How much is Skype paying MySpace?
For a while we are back to the square one with the Skype type businesses. For the second time in VoIP history, the number of downloads and free callers do not matter because a company as creative as eBay has failed to leverage that huge user base toward something out of this world. What matters is how much money Skpe is generating. And the source of revenue is its PC-to-Phone application. So far the customer acquisition cost for Skype has been less than $0.01 per customer. Not any more. eBay is out to sign up as many new Skype customers as possible, expand the paying SkypeOut user base, and in the process scale up the Skype revenues. The deal with MySpace is just one of many such expansion driven partnerships.
The revenue sharing arrangement between the two has not been disclosed. The simplest model is paying MySpace a cut out of the SkypeOut revenues generated by the MySpace IM users. The other model is to pay MySpace a fixed amount per new paying customer that Skype signs up through MySpace IM. I think the latter is a more sensible model for MySpace although in practice I think they have gone for a mix of the two models. Having said that, I doubt if the social networking site would want to trifle with the telecom billing, the CDRs and all that frightening stuff. If my guess is right, I am also curious to know how much Skype will pay MySpace per (paying) customer acquisition.
The key to financial success in the PC-to-phone market, which is what Skype has now effectively been relegated to, is sharply reducing customer acquisition costs. Until the last dotcom collapse, Internet advertising rates and portal deals were extremely expensive. For example, Net2phone did several exclusive portal deals in 1999 and 2000. These deals typically involved an upfront payment of $2.5 million to the portal, which also received between 5% and 15% of revenues resulting from any sales. A former CFO of a competitor estimated that Net2phone was paying between $150 and $250 a head for customers acquired through its portal channels. And these customers had expected lifetime revenues of $150, to $50 with anticipated cumulative revenue of $100.
Net2phone even, at one point, paid $31 million to restructure its Yahoo co-marketing relationship. The revised deal forced Yahoo to license Net2phone technology and pay part of the underlying network costs.
Fortunately, post downturn, the industry has gained control over the marketing expenses. However if eBay is prepared to run Skype business at a loss for a while, my guess is they will spend liberally on customer acquisition. They might not have an option because there is another danger lurking. The 3Q07 Skype results show that there is a serious threat of churn. Churn has always been a serious problem in the PC-to-phone industry. If you look at the PC-to-phone minutes handled by Skype during 3Q07, there has been a marginal increase from 1.3 billion minutes in the previous quarter to 1.4 billion in 3Q07. And the PC-to-PC minutes have actually seen a decline.
