Analysis: Skype, better with Facebook than Google?

NEW YORK Fri May 6, 2011 7:33am EDT

Zubair Ghumro speaks to his friend Sheeraz Qazalbash using Skype software at an internet cafe in central London August 10, 2010.REUTERS/Paul Hackett

Zubair Ghumro speaks to his friend Sheeraz Qazalbash using Skype software at an internet cafe in central London August 10, 2010.

Credit: Reuters/Paul Hackett

NEW YORK (Reuters) - As two Internet powerhouses slug it out to tie the knot with Skype, Facebook looks likely to be a more aggressive suitor than Google, and the world's largest social network may make for a better fit.

Reuters reported Wednesday that Facebook and Google are separately weighing partnerships with Skype, the popular web video telephony service used by millions around the globe for communication.

Talks with Facebook and Google are still preliminary, but any deal could involve an outright takeout or a joint venture partnership, two sources told Reuters.

A deal involving Skype, which is readying for an IPO, could be valued at $3 billion to $4 billion, the first source said. Skype's public offering is expected to raise about $1 billion, several other sources said.

Analysts and technology observers are betting on Facebook, in the belief the two make better companions and that Skype completes Facebook by providing assets it does not have.

"It's not surprising to me that both these companies are interested," said Eric Jackson, founder and manager of the investment firm Ironfire Capital. "It's a much more valuable asset to Facebook than to Google."

Google already has voice chat and video capabilities, though Skype is a more robust product, said Rory Maher, an analyst with Hudson Square Research.

It could incorporate Skype into Google Voice, and even get some social-media credibility after it failed in an attempt to do so with Buzz.

"There are benefits that Google has from combining Skype, but I think it's less clean than it is for Facebook," says Maher.

Conversely, Facebook has that much more incentive to snap up Skype because it would encourage people to spend more time on the site than they already do -- virtually the social network's raison d'etre.

"Communication is core to what Facebook users do," said Mo Koyfman, a principal at the venture capital firm Spark Capital. "Owning that platform would be very interesting."

Google, Facebook and Skype declined to comment.

THE ART OF SKYPE

Skype is still on track for an IPO later in 2011, raising as much as $1 billion by some estimates. That it has become the belle of the ball, attracting the interest of the Internet's two most dominant powers, bodes well for its debut.

Last year, Skype boasted about 124 million connected users every month by the end of June. But just 8.1 million were paying customers, using Skype to make calls to traditional phones at discounted rates.

The company was founded in 2003 and bought by eBay two years later for $3.1 billion. Ebay then sold a majority stake in Skype to an investor group in 2009, while keeping about a third of the company.

Now, both Skype and Facebook could tap new users worldwide while Facebook stands to gain a new revenue stream, Koyfman said.

Facebook had net income of $355 million in the first nine months of 2010 on revenue of $1.2 billion. It is one of a handful of Internet companies including Twitter, Groupon and Zynga that have stoked interest from investors eager to jump on the social media bandwagon.

And it has also put the big Internet guns -- including Google -- on alert.

Indeed, some speculate that Google could be bidding for Skype just to keep it out of the hands of other companies.

"Any deal that takes a great asset away from Facebook is a win for Google," suggested Ironfire Capital's Jackson.

(Reporting by Jennifer Saba; Editing by Edwin Chan and Steve Orlofsky)

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