9.37 Skype Communications

Skype is a software application allowing users to make voice and video calls over the Internet. Calls to other users within the Skype network are free. Calls that combine traditional landline telephones and mobile phones (Skypeout) are charged at low rates, undercutting telecom charges. Additional features include instant messaging, file transfer, and video conferencing. {1}

Skype is the world's largest provider of cross-border communication services, with 663 million registered users in 2010. {1} Skype's revenue have grown steadily, {2} and are expected to exceed US $1 billion in 2011 {9}

eBay purchased Skype for $2.6 billion in October 2005. Microsoft Corporation subsequently acquired Skype Communications in May 2011 for US$8.5 billion, again still keeping the service largely unchanged. {1} {13}

Skype Business Model

Skype employs a cost structure quite different to that of its telecom rivals. Free calls are routed through the Internet, generally with peer-to-peer technology. Skype does not manage its own network, therefore, and incurs only minor costs for client software and the hosting accounts. SkypeOut charges are only slightly higher than those Skype itself incurs for calls routed through wholesale carriers. Skype also earns licensing revenues from brand partners, such as mobile operator 3 in the UK, with devices from Logitech, and from a number of plugin services they co-market. {6}

In summary, Skype makes its money: {9}

1. From user services:

     a. Premium services that build on free services: group video, group screen sharing, live chat and unlimited calls to selected countries.
     b. Accessory services: TV, mobiles & tablet computer use.   
     b. Sale of applications: business, games, translation, etc.

2. From licensing opportunities, e.g.

     a. Skype-Nokia and Skype-MySpace relationships
     b. Hardware royalties
     c. Carrier relationships, such as the Skypephone on 3 example noted below.

3. Advertising opportunities yet to be properly developed.

The model is successful, with impressive statistics:

1. Skype adds over 350,000 new account registrations every day. It had 32 miilion users in February 2012. {14}
2. Users are spread across the world.
3. Skype has now achieved over 100 billion cumulative calling minutes.
4. Over 8% of the world's international calling minutes are on Skype.
5. Skype delivers free video, these increasing from 27% to 34% of call time from December 2007 to December 2008.
6. Steady increase in call lengths.
7. Skype now only needs its users to make one more call per day to be a billion dollar business.
8. 35% of users use Skype primarily, or often, for business.
9. Three markets remain largely untapped: core consumer (size: $240B), mobile (size: $603B), and business (size: $203B).

Skypephone on 3

Skype's mobile service {11} again looks profitable. Note: {9}

1. Over 500,000 units have been sold. Skype had 42 million people concurrently online in September 2012.
2. Skype 3's margin on Skype phone is 20% higher than their average margin on handsets.
3. 79% of Skypephone customers are new 3 customers.

Sale of Skype

eBay bought Skype in 2005 for its potential in lead generation and access to new markets: new cars, travel, real estate, and personal and business services. {11} eBay sold Skype a few years later to private investors because its business model did not fit with eBay's: there was no mutual benefit or synergy between them. {4} {5} Equally important, Skype did not take advantage of new needs and technologies, and indeed users couldn't make or pay for an eBay purchase with it. {6} That said, Skype was at the time considering selling time to Yellow Pages companies that would charge businesses to list their numbers in its directory and/or charge on some click-to-call basis. {7} {8}

Microsoft probably acquired Skype to:

1. Acquire its technology.
2. Extend its marketing base.
3. Access its growing revenue streams.

Points to Note

1. Skype turned largely free resources (Internet) into revenue streams.
2. The free service acts as a loss-leader to its subscription services.
3. eBay unbundled Skype when there was no synergy between the companies.

Questions

1. What is Skype? How, briefly, does it work?
2. Explain the eBay and Microsoft acquisitions.
3. Provide an appropriate business model for Skype.
4. Where do further opportunities lie for Skype?

Sources and Further Reading

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