Skype has become one of the Internetâ€™s most popular services â€” so much so that it is even used as a verb to describe a phone call over the Internet, as in â€œSkype me.â€
The seven-year-old company, however, is still a work in progress on the financial front. It was sold to eBay, then taken private and now aims to complete the round trip with an initial public offering.
Under its new chief executive, Tony Bates, Skype is seeking new ways to make money from its 124 million users, most of whom do not pay a cent. In particular, Mr. Bates is looking at possible new markets like corporate phone systems and mobile devices, both highly competitive.
Skype, based in Luxembourg, recorded $406 million in revenue in the first six months of the year, up 25 percent from the period a year earlier, according to the companyâ€™s recent filing with the Securities and Exchange Commission. Net income was down 42 percent, to $13 million.
The increased revenue is coming from users making more paid calls. But that success is modest given Skypeâ€™s widespread adoption by consumers. Only 6.5 percent of Skypeâ€™s users pay to make calls from their computers to landline and mobile phones. The vast majority call only fellow Skype users, which is free.
Those free users have some value, said Charles Golvin, an analyst for Forrester Research. But converting them to paying customers has proved difficult, which, he said, will weigh on any public offering.
â€œI find it hard to understand why an investor would feel enthusiastic about owning that stock when the prospects for revenue growth are dim,â€ he said. â€œThey may be growing revenue, but itâ€™s not like its growing to billions of dollars.â€
Mr. Bates, who is originally from England, came to Skype in October from Cisco Systems, where he led its enterprise, commercial and small business division. In his first interview as chief executive, he described himself as a fan of Skypeâ€™s complex infrastructure, which handled 25 million users simultaneously last month, the most in its history.
The service came to his rescue, he said, while at a lodge in Alaska. Rather than waiting in line to use the lodgeâ€™s only phone, he took out his cellphone, connected to the lodgeâ€™s Wi-Fi and used the Skype app to check his messages.
â€œUniversal, and useful and wonderful â€” theyâ€™re the things that Skype can do,â€ Mr. Bates said. â€œTheyâ€™re not easy to do on a global scale.â€
Because Skype filed its initial offering document in August, Mr. Bates is limited in what he can say about future products and the companyâ€™s financial performance under rules governing company quiet periods. But he said that Skype could offer more premium phone and video services. He also spoke of the possibility of Skype embedding its service with other Web companies to accelerate growth.
In October, Skype introduced a feature that allows users to get their Facebook news feed directly in their computer monitorâ€™s Skype window and to call Facebook friends who are Skype users.
Cellphone users complain that Skype has been slow to release new products. For instance, Skype has yet to make video chat available on mobile phones, except on a single Nokia handset. The company says it is working on video products. Skype also waited until October to introduce its Android app, long after Android had become one of the top smartphone operating systems.
The company does have to deal with its legacy. Skype was founded in 2003 by Niklas Zennstrom, a Swede, and Janus Friis, a Dane, as an online alternative to the traditional telephone companies and their expensive rates. Users quickly embraced the service, positioning Skype as a major communications company of the digital age.
EBay acquired Skype for $2.5 billion five years ago. It hoped to use the service so buyers and sellers in eBayâ€™s marketplace could talk to each other. However, the combination, which was supposed to increase sales, failed because eBay users preferred to communicate as they had always done â€” by e-mail. EBay sold about 70 percent of Skype last year to an investor group led by Silver Lake Partners for $1.9 billion.
Skype has said that it hoped to raise $100 million in the public offering, although the amount is expected to change.
Free service is synonymous with Skype, but only to consumers. Mr. Bates said he believed corporations would pay for an Internet service that cut their phone costs while also giving them an easy way to conduct video conferences, to use instant messaging and to communicate with customers.
â€œThe world previously looked very much like there was a business world and a consumer world,â€ Mr. Bates said. â€œTheyâ€™re blurring very quickly.â€
To entice companies, Skype has partnered with Avaya, a major seller of corporate phone systems, to get its bundle of products to businesses that use Internet-based systems. Skypeâ€™s video and instant messaging is to be added to the bundle next year. About 38 percent of corporate phone lines are enabled for Internet calls, according to Frost & Sullivan, a market research firm.
But persuading managers in charge of corporate phone systems to use Skype is difficult, said Melanie Turek, an analyst with Frost & Sullivan. Entrusting a newcomer like Skype with something as important as a companyâ€™s phone service is considered risky. â€œMost organizations are going to say, â€˜Yeah, Iâ€™ll believe it when I see it,â€™ and â€˜Iâ€™m not really going to look at Skype very hard,â€™Â â€ Ms. Turek said.
Mr. Bates also wants to put Skype on mobile devices, but mobile carriers are wary of Skypeâ€™s plans. Skype could undermine wireless businesses by enabling consumers to circumvent the carrierâ€™s network and make free or cheap calls using Wi-Fi or their wireless networks. â€œThey have this love-hate relationship,â€ Arlo Gilbert, chief executive of iCall, a Skype competitor based in Greenwich, Conn., said of the wireless companies. â€œThey think the old way was great.â€
Last year, AT&T refused to allow iPhone users to make Skype calls over AT&Tâ€™s 3G wireless network. AT&T eventually relented after intense criticism by consumer groups. Mr. Bates points to Skypeâ€™s partnership with Verizon Wireless as an example of how Skype and carriers can get along. Verizon offers more than two dozen phones that are compatible with Skype, about half them sold with Skypeâ€™s mobile app already on the phone.
Calling fellow Skype users with the mobile app is free. Users who make domestic calls to non-Skype users are charged against their Verizon planâ€™s minutes. International calls are billed at Skypeâ€™s usual international rates.
Under the agreement, Verizon routes all Skype calls over its network while blocking calls over Wi-Fi, except for calls made from abroad. Verizon said the decision was based on ensuring good sound quality, not to maximize profits.
â€œWe could have continued to compete,â€ said Jennifer Byrne, executive director for business development at Verizon. â€œWe are both in the voice business, but there are also ways we could work together.â€