How to value Skype at $3.5bn and LinkedIn at $7bn

We compare Google's valuation to Skype's and LinkedIn's. For Google, we look at market expectations, for Skype and LinkedIn we use the IPO-filings information. Our valuation metric is a variation of the PEG ratio, i.e. we compare price to some form of earnings (gross result and result after product development/R&D).

First Google. We see that the ratio of price (EV) to earnings (gross) to growth is around 0.33, while price (EV) to earnings (after R&D) to growth is 0.40.

Now, we look at Skype. To arrive at a similar valuation and assuming a value of USD 6 billion, you can see that we need to put in some very solid revenue growth (26%) and a limited product development cost rise (36%). If we use growth rates that appear to be more plausible, valuation needs to be brought down to USD 3.5 bn in order to match Google's valuation.

Finally LinkedIn. We look at two scenarios: in the first, we assume that growth will fall off from the extremely high 2010 levels. We then see that we need a USD 7 bn valuation to match Google's valuation. Alternatively, we assume a USD 2.4 bn valuation (which is what SharesPost.com currently states) and play with the growth rates to match Google's valuation. What becomes apparent is that growth can be allowed to drop much further from the 2010 levels.

Conclusions:

• Skype: a USD 6 billion valuation appears to be a bit high; USD 3.5 bn seems to be more appropriate, based on the assumptions above.
• LinkedIn: a USD 2.4 bn valuation seems to be quite low; the company could be aiming for something in the order of USD 7 billion, again: if the assumptions above hold.

FTTH and LTE help increase focus on wholesale

Three weeks of holidays create a truck load of catching up to do. Results, LTE, MVNO, FTTH, VoIP, WiMAX - every possible new item crossed our mail boxes. They can best be categorised at the next higher level: Corporate, NGN, Wholesale and OTT.

Corporate:

• Results: incumbents (KPN, DT, BT, Telefonica, Belgacom, FT, Bell Aliant), mobile (Sprint), cablecos (Liberty Global, Telenet, Ziggo, Virgin Media, ONO, Comcast).
• Financing: Reggefiber got its desired EUR 130m loan from the EIB.
• IPO: Skype's $100m plan.
• M&A: possible buyers (Telefonica, PT, Vodafone, FT, TI) and sellers (PT, TI, Vodafone).

NGN:

• FTTH: lots of deployments announced (inclusing China and India).
• NBNs and NBPs: Australia expands coverage plans to 93%, New Zealand receives 15 bids, the US awards another round of funds.
• LTE: several deployments announced.
• 4G: Clearwire moving closer to switching from WiMAX to LTE and the WiMAX2 standard gets ready for a 2012 launch.
• 1 Gbps: several MSO and telcos are now going beyond 100 Mbps, while ever more are eying 1 Gbps as the new frontier for bandwidth.

Wholesale:

• Structural separation: proposal from Telecom NZ in order to be able to bid for the Crown Fibre plan.
• MVNO: KPN reports success with foreign MVNO operations (2G, 3G); Econet plans launch on the Everything Everywhere network (3G); Best Buy will do the same on the Clearwire network (WiMAX); Airspan is LightSquared's first wholesale customer (LTE); Tele2 NL started offering CATV on the networks of Ziggo and UPC (analogue TV); Chile considers a wholesale-only network (mobile and digital TV).
• BT was not allowed to raise wholesale prices to help stem the pension fund deficit.

OTT:

• Apps: Google ended the development of Google Wave and acquired Slide; Samsung announced a developer contest.
• Net neutrality: Google and Verizon struck an agreement.
• Hybrid TV: Apple was rumoured to rework Apple TV into iTV, Cox partnered with TiVo and the Virgin UK/TiVo partnership added Cisco.

Conclusions:

• The focus in the sector is shifting to Wholesale and OTT; FTTH and LTE are ongoing; wholesale is established as an important new business.
• M&A is focused on emerging markets, esp. Latam.
• Many incumbent telcos are still assembling global empires in order to be able to show growth. KPN is continuing on the wholesale path for growth.
• A telecoms network can be looked at as a vital piece of national infrastructure. If structurally separated, its cash flows can be seen as a vital element of the governments budget (incl. retirement funding).
• Cablecos are outperforming telcos. If you split the business three ways, it becomes clear why. 1. Connectivity (access): Docsis 3 outperforms xDSL and provides cable with a growth engine. Utility rates are close to 80% in the Netherlands, still much higher than FTTH's. 2. Communication: a nice add-on for growth and loyalty, hitting incumbent telcos in their hearts. 3. VAS (incl. content): here cable is the incumbent and benefits from a considerable head-start on multiple fronts (network, digital services, content deals). The foremost risks include FTTH and non-linear TV/hybrid TV/OTT.
• NGNs (FTTH, LTE) are exploring their advantages: 1. Maximum symmetrical bandwidth. 2. Lowest opex, highest score on the green scale. 3. Options for open access and wholesale.
• OTT is a complex and uncertain field, but hybrid TV seems to be a promising direction.

Final conclusion: while areas such as Latam may provide telcos with some more growth, wholesaling (open access) appears to be the way to maximise the value of a network. FTTH and LTE carry the lowest possible technology risk. OTT is a promising but complex development.

Skype faces legal proceedings

Skype could be facing a rough month of March, as per the recent 10-K filing (page 32-33). If a lawsuit is filed, we will know who (and which technology) this third party is.

Skype licenses technology underlying certain key components of its software from third parties it does not control, including the technology underlying its peer-to-peer architecture and firewall traversal technology and the video compression/decompression used to provide high video quality. Although Skype has contracts in place with its third-party technology providers, there can be no assurance 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, or at all. The loss of, or inability to maintain, existing licenses could result in a decrease in service quality or loss of service until equivalent technology or suitable alternatives can be developed, identified, licensed and integrated. While we believe Skype generally has the ability to either extend these licenses on commercially reasonable terms or identify and obtain or develop suitable alternatives, the costs associated with licensing or developing such alternatives could be high and the technical challenge of assuring “backward compatibility” with older versions of Skype’s technology may be difficult to overcome. Any failure to maintain these licenses on commercially reasonable terms or to license or develop alternative technologies would harm Skype’s business. Skype and one of its licensors are currently attempting to resolve a dispute concerning certain key licensed technology. The parties previously entered into a “standstill agreement” to allow further time to resolve the dispute without the possibility of immediate litigation. While Skype is continuing to attempt to resolve the matter, in February 2009, Skype terminated this standstill agreement, and either party may commence a lawsuit against the other party beginning in March 2009. Although Skype is confident of its legal position, as with any litigation, there is the possibility of an adverse result if the matter is not resolved through negotiation. In such event, continued operation of Skype’s business as currently conducted would likely not be possible.

And then there are these long-standing issues (pages 41 and 42):

Skype is in the process of applying to register the Skype name as a trademark worldwide. In the EU, Skype’s application is being opposed. If these oppositions to Skype’s applications were to be successful, Skype’s ability to protect its brand against third-party infringers would be compromised. We have licensed in the past, and expect to license in the future, certain of our proprietary rights, such as trademarks or copyrighted material, to others. These licensees may take actions that diminish the value of our proprietary rights or harm our reputation.

In June 2006, Net2Phone, Inc. filed a lawsuit in the U.S. District Court for the District of New Jersey (No. 06-2469) alleging that eBay Inc., Skype Technologies S.A., and Skype Inc. infringed five patents owned by Net2Phone relating to point-to-point Internet protocol. The suit seeks an injunction against continuing infringement, unspecified damages, including treble damages for willful infringement, and interest, costs, and fees. We have filed an answer and counterclaims asserting that the patents are invalid, unenforceable, and were not infringed. The parties have completed claim construction briefing and attended a pre-trial conference hearing. The claim construction hearing is set for March 2009 and the trial date is not yet set. We believe that we have meritorious defenses and intend to defend ourselves vigorously.

Skype sale limited by Silicon Valley clusters

Skype was probably rumoured to be for sale the day after eBay bought it. Recently, at the Q4 analyst meeting, new speculation found furtile soil. I added a little myself.

There is an interesting case for incumbents to take a look at Skype (which neither is a very new idea). Not only would they buy back some lost revenues, but they would also expand internationally (including emerging markets, where they all want to focus their investments at this point - talk about following the crowd). I particularly like the option to buy an international brand name that could be extended to include other services (such as operating the services and the active layer in FTTH networks throughout Europe).

A very valued reader pointed me to a limitation regarding Skype's sale. It has to do with how Silicon Valley seems to work. Apparently, development activity in Silicon Valley is grouped together in a number of clusters, and the sale of proprietary technology that Skype sits on may be limited to companies within the cluster. It could possibly even be a little more pronounced than that: the technology (check out this 1998 company and see what has become of it) serves as the basis for VC groups to set up a range companies. In Skype's case: the Joltid Global Index sofware was first used for Kazaa, then for Skype and next for Joost.

I'm not quite sure how these clusters are formed, but supposedly there is one around Redmond (Microsoft - don't mind the exact geo location), one around Palo Alto (Sun) and one around Stanford (Google, Yahoo!, eBay). This seems to preclude a sale to anything like a European incumbent. But how about KPN - doesn't its iBasis subsidiary have a deal for SkypeOut?

New Research Brief: Skype for sale?

Today my employer publishes a Research Brief on Skype. It elegantly counts 7 pages, 7 paragraphs and 7 tables.

Paragraphs:

1. Skype may be up for sale
2. Skype is an established VoIP player, with an extensive product range and ecosystem, but is not a primary line service
3. Usage growth outstrips user growth, but revenue growth lags behind
4. Revenue growth disappointed from 2006, but the margin has reached an estimated 17%
5. The network effect delivers high growth, but revenues from SkypeOut could be in danger
6. European incumbents could expand internationally on the wings of Skype
7. Google-like growth would imply a USD 600-700 million valuation
   

Tables:

1. Skype products
2. Selected embedded technology partners
3. Selected distribution partners
4. Users, usage and year-on-year growth rates
5. Revenue, year-on-year growth rate and usage
6. Short P&L
7. 2008 Results, market capitalization, total enterprise value and multiples

Some thoughts on KPN's vertical integration

Amsterdam finally published the Phase 2 plans, with the KPN/Reggefiber joint-venture, for its munifiber Citynet network. Phase 1 included 43k homes. Some notes:

• No timescale for the 100k homes, let alone the final 250k ones.
• I asked Ad Scheepbouwer about his views on KPN's stake in the passive layer. It has an option to acquire a majority in the Reggefiber joint-venture, but it could also allow it to dilute by raising third-party funding and ultimately get out of the infrastructure business altogether. Alas, Ad keeps his options open at this time. Reggefiber, for that matter, has no ambitions whatsoever to become a service provider (they do have a stake in the XMS joint venture with BBned).
• I liked mayor Job Cohen's referral to earlier PPP projects: the Amsterdam banking industry (400 years ago), the North Sea - Amsterdam channel, Schiphol airport and the wildly interesting AMS-IX.

KPN will also be operating the active layer (BBned is the active operator on the Phase 1 section), and be service provider as well. In other words, it will be a vertically integrated operator/provider once more. No exclusivity in the active layer, though (which BBned has). Some more notes:

• It remains to be seen if it works. The regulator should monitor KPN's actions (pricing) very closely.
  
• Will only SPs compete, or will there be alternative active operators as well? In the Phase 1 areas, competition is limited to SPs, because of BBned's exclusivity. However, the number has gone down drastically, and two (Alice and InterNLnet) are owned by BBned itself. Is there no interest in competing in the services layer only?
• Competing in the active layer is a lot more expensive, but I believe this is equivalent to LLU investments in the DSL world (cutting out the wholesale payments to KPN to improve the business case). This implies two things: 1. You need scale. 2. Since FTTH is the end game, there is no risk of becoming obsolote (which has happened to LLU operators, who were subsequently hoovered up by KPN). In other words: a new entrant, operating the active layer (and bringing its own SP) could alter the Dutch landscape dramatically. I see a big opportunity for other incumbents to first buy BBned (it's for sale!) and then expand.
  
• Obviously, some things stand in the way of operators expanding into the Netherlands: 1. The global financial crisis, 2. focus on expansion into emerging markets.
• Still, there is also a case for European incumbents to enter the Netherlands as service providers only: find some extra growth from an infrastructure-light approach, get experienced in an open access FTTH environment, hurt your competitor (KPN), etc. Now, of course you would ideally need a good brand name to make such a move. KPN is expanding Simyo (its MVNO) across Europe, which could serve as a mobile equivalent. How about Skype (it seems to be for sale ...)? It could be used as a vehicle for any incumbent and subsequently be enhanced with new products, turn it into a pan-European SP (and next get into the active layer).
  

Cool news: FTTH, M&A, SMS, products and services

Here is some recent and noteworthy stuff, with just a few words of my own:

FTTH:

• Gaining a lot of momentum. I just updated my private litle database, a Google spreadsheet that you can also access on the right (under 'Fiber Ring').
• Of note: OEN (Houston) closes its network, SureWest may buy the assets.

Takeover speculation:

• DT is checking out EDS. Will DT be the big new consolidator? DT is also interested in 3's European assets.
• Google is weighing Skype.
• TI is looking to exit France, Iliad is interested.
• Several operators are mysteriously selling international mobile assets, or are putting them at an arm's length: PT and its Africa Holdings, Telmex and its Telmex Internacional, Telekom Malaysia and its TM International. Vodafone is interested in the latter, as well as in Vodacom. And Tele2 is still busy buying and selling things.

Cool new products:

• Everex is launching a Google-friendly PC, the Green gPC, with Google apps pre-loaded or given easy access to. I suppose that is an 'asset-light' entry into the PC-market.
• Amazon Kindle, Kindle Store and Whispernet. Many comments widely available. Connectivity is included - very much a Telco 2.0 strategy. A European launch will be hampered by lengthy negotiations with operators.

Cool new services:

• Celtel in Africa is launching 'One Network', essentially a roaming deal turning 12 networks into one. Calling at local rates, automatic activation, no sign-up or fee.
• Cox is stretching its network towards 1 Gbps bandwidth.
• BT is negotiating e-health business opportunities in Qatar and neighbouring states. I think e-health is a multi-billion opportunity, where many participants meet. That will allow operators like BT to become the center of an ecosystem.
• Jajah is launching an opt-in service where advertisements replace ring-back tones. They say it takes an average 12 seconds before people answer a call. I suppose they will not allow competitors into the advertising network.

Ever new SMS-based apps:

• Zain launched automatic translations (Arabic/English).
• SpinVox enables voice-to-text conversion and has a deal with Skype: a voice message will be converted into an SMS. Also several operator deals (Alltel, Vodacom, Telstra a.o.).
• Kajeet, an MVNO on Sprint, launched 'Feeds': entertainment and information pushed to the user as an SMS, at 10 c/SMS.
• Mobile payments using SMS, e.g. Safaricom in Kenya and Base in Belgium. Proximus (Belgium) launched public transportation ticketing by SMS.
• KPN's 'flirting service' olllo uses SMS (priced at 55 cents!).

Vodafone launches innovative web phone in Portugal

Vodafone Portugal launched 'Vodafone web phone'. It's a download to your PC, which is assigned a mobile number. Through it, you can IM, voice/videocall, SMS and MMS.

Some of it looks new to me:

• Vodafone essentially launching a Skype/MSN/AIM-like VoIP-service.
• Allows calling to and from mobiles, the PC mimicking as a mobile phone. Interesting in countries where SkypeIn is not offered (such as the Netherlands; SkypeIn so far is offered in just 15 countries). Tariffs of course are mobile tariffs.

I'm not sure what the technology is (most likely Microsoft). On-net and PC-to-PC calls are free of course, as any non-Portuguese speaker can understand from the demo.

HARDWARE://Implications from Apple

Apple introduced the iPhone (with Cingular), Apple TV and AirPort Extreme. I am sure they will be widely covered in the blogosphere; I will be short.

Here are my questions and remarks:

• Will the user interface (touch-screen, one button) really work well?
• Why is the deal with Cingular exclusive and multi-year? (The Verizon Wireless/YouTube deal is exclusive for only a limited period of time.) What did Cingular/AT&T offer to get this deal from Apple?
• The iPhone seems an expensive gadget (for now?), therefore addressing a limited market - unless Cingular offers a big subsidy. Apple did the same for Mac and iPod, so that is OK. What puzzles me is that the 8 GB product is a full $100 more expensive than the 4 GB handset.
• What will the Cingular service plan look like, especially the data part? Will they go the Hutchison/X-Series way?
• It lacks UMTS (for now?). Apple seem to be commiting to the GSM-world anyway.
• It has a 2 MP camera, which I personally consider too limited for competing against standalone digital cameras.
• How will the iPod hold up against the iPhone?
• Has a deal been worked out with Linksys/Cisco for the use of the iPhone brand?
• Who will be partners in Europe and Asia?
• Apple follows the divide-and-conquer road, allowing both Yahoo! (push email, search) and Google (Talk, Maps, search) on the iPhone. Skype is a notable absent (but now there is iSkoot - Symbian only, but that will change and could include the Apple OS?), but Jajah has stated that it will be compatible.
• Will there be any truth in Eliot Van Buskirk's rather compelling case against iTunes?
• The AirPort uses the hip draft-11n standard.
• Apple TV ($300) must hurt Sling Media's new SlingCatcher (which will be cheaper at < $200), as well as Orb (free).

UPDATE (Jan 11):

• UI: see David Pogue in the New York Times
• Price points already include Cingular subsidies, so it seems.
• Cisco is suing over the iPhone name.
• It looks like it will be a closed system: no downloads of any VoIP clients (Jajah needs no dwonload).

UPDATE (Jan 22):

• iSupply calculates the cost of the $500 handset at $246. The 4GB NAND flash memory costs $35, the 8 GB costs $70.
• Telefonica's O2 is rumoured to be a partner in Europe.
• The draft 11n standard gained support at the IEEE, but full ratification is not expected until April 2008.