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The New Economy

Skype: Will investors buy if customers are hooked on free?

Skype, the Internet calling service, is launching a $100 million IPO. But most Skype customers use the service for free.

By / August 10, 2010

In this 2009 file photo, the Skype Web browser is shown on a computer screen in Palo Alto, Calif. Skype SA, the Internet calling service, filed Monday for a US initial public offering. Luxembourg-based Skype tentatively put the value of the offering at $100 million.

Paul Sakuma/AP/File

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Skype said Monday it's going public and hopes to raise $100 million from investors in the stock market.

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This has venture capitalists salivating.

Everyone knows Skype, the company that offers free- and nearly free calling around the world. It's base of connected users grew 40 percent last year; net sales are up 25 percent from the first half of last year to the first half of this year. If Skype can launch a successful initial public offering (IPO), that will prepare the way for Facebook and other high-powered high-tech wonders to sell shares in coming years.

But skeptics note a problem: Practically all of Skype's active customers use the service for free. And that share of nonpaying customers is edging up. It was 91 percent in 2007; more than 93 percent now.

To its credit, Skype is actually turning a profit (before extraordinary one-time charges) because of that small base of paying customers. They pay a small fee to connect a Skype call to landline phones rather than another Skype-enabled computers. That's far better than the wanna-be public companies of the dot-com bubble who had no profits (and barely any revenues).

Still, it's not exactly encouraging when a company says its share of paying customers is going down.

In its filing for the IPO, Skype laid out four strategies for growing its base of paying customers, including new marketing initiatives and strategic relationships, new features and paid products, promotion of its subscription service, advertising, and a push to provide communication services to businesses.

All these are valid plans, which lots of other companies and industries are pursuing.

Can Skype pull it off? In this era of diminished expectations, it's a definite maybe.

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