Skype: how a Northern European peer-to-peer software has conquered the world thanks to network effects

Once the ultimate savior of long-distance relationships (no matter what their nature is), Skype has been increasingly challenged by new digital players, What’s app in particular. How did Skype make itself so relevant, and how does it capture enough value to be acquired 8.5 billion USD by Microsoft in 2011?

Nowadays, no one would dare questioning the planetary dimension of Skype or its considerable – if not existential- added value for human interactions across the globe. The years 2000s would have been tremendously different without the existence of Skype – and many long term friendships and romantic relationships would have been properly impossible to be. Yet, this revolutionary software cost nothing to not much for the majority of the company’s giant user-base, and many more recent players are fiercely competing today against Skype. Let’s have a closer look at the “Skype success story”, understand its operating model and assess the strength of its competition.

 

Before taking off and populating every global citizen’s desktop and phone in the world, Skype was a small scale Scandinavian venture. Founded in 2003 by a tandem of Danish and Swedish entrepreneurs, the software was conceived by a team of Estonian engineers. In 2005, Ebay acquired it for 2.5 billion USD, and the rise of the venture kept going until its acquisition in 2011 by Microsoft for 8.5 billion USD.

 

Skype is a telecommunications application software which provides voice and video communications via computers, tablets and mobile phones. The technology exclusively relies on the use of Internet, which also allows file-sharing. Skype uses a freemium model: communicating via Skype is free unless the user wants to call a landline or a mobile phone number: in that case, the user needs to purchase Skype credits. The groundbreaking value proposition of such technology is that it enabled millions of people across the globe to communicate instantaneously for free as long as both users are in possession of the software, in the mid-2000s where no other technology was allowing this. In such context, the revolutionary technology of Skype enabled the constitution of extremely strong network effects, leading to a worldwide success.

 

If Skype’s value proposition is to enable free phone calls via its free software, how can it generate revenues and justify a 8.5 billion USD purchase by Microsoft? The answer is paying upgrade services and advertisement. The nature of these services has evolved over time, in order to capture as much value as possible in the most customer-friendly way. For example, Skype had developed a feature which would allow the customer to send money via the software – but since it would cannibalize Paypal, whose owner was the same as Skype, the service was shut down in 2008. Nowadays, one can get Skype credits or a monthly subscription to make low-cost calls to mobiles and landlines – an interesting feature for businesses, which make up for 35% of Skype’s customer base. Group video is also a paying feature that enriches the platform’s value proposition for businesses, and which plays an active role in the strengthening of network effects for business users of Skype.

 

Skype would still be living in paradise if it had not been seriously challenged by new digital players in the field of telecommunications from the end of the 2000s, the biggest challenger being What’s app. Unlike Skype, What’s app is not Internet-based and works through mobile phone number and text messages for free. Although, while What’s app is much more recent and with a different operating model compared to Skype, both companies share a lot of similarities. What’s app was acquired in 2014 by Facebook for a massive 19 billion USD bill. Moreover, with a completely free service, each What’s app user is charged 1 nominal USD per year. For both companies, there is still room for growth and possibilities for future value capture – for example, What’s app has a strict no-advertisement policy on its platform, which leaves a lot of value to capture yet. The business model is almost certainly going to evolve to address these value capture issues, and with other newer players like WeChat or GroupMe, the war is far from being over…

 

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Student comments on Skype: how a Northern European peer-to-peer software has conquered the world thanks to network effects

  1. Do you know if Skype has made any effort to attract 3rd party developers as a platform? I’m trying to think about ways to increase the value of its network, and perhaps this could be one avenue. Other companies, most notably Twilio, offer communication (voice + SMS) APIs for developers who want to integrate communication into their own products (for example, when Uber texts you that your car is arriving). Could Skype have reinforced the power of its network by going this route as well?

  2. Great post summarizing Skype’s growth and potential threats. This is interesting because we can see how the industries that competitors are coming from gradually blurs. As digital innovation evolves, old platforms are rendered obsolete due to new methods of communication. In this case building a wide reaching network with huge user base is no longer enough, which is prompting Skype to move towards adding other types of value-add other than just online chatting. I think one of Skype’s greatest strengths still lies in their ability to call landline from computer, but as technology progresses and wifi gradually replaces landlines, I imagine this advantage to also gradually diminish. It is then evident why they are striving to expand their value-add. However, their move to replace MSN with Skype still seem to puzzle me, and as mobile messaging services move towards having a web version available, the migration rate is fairly low. I wonder if there’s any better explanations to making that strategic move?

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