Look out! Aswath’s talkin’ business. Vonage, that is…
Riffing on Cynthia Brumfeld’s analysis of the revised Vonage S1, and the iotum / Phonegnome announcement, Aswath concludes that reduced churn and increased revenues are the keys to success for VoIP providers. Moreover (and thank you for the kind words Aswath), new applications are the way to deliver those revenues. Hear hear!
The real issue is margin, not revenue.
Once again, the real issue is margin, not revenue.
Seven months ago, EBay acquired Skype. Since that time, Skype’s registered user base has grown from 54 million to a staggering 100 million. That’s growth of 46 million users in seven months. If Skype’s acquisition costs were the same as Vonage’s, gaining those subscribers would have cost a cool $9,614,000,000. Servicing those 100 million customers would have an annual cost of $10,440,000,000.
Vonage is a telco. Skype is not.
Vonage has telco economics. Skype does not.
This past quarter Skype earned $35.2 million from its 96 million (at the time) subscribers. That’s a 42% improvement over the prior quarter, and revenues are actually growing at a faster rate than subscribers. We all know, though, that 96 million overstates real usage. Right now there are 3.3 million Skype subscribers online. Sometimes I’ve seen as many as 6 million. So, let’s be generous and say that there are really 15 million regular Skype users – the Skype hardcore. Monthly, Skype is probably billing 80 cents per hardcore user, or around $10/year. That sounds about right to me. I don’t know when I last bought Skype-Out credits, but it was a while ago.
By way of comparison, Vonage made $27.70 per subscriber per month, or $332.40/year.
80 cents per month doesn’t sound like much, compared to $27.70, does it? So why am I so bullish on Skype (I am), and so down on Vonage? There are two reasons: churn, and operating expense.
By 12 months from now Vonage will have 25% of their subscriber base churn away, or roughly 400,000 customers. The cost of replacing those subscribers will be $83,600,000. In contrast, it doesn’t really matter how many Skype users churn away. More are coming all the time, and the cost of acquisition is basically zero.
The hard costs of running Vonage’s network are $8.70 per month, per line. That works out to about $167 million annually. Skype spent about $2 million last year on infrastructure costs.
The result? Vonage lost $72.8 million on revenues of $118 million last quarter. We don’t know what Skype’s loss was, because EBay doesn’t break it out. But logically, without Vonage’s costs, it must be lower.
Let’s do a little thought experiment. Let’s assume that Vonage continues to add subscribers at their current rate, and Skype does also. By the end of 2006, Skype should be approaching 150 million subscribers. Vonage, should be at about 2.5 million. Let’s also assume that Skype’s revenues continue to grow at the same rate they have recently. Q4 of this year should be a $100 million quarter for Skype. Vonage, with 2.5 million subscribers should have about $208 million in revenue. If the trend holds true, then Vonage should see losses of approximately $125 million on that $208 million. And what will Skype’s loss be?
Ebay is forecasting that Skype will be profitable in Q4 of this year.
The real issue is margin.
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