ cash cow: voice. And operators move ever closer to the dumb pipe destiny.
There is no doubt that Facebook is a ticking time bomb under the mobile operators’ business model.
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