Skype’s Anti-competitive Uneconomics

April 2, 2009

There are two primary problems with eBay-Skype’s attempt to get the Government to force competitive wireless providers to carry Skype’s free communications app under the guise of wireless net neutrality and Internet openness; first, it is wildly uneconomic, and second, it is anti-competitive.

  • The issue has surfaced in the news (USAToday, WSJ) as Apple enabled a Skype app on the iphone for use on free public WiFi networks, but not on the iphone’s commercial network provided by AT&T; and again when Google’s Android banned a tethering app because it violated T-Mobile’s terms of service as reported by CNET.

I. Skype’s .2% Uneconomics

What is uneconomics? Just what the term implies, not economic, unsustainable… arbitrage.

Skype, has long been seeking a government ruling that its free communications app should be usable on its competitors’ commercial wireless networks with no payment necessary by Skype users or payment by Skype to wireless providers for providing Skype with commercial network services. Its justification has been its interpretation of net neutrality and the FCC’s Broadband Policy Principles, that Internet openness should mean Skype should be able to be used on commercial wireless networks without permission from, or payment to, wireless providers.

Let’s unpack the core microeconomic numbers behind Skype’s uneconomics.

  • At the end of 2008, Skype had 405 million users that generated $550m in revenues — generating $1.36 per user per year, or 11.3 cents per user per month in revenues (RPU).
    • $550m/405m = $1.36… $1.36/12 = $.113
  • At the end of 2008, according to CTIA, the U.S. wireless industry had ~270 million subscribers that generated ~$151 billion, and had average revenue per user of $50.07 per month (RPU). (Since 2000, wireless subscribers monthly bills have remained roughly flat while minutes of use have increased over 700%.)
    • On that revenue base, the industry:
      • Invested $21.1b in infrastructure/spectrum in 2008, for a total cumulative capital investment since inception of $265b;
      • Provided 268,528 direct jobs that pay significantly above the national average comparables (this is an increase of 46% or 84,079 jobs since 2000); and
      • Contructed and operated 242,130 cell sites (this is an increase of 132% or 137,842 since 2000).
  • Now let’s compare the business/economic models of Skype vs. wireless providers.
    • Skype generates $.113 in RPU to competitive wireless carriers $50.07.
      • That means competitive wireless carriers produce 443 times more RPU than Skype.
      • That also means Skype’s RPU is .2% of wireless providers’ RPU.
  • For illustrative purposes only, lets now assume Skype’s .2% uneconomics were somehow forced on the U.S. wireless industry (which already is arguably the most competitive in the world)and Skype’s business/pricing model became the new business model and pricing point at which U.S. wireless providers had to offer services. Looking at it another way, if Skype’s business model became the Government’s new economic benchmark to beat, and we take Skype’s .2% uneconomics to its logical extreme, that would mean a 99.8% reduction in wireless:
    • Revenues from $151b to $300m, a reduction of $150b from the economy, much more with a normal macroeconomic multiplier; and
    • Employees from 268,528 to 537, a reduction of 267,990, much more with a normal macroeconomic multiplier.
  • For those who think this comparison is extreme, it is not, I was actually generous to Skype.
    • The comparison/ratio is actually about four times worse for Skype, because for the comparison above, I attributed all of Skype’s meager revenues to the U.S. when eBay reports that only 20% of Skype’s revenues are actually generated in the U.S. ($110m of 550m). (See page 9 of this eBay release.)

The point of this illustration is to spotlight the extreme uneconomics of forcing Skype’s Internet arbitrage business model on the competitive commercial wireless industry.

II. Skype’s Anti-competitive Problem

In proposing that wireless economics should be mandated to adapt to Open Internet uneconomics where the expectation and right is not to have to get permission from anyone or pay anyone to do something on the Internet, Skype is basically taking a public policy position that is anti-competition policy, and hence logically anti-competitive.

  • To the extent that the FCC’s most recent data and assessment of the wireless industry is even remotely accurate, the U.S. enjoys one of the most competitive wireless markets in the world.
  • It is still attracting over $20b in annual captial investment and is still growing and adding products and services all the time.

In proposing .2% uneconomics, Skype is really proposing a system that is not competitively economic or sustainable.

  • The only way Skype’s proposal could work is if the Government reversed longstanding bipartisan policy in support of competition and replaced it with a government utility model, which would require very heavy governmental subsidization.

In sum, the point of this analysis was to expose the economic irrationality and unworkability of imposing Skype’s vision and economic/business model of an Open Internet on the U.S. wireless industry.

  • At core, Skype’s vision is uneconomic and anti-competitive.
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