eBay recently announced an agreement to sell majority ownership of Skype (65%) to a consortium of private equity buyers. The transaction values Skype at $2.75 billion, slightly lower than the $3.1 billion eBay ended up paying (50% in stock) after earn outs. Skype makes money by charging users of its VoIP application for calls to landlines and mobile phones. Calls to other Skype users are currently free. The success of Skype depends on the number of users on its platform and the amount of revenue it can generate from each user.
Revenue per Skype User increased briefly from 2005 to 2006 and has been declining since. We estimate that the Revenue per Skype User will be $1.30 in 2009 and decline to $1 by the end of the forecast period. Although overall Skype revenues will increase due to growth in the Skype user base, we believe that per user revenue will decline due to an increasing mix of free Skype users. Additionally, greater user adoption of alternative VoIP providers in the US such as Vonage and triple play providers like Comcast, Time Warner Cable, Verizon and AT&T may make such users less likely to pay for Skype service.
Based on our forecasts, Skype constitutes 5% of the $33.07 per share Trefis estimate for eBay’s stock, implying a valuation of $2 billion for Skype. In order for the transaction value to be justified, Skype’s new owners must believe that the company will be able to generate more revenue per user either by directly charging users or through more advertising for free users. Within our eBay content, you can see how Skype would be worth $2.8 billion or more if Revenue per Skype User trended up over the forecast period.
