Evaluating Skype's Actual Contribution To eBay

On the heels of a strong 1Q07 report by eBay (EBAY), we decided to take a look at the actual contribution of the communications subsegment of eBay’s business and its prospects for further growth.

Looking first to the standard reported quarterly numbers, we see impressive but slowing revenue growth and a steady 20%-ish QoQ increase in registered users, eBay’s standard measurement of user base growth. In 1Q07, Skype added approximately 28,000 registered users per day.

Of course the registered user statistic is interesting, but it is generally accepted (albeit speculative and somewhat arbitrary) that the true number of active Skype users can be divined in one of two ways: by either taking 10% of the total registered users (or about 19.6M as of end of 1Q07), or by using a multiple of about 2x of the peak concurrent users (about 18.8M). For our purposes, we will be using an average of the two.

Luckily, we have been capturing raw usage statistics since July of 2006. This gives us a solid foundation upon which to build an accurate understanding of customer adoption rates and monetization. We can see that average active users have continued to grow, but it appears that the meteoric growth of the pioneering days of Skype is eroding some in the face of VoIP competition and alternatives.

As Skype is based on a free peer-to-peer network, only a small portion of Skype users actually generate revenue. Predominantly it is those users who use SkypeOut, which allows Skype calls to connect with traditional land-based phones. SkypeOut calls make up less than 17% of total Skype usage, and this number appears to have peaked. In fact, while the YoY growth of SkypeOut minutes has been impressive, there was effectively no growth from 4Q06 to 1Q07.

The quarterly growth in active users, at 13.5%, is rapidly outpacing the growth in both Skype-to-Skype and SkypeOut minutes, at 1.3% and 0.0%, respectively. This is worrisome because it indicates that each additional user is spending less and less time on Skype. The demise of service offerings such as SkypeOut may be a self-fulfilling prophecy. As more users join the Skype VoIP network, there is an inverse relationship with the demand for the ability to call land-based lines, as Skype members can still call each other for free. Regardless, slowing growth of the core revenue stream will need to be offset by follow-on, value added service offerings such as Skype Prime.

While overall growth is slowing, there remain very positive trends. Over the last three quarters, the growth in average revenue per active user has been growing and even accelerating. This could be attributed to the sale of licensed hardware products (such as Skype phones) as well as the up-sell of value added services to the existing user base.

Additionally, the average number of concurrent users is closing the gap with the peak number of concurrent users. This indicates that while maybe they're not actually reaching out and touching someone, more and more existing users are staying signed on for longer periods.

Given current user adoption and monetization trends, we expect Skype to add approximately 31,000 users/day, or just over 2.8 million users in 2Q07. This should equate to approximately $90M of revenue in the second quarter, a QoQ growth of 15.9% and YoY growth of 102%.