Tuesday, August 10, 2010

Video Chat CAN Be Profitable -- We Proved It at SightSpeed

The tech and financial community are abuzz with the news that Skype has filed for a $100 million IPO. The company has demonstrated significant growth over the past year -- for the first half of this year, the company generated $406.2 million -- up 25% from the year before. BUT, nearly all of Skype's revenues (87%) come from one product -- SkypeOut calling -- which will be challenged over time by other PSTN calling service alternatives (i.e., public switched telephone network). This dependence on one primary revenue stream should give any future investor pause.

Skype, however, thinks it can change that dependence by monetizing other new services, including its new multi-party video chat. Although video chat already tantalizingly accounts for 40% of all Skype calls, some pundits -- including Ryan Lawler of NewTeeVee -- doubt that money can ever be made in video chat.

To those doubters, I can tell you "Yes We Can!" How can I be so sure? Because we at my former company, SightSpeed (widely recognized as being the video chat leader and later acquired by Logitech), proved it. We made money solely on video chat -- in fact, we became profitable solely on video chat.

How did we do it? With multiple revenue streams, that's how.

First, we -- like Skype plans to do -- offered both free and paid upgraded video chat services. A primary driver for purchasing the paid upgrade was, in fact, multi-party video chat. Multi-party video chat is essential for many small-to-medium business users for purposes of collaboration. Second, for those users who did not upgrade to the paid service, we monetized with a combination of advertising and paid search via an installable tool bar -- specifically, via our partnership was with Ask.com, we received a portion of revenues generated by any web searches using that toolbar. Third, we developed customized video chat applications for strategic partners -- including Dell -- and monetized those accordingly.

And, this all happened before Logitech acquired SightSpeed.

Logitech subsequently bundled our video chat services (now called "Vid") with every webcam it sold -- the goal of which was to offer a seamless customer experience out of the box and, hence, increase customer satisfaction and word-of-mouth. In other words, to sell more webcams. Logitech's strategy in this regard borrowed a page from Apple, which has proven time and time again that seamless integrated software services generate more hardware sales (case in point -- iPod/iTunes). And, has Logitech been successful to monetize video chat in this way? Absolutely. Logitech's webcam numbers have grown materially since the SightSpeed acquisition.

Bottom line -- yes Virgina, money can be made in video chat. And, the utility of -- and demand for -- high quality and affordable video chat is only growing.

Does that mean I would invest in Skype's IPO?