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Skype - from marginal to mainstream

Finance | John Tate | 27 May 2011

John Tate examines the potential, and the pitfalls, of Skype, the fast-growing communications phenomenon.

Last month Microsoft announced its intention to buy Skype for $8.5bn. Most readers will be familiar with Skype – as the market leader in Voice-Over IP (VOIP) telephony. Skype allows users to make telephone calls via the internet. Where the call is to another Skype user the basic facility is available free of charge.

Skype is widely used in the not-for-profit sector and is a good way to keep costs down – particularly for overseas calls.

So what does this potential acquisition mean for the sector and why is Microsoft planning to buy Skype?

• Firstly, let us look at the scale of adoption. There are around 750 million registered users of Skype worldwide and estimates suggest that there are 50 million people who make ‘active use’ of Skype on a daily basis.
• Secondly, in terms of performance, there have been some ‘outages’ with Skype in the last year – which have meant people have not been able to make Skype calls for periods of time. Also, Skype relies on internet access. Many charities and individuals experience periods when their internet access is down so they cannot then use Skype. Additionally, if someone is away from the office they cannot use Skype for free if they, or the person they are trying to reach, does not have internet access. Skype does offer competitive prices for making calls to mobile devices or conventional landlines which can get round this problem, but there is a cost associated with this.
• Thirdly, there is a security issue with using Skype. It operates on a ‘peer-to-peer’ network basis which means individuals using Skype are allowing their machine to be used to help Skype run their services. There is a risk that unauthorised information may leave your office via your computer, or that your call may be monitored. Both these situations should be unlikely to happen, but if your organisation works with confidential information you need to manage this risk.
• Fourthly, the quality of the voice sound can be variable depending on the performance of the web. I have been on Skype calls in the past where it is been impossible to properly hear someone else. Usually this is resolved by re-establishing the connection. This is not usually a major problem with a call between two people, but if you are using the Skype conferencecall facility with several people on the call this can be a challenge.

So if you are seriously considering using Skype you should identify a back-up option in the event of a failure in the network or Skype itself, and be aware of – and manage – the risks mentioned above.

So why is Microsoft making this acquisition? The proposed purchase price is 32-times operating profits so has a substantial price-to-earnings ratio. Clearly Microsoft sees a lot more profit and growth potential in Skype, and/or a broader strategic benefit rising from the acquisition.

Skype offers the ability to make video calls as well as the conventional voice system. Microsoft has a number of products that could benefit from this technology – ranging from instant messaging to their CRM system – where Skype could potentially be used to initiate a video-conferencing call with a customer. Maybe Microsoft sees video calls largely replacing conventional phone calls in the future, and wants to own the technology/customer-base to take advantage of this development?

It is also possible to use Skype with some hand-held mobile devices, potentially reducing or eliminating the cost of calls to other people. Maybe Microsoft also sees untapped potential here?

The next few years will be an interesting time for internet use. Products like Skype will increase the bandwidth requirements when there are already parts of the country where the cable/network infrastructure struggles to support this. Commercially, the current ability we all have to get internet access for free, or very cheaply, looks increasingly likely to be challenged as the internet service providers will need to get a return on their investment in building faster and more-extensive web access.

I would encourage charities to look into the potential cost savings from Skype, recognising the issues that go with adopting VOIP in the workplace. I would also suggest that organisations with a mobile workforce, or people working from more than one location, review the benefits of using video conferencing. This could be a significant growth area in the next few years and of real benefit to the sector.

John Tate is MD of ChangeBASE, IT adviser to the CFDG and a visiting lecturer at Cass Business School 

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