Mobile Exposes Skype's Achilles' Heel

In their IPO filings, new companies coming to market stop short of forecasting Armageddon in order to protect themselves from shareholder litigation if an unforeseen event damages the company's financial performance. Skype's IPO filing is no different, identifying a raft of potential risks facing the company, but in the mobile space, the challenges the company reveals are very much justified.

Focal Points:

• In the case of Skype the web service is voice and video over IP. Having started on the desktop, the Skype application has now been released for all major smartphone OSes - Android, Blackberry, iOS, Symbian, Windows Mobile - each supporting varying levels of functionality. Video is not currently supported by the smartphone app, but is expected.
• The challenge which Skype faces in mobile comes from two of the dominant smartphone platform providers - Apple and Google - who are encroaching on Skype's VoIP turf with in-house solutions. Apple's FaceTime and Google Talk run natively on their respective OSes and do not require discovery, download or installation. As native apps they are able to run far more efficiently as background processes. While FaceTime doesn't integrate with Apple's iChat, it does support video. Google Voice for Android doesn't currently have video but it is an extension of the established desktop offering.
• The Skype application is free but it must be manually downloaded from the app store and configured. The capability of the app is almost entirely at the mercy of both the OS provider and carriers. For example, initially, Skype iPhone users were unable to make calls over 3G. Also, until the release of iOS4.0, the app could not run in the background on the iPhone. And although Skype can now run in the background on most OSes, it is a power hog, devouring battery life, which encourages users to kill the app when not in use. Naturally, if Skype isn't running, the user cannot be contacted.
• Many of these issues are acknowledged in Skype's IPO filing: "For example, although our application for the Apple iPad, iPhone and iTouch is currently enabled to make voice communications over 3G networks, Apple or its carrier partners may choose to alter the terms of inclusion in its application store, effectively withdrawing this functionality at any time or develop competing applications, such as Apple Face Time, that may better integrate with Apple's devices," says Skype in the filing.
• The threat posed by the smartphone platform providers goes beyond the mobile space, and this is risk which Skype fails to clearly articulate in its filing. It would be hard to argue that the most natural context for a voice call is on a phone, as opposed to seated at a desk in front of a PC. The same may very well be true for a video call. The danger for Skype is that if FaceTime and Google Voice become the de facto VoIP applications on smartphones, users will migrate to these services on their desktops as well, benefiting from a consistent and seamless experience across mobile and fixed platforms. What point is there of maintaining a Skype account if, for example, an integrated FaceTime experience is possible across the iPhone, iPad, iPod Touch, Mac and PC?
• Playing in Skype's favor is its first mover advantage: since its launch the company has amassed 560 million registered users. However, an average of just 124 million use the service each month and only 8.1 million part with any cash.
• In the six months to the end of June, Skype posted revenues of $406 million so its annual revenue are roughly at the $1 billion mark - not to be scoffed at. However, its net income for the six-month period is a paltry $13 million. Through the IPO, Skype hopes to raise $100 million. Considering the challenges it faces in mobile, it'll need every penny.

The Skype filing highlights what a double-edged sword the mobile application market is. On the one hand, mobile applications have been a massive boon for web services providers since the marriage of smartphones and third-party applications have quite literally placed these services in the palms of consumers' hands. Unlike applications running on a tethered PC, the mobile version of a web service supports virtually every context users might find themselves in. On the other hand, the more fundamental a service becomes to the smartphone experience, an incentive emerges for that service to be supported natively within the operating system itself.