Skype Not Adding Paid Users As Fast As Free Ones

by Mark Walsh, Mar 7, 2011, 4:45 PM

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No wonder Skype is getting into advertising. The company's updated IPO registration filed last Friday shows it still has only 8.8 million paying customers out of a total of 663 million users for its for its Web calling and video chat service.  That's just over 1%--well below the roughly 10% of paying users considered a standard level for the freemium model Skype's business is based on.

The latest numbers also show that while Skype has increased total registered users 12.5% from 560 million to 663 million since filing for its public offering in August, the paid user total has grown only about 8.5% from 8.1 million. The number of active monthly connected users (the average of those using Skype over the last three months) has increased 17% to 145 million.

Overall, Skype's net revenues were up 20% to $860 million in 2010 from $719 million in pro forma 2009. Its net loss was reduced to $7 million from $418 million (which includes a $344 million charge in connection with a settlement with eBay over its use of certain peer-to-peer technology in its network).

The bulk of that revenue to date has come from the charges Skype applies to calls made to and from landline and mobile phones using its SkypeOut service as opposed to the basic free PC-to-PC calls. But the company has added other premium options like group video calling and Internet access as well as paid services for businesses to help bolster revenues. But growth on the subscription side over the last six months doesn't look to be on fire judging from the still tiny proportion of paid users.

Enter advertising, with Skype's announcement today that it will start rolling out high-visibility display ads in the "Home" tab of Skype for Windows (version 5.1 or later). Through a partnership with online chat provider Meebo, it will also offer takeover ads across Meebo.com and the site's companion iPhone app. Visa, Nokia, and Groupon were among the launch advertisers on Skype. Adding advertising is a natural step for Skype, similar to other "free" services like Gmail in which people have come to accept a certain amount of ads in exchange for usage.

Adam Kasper, EVP for digital investments at Media Contacts, expects the same thing to happen with ads on Skype. "Consumers have been getting a great deal from Skype for a long time, so I think they will be generally accepting of advertising," he said. "If people are captive (which they are) and getting value--which they are--then marketers should find it a desirable vehicle."

Beyond display, he noted that video could potentially be a good fit for Skype since people are less likely to click when they're trying to make a video call. Having to watch a video ad before making a video call would certainly be more of an interruption likely to annoy users than a display ad. In any case, "it will be important to introduce ads slowly and not overload the experience with ads though," said Kasper.

Whether Skype can strike that balance of easing in advertising while it tries to ramp up revenue in advance of an IPO expected in the second half of 2011 will be one of the company's challenges. Driving away free users before they have a chance to convert them into paying ones is the last thing Skype wants to do as it prepares for its stock market debut.

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