The Skype's the Limit

Last week, News Corp. (NYSE: NWS  ) figured that it would be able to pull another new-economy rabbit out of Rupert Murdoch's hat. Just a month after announcing that it would be acquiring Intermix (AMEX: MIX  ) to land social networking site MySpace.com, it was revealed that Murdoch's company was talking to Skype about a buyout.

With a $3 billion price tag being batted about, it now seems as if Skype's most likely course is to test the market's open waters and go public. It is now in talks with Morgan Stanley to discuss its next move.

What is Skype? Why did Murdoch want in so badly? What will it all mean to you? If you don't know the answer to all three questions, look alive. That's where I'm going next.

What is Skype?
Voice over Internet Protocol -- or VoIP -- has been a busy buzzword lately. Providing telephone service through Web-enabled broadband accounts has proved to be a popular option for thrifty chatterboxes. You may be familiar with Vonage, offering unlimited phone calls to the United States, Canada and Puerto Rico for a mere $24.95 a month. The company has signed up 800,000 users and counting. Traditional dial-up telcos are also getting in on the act, and you can't really blame them. This is their potential obsolescence we're talking about.

Skype is different. It's free. Rather than relying on a network of regional data centers and local rate centers to route your calls to cell phones or landlines, Skype calls are absolutely gratis when they are placed from your Internet connection to another user online. Odds are that you won't have a shortage of people to talk to -- the free software has been downloaded 148 million times. That's not too shabby for a company that wasn't even around two years ago.

If you haven't heard of Skype, it's because the Luxembourg-based company has a more prolific life in Europe and other overseas markets. That will change. The company was founded by the same folks who brought you file-sharing giant KaZaA. Skype isn't going to get into the same legal tangles that its peer-to-peer MP3 swapping site did, but that doesn't mean that it's any less disruptive to an established, yet troubled industry.

Phone companies may see Vonage as a low-priced competitor, but Skype is an all-out threat.

To be fair, Skype has gone old school in one sense. It rolled out a SkypeOut service that charges users who want to call a conventional phone line. Users pay by the minute and the rates are attractive for calls placed to most countries.

Why did Murdoch want in so badly?
When people think Murdoch, they think about old media properties like Fox Network, The New York Post or The Times of London. However, News Corp. has always had a bit of a new technology streak. It's a heavy hitter in global satellite through BSkyB and its minority stake in DirecTV (NYSE: DTV  ) .

However, News Corp. has always felt like an incomplete entertainment conglomerate because it lacked the huge online presence of its media rivals. If folks continue to flock online and it comes at the expense of less time thumbing through the morning paper or watching television, News Corp. needs to matter in cyberspace.

It helped itself in grand fashion with MySpace.com. Social networking is huge as users exchange thoughts and media with folks who have similar interests. It's been hard for dot-com specialists to monetize the gargantuan number of page views that social networking has been generating, but it shouldn't be a problem for a broadcasting company like News Corp. to take advantage of hooking up its base of sponsors with the young audience that advertisers crave.

Skype would have been -- and may still prove to be -- a major coup for News Corp. It's a free software program that is now deriving some revenue through its landline connections. A company with wide advertising arms like News Corp. should be able to make the most of marketing to the Skype audience without turning them off along the way.

What will it all mean to you?
Skype isn't the only game when it comes to Internet telephony for freeloaders. Yahoo! (Nasdaq: YHOO  ) and Microsoft (Nasdaq: MSFT  ) offer free voice chat capabilities through their popular instant messaging programs.

However, as big as those two juggernauts may be, there is something to be said for specializing. You also can't discount Skype's mastery of viral marketing. KaZaA has been downloaded 370 million times, so Skype may just be scratching the surface at less than half that sum.

Obviously, all 148 million instances in which Skype's software was downloaded didn't translate into active users. However, when you consider that Vonage is leading the way with less than a million premium subscribers for its telephone service, Skype's installed reach is already much greater than that.

Skype, for all practical purposes, is what we like to call a Rule Breaker around here. That's the name of our ultimate growth investing newsletter service. You are welcome to check it out with a free trial subscription to learn more about promising disruptive technology stocks with Skype-like potential.

Whether Skype does go public or get acquired along the way, investors have good reason to follow a tantalizing company like this as it transforms into a publicly traded entity.

Murdoch would be blessed to land Skype before the rest of the world came calling (and thanks to Skype, those calls can be free, to boot). I can definitely see cash-rich companies like Google (Nasdaq: GOOG  ) , Yahoo!, and Microsoft all making a play for Skype.

Broadband's wide acceptance means that these companies aren't just counting eyeballs. Eardrums are starting to matter, too.

Digital audio? Global popularity? Oh, right. Add Apple Computer (Nasdaq: AAPL  ) -- which also offers voice chat through its iChat software -- to the list of companies that may very well tempt Skype to elope before the bachelor auction takes place.

It's going to be good. Market cynics will argue that the company is overvalued, because it has produced such modest revenue in the past, but you know the score. Investing is all about the monetization potential of the future. If you've got the time, listen in.

Longtime Fool contributor Rick Munarriz realizes that Skype rhymes with hype, but he thinks the company lives up to its billing. He does not own shares in any of the companies in this story. The Foolhas a disclosure policy. He is also part of theRule Breakersnewsletter research team, seeking out tomorrow's ultimate growth stocks a day early.


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