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Skype: Fear and loathing in Cupertino, Mountain View

Ditches MySpace warns on patents and Apple

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Analysis Skype’s IPO has revealed some interesting nuggets about the voice network provider’s intentions and fears as it looks to make an initial public offering of its shares. Chief among them are its decision to ditch MySpace and expressions of concern about Google and Apple.

“We believe that users that have registered through MySpace are infrequent users of Skype products,” noted the company in today’s filing with the US Securities and Exchange Commission.

Skype said it increased its average monthly connected users from 91 million to 124 million in the three months ended 30 June this year. At the same time its average monthly paying users grew from 6.6 million to 8.1 million.

However, only one million of these registered users connected to Skype, after signing into their MySpace account.

“We have notified MySpace that we do not intend to renew our contract arrangement with MySpace, through which users can register through MySpace, when it expires on November 27, 2010,” said Skype.

“It is currently uncertain whether users that connected to Skype through MySpace will continue to do so following the expiry of this contract.”

MySpace first agreed to let eBay's relatively short-lived IP telephony outfit plaster its pages with click-to-call buttons in October 2007. It went live in November that year, and the two companies inked a deal to share revenues in an undisclosed carve-up.

A now emboldened Skype obviously feels that MySpace isn’t doing enough heavy lifting in the sales department to justify keeping their relationship ambling along. Hence, the News Corp-owned social network is now getting the boot.

Elsewhere in Skype’s IPO filing, the firm expressed fears about its intellectual property rights.

“We licence technology for certain elements and other components of our products from third parties, including the VP7 video compression/decompression technology, which we have licensed from On2.”

Google of course finally bought On2 Technologies in February this year in a deal valued at around $124.6m.

“The VP7 video compression/decompression technology is used to provide high video quality. There can be no assurance that disputes will not arise as to the scope of a relevant license or the terms of our use of a particular technology or that the licensed technology or other technology that we may seek to license in the future will continue to be available on commercially reasonable terms, if at all,” said Skype.

The company is also worried about being unseated by what it described as the “application store owners” who “have ultimate control over the products and services made available through their channels”.

Apple and other potential rivals could walk away from Skype if vendors view the VoIP provider as a competition threat.

“For example, although our application for the Apple iPad, iPhone and iTouch is currently enabled to make voice communications over 3G networks, Apple or its carrier partners may choose to alter the terms of inclusion in its application store, effectively withdrawing this functionality at any time or develop competing applications, such as Apple Face Time, that may better integrate with Apple’s devices,” said Skype in the filing.

So in effect, the company has a battle on its hands even to remain relevant in the tech landscape up against the likes of Google and Apple. So will the IPO – the number of shares on offer and the price range for which have yet to be revealed – make a difference?

In the first six months of 2010 it pulled in net sales of $406.2m and net income of $13.2m. Skype scored 2009 revenues of $719m, but also lost $99m in the same year.

At the end of the firm’s last quarter, Luxembourg-based Skype reported $727.9m of debt outstanding on its books under its amended five-year credit agreement.

So the company, while something more of a cash cow now, certainly doesn’t come without risks attached. And that fact perhaps best explains why the IPO’s top page figures remain shrouded in mystery for now. ®

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