) recently launched a consumer Internet phone service for U.S. and
Canadian users of Gmail, its popular e-mail platform. Calls within
the U.S. and Canada are currently free. Google charges modest fees
for international calls. In coming months, Google plans to extend
phone service to international Gmail users and businesses.
We think the online telephony market holds significant economic
potential for Google. Google stands to make money in two ways.
First, Google can sell phone subscriptions in competition with the
likes of Skype, which is planning an IPO this year. The new phone
service could also attract more users to Gmail, which would boost
Google's ad revenues. Overall, we see a potential 3% upside to our
$643 stock price estimate for Google.
Our analysis follows below.
Gmail vs. Skype
Gmail currently boasts around 200 million active users,
according to the Wall Street Journal
. We expect the Gmail user base to reach 225 million by the end of
this year and rise to around 520 million by the end of the Trefis
forecast period. By contrast, Skype had 124 million active users
per month as of last June,
according to Techcrunch
Gmail provides multiple services under one umbrella, including
e-mail, chat, calendar and productivity applications. The latter
falls under the Google Docs rubric, which includes hosted word
processing, spreadsheets, presentations and data storage. With the
addition of phone service, these apps give Skype users a strong
incentive to migrate to Gmail.
Google could also grab users by underpricing both Skype and
mainstream telecom providers like AT&T (
), Sprint Nextel (
) and Verizon (
) in the U.S. Initially, Google will charge two cents a minute for
calls to international landline numbers. Calls to international
mobile numbers will be more expensive, costing 18 cents a minute
for U.K. mobile numbers and six cents a minute for Indian mobile
By contrast, Skype charges 2.1 cents a minute for calls to
landline and mobile numbers in the U.S. and many other countries,
according to the Wall Street Journal report.
In this scenario, Google could potentially attract more users to
Gmail, which would boost the company's ad revenues. However, Gmail
constitutes less than 1% of the $643 Trefis price estimate for
Google's stock. We see a modest upside of 1% or less for the stock
even if Gmail user growth dramatically exceeds our expectations,
reaching one billion by 2016 instead of the 520 million that we
You can drag the trend-line in the chart above to create your
own Gmail growth forecast and see how it impacts Google's estimated
Last September eBay (
) sold its 65% stake in Skype to a group of private investors led
by Silver Lake Partners, a private equity firm headquartered in
Menlo Park, CA. The deal valued Skype at $2.75 billion.
As discussed above, Gmail's broad feature set could help it
build a larger business compared to Skype. Assume for argument's
sake that Google builds a phone subscription business double the
size of Skype's. This scenario would add $5.5 billion to our $205
billion market cap forecast for Google, yielding a 2% upside to our
stock price estimate.
You can see
the complete $643 Trefis Price estimate for
Google's stock here.