3. The Hype about Skype
(3084 words)
Known to have originated as a stemming idea from an existing file-sharing company Kazaa,
Skype has its roots in Sweden. Swede Niklas Zennstrom and Dabe Janus Friis in 2003 (n.a.,
2013) founded it together, with an aim to simplify communication and make it affordable
across the globe.
Skype is a VoIP Telephony company which has been successful owing to a number of
factors. According to the researcher, a company is successful if majority of people across
continents have heard of it. A company is truly global when its services are consumed by
people of all countries. E-Commerce firms often exercise this strength as their reach is not
confined by physical borders.
Ever since its inception in the psyche of every internet user across the world, Skype has
moved towards bringing the world closer and has created an impact world over. Taking a
look at some of its strategic moves will give a clearer idea as to what the video calling-
synonym owes its success to.
Strategic Analysis
Mission and Vision Statement:
“To be the fabric of real-time communication on the web.” (Tart, 2011) Skype has an
effective mission statement as it clearly defines its purpose and its aim. The mission
statement not only motivates the employees of the firm, but it also helps ally the resources of
the organization towards attaining consistency and focus (Bart, 1997). The brevity and
accuracy of the mission statement make it stand out and render it effective. Skype has proven
to maintain this consistency, regardless of shift of ownership over the years.
Skype Timeline
In terms of ownership, Skype has had a fairly turbulent trajectory [See Appendix 1]. What
once was a peer-to-peer (P2P) file sharing software company Kazaa, has now branched out to
become what we today know as Skype. Kazaa did not survive the wrath of law suits accusing
it of piracy of music and unfair means of sharing data.
P2P is a low maintenance technology with easy means of user-registration. The P2P
architecture was not a substitute for paid telephone lines, but an addition and development to
the communication industry. Of course, there was heavy competition from established
players such as AT&T, but Skype’s timing of entry into the market as well as its free of cost
calling service, gave it the competitive advantage (Angelov, n.a.).
4. Porter's Five Forces Analysis
[Image Source: mmu-strategic-management.blogspot.com]
Studying the telecommunication industry in the United States of America, it is suitable to say
that Skype had major competition at the time of its launch. It was faced with VoIP providers
such as Vonage, Net2Phone, 8x8, DialPad, FreeWorld Dialup and others, and the traditional
voice carriers such as AT&T, Verizon, Qwest etc (Angelov, n.a.). Even though Skype had a
distinctive service to offer, it had the threat of substitutes from existing service providers.
“The idea of charging for calls belongs to the last century. Skype software gives people new
power to affordably stay in touch with their friends and family by taking advantage of their
technologies and connectivity investments.”
--Niklas Zennström, CEO & Co-founder of Skype.
Skype was capitalizing on the bargaining power of customers, which seeks to reduce costs of
a product or service in an industry (Porter E, 2008). By providing a service absolutely free of
cost, it decreased threat from substitutes to a large extent. People in favour of disruptive
technology and willing to try something new in the post-recession era benefitted from Skype
immensely.
5. Disruptive Innovation & Blue Ocean Strategy
Skype technology has been a disruptive innovation in the telecomm industry. By its first
anniversary on August 29, 2004, Skype software had been downloaded over 20 million times
and Skype had more than 9 million registered users (Angelov, n.a.). Skype’s offering to the
industry was a hybrid of free calling and VoIP, a combination which no company had tried.
According to W. Chan Kim and Renee Mauborgne, ‘blue ocean strategy’ implies innovation
in an existing industry using a unique idea that makes it stand out from the existing industry
dynamics (red ocean) (Kim & Mauborgne, 2004). Skype took an existing model of the
telecom industry, added new technology and made it absolutely economical for people to use.
Companies which create a demand for their product or service, instead of fighting over
market share of existing industry have higher chances of fast growth and profitability. Skype
has capitalized handsomely on an unexplored mine of opportunities. As Zennstrom
comments:
“Timing is important. No one was interested in that space. AOL Instant Messenger, ICQ and
Microsoft all had voice in their IMs, and it was all crap — push and pull, where you had to
hold down a button. We managed to do a good job. We had groundbreaking technology and
we knew no one would come out right away that could be compared with us. Everything was
viral — we needed critical mass. Someone would download Skype and make a phone call to
friends, and it would have better quality than the telephone. Then they’d tell their friend or
their mother or sister or brother, get Skype. It took time for big companies to offer competing
services. By 2005, we had critical mass.” - Zennström(Gage, 2011)
The groundbreaking technology mentioned by Zennstrom is none other than VoIP. VoIP is an
Internet Protocol (IP) based application among internet users on different devices (Angelov,
n.a.). It is interesting to consider how a disruptive technology such as VoIP could create a
massive user base for Skype. The more the users, the faster the communication and reliability
of the service.
Once the technology finds its foothold in the market, it eventually replaces the existing
technology (Powell, 2015). An evidence for this is the evolving strategies of telecom players
in the market. "Our revenue streams are moving towards data services. Telecom industry is
all for innovations among OTT (over-the-top-technology, like Skype) and it is most welcome.
It will be wrong to project...that telecom operators are against OTT.” - Akhil Gupta, VC,
Bharti Enterprises (n.a., 2015). It is evident from recent trends that established telecom
companies such as India’s Bharti Airtel are being driven towards data services and that they
are willing to join the OTT league.
Skype surely has been a successful enterprise with regard to a large user base, however the
question that lingers is, has it been equally profitable?
6. Financial Analysis
Skype was acquired by Microsoft in 2011, ever since then Skype’s annual financial reports
have not been released for public from Microsoft. It has received mentions in the annual
reports of Microsoft under some segments in the Microsoft Annual report (Nadella, 2014).
Skype has gained its popularity owing to its free calling service. It doesn’t come with much
of a surprise then that Skype may not be making a profit even after a large user base. Skype
has a Freemium revenue model. Skype’s basic version lets one make free Skype-to-Skype
calls. Along with calls, video calling, instant messaging are also free of cost for the user.
Users can share music files, images and share screens, all for free. However, Skype also
offers a variety of options for a little more money. These features include: calls to mobile
numbers and landlines with the help of Skype Credit or a monthly subscription (n.a., n.d.).
Skype also has some licencing partnerships with Nokia and MySpace. Nokia provides Skype
in its N97 handset. Skype also launched its very own Skypephone 3 series, of which over
500,000 units have been sold, it has become a means of monthly revenue stream for Skype.
Skype has negligible customer-acquisition expenses. Word-of-mouth publicity has helped
Skype acquire a much larger user base than any other VoIP competitor. Skype uses the peer-
to-peer communication architecture, which makes it extremely low maintenance and cost
effective for owners and stakeholders. Skype has no network maintenance costs or collection
costs as all payments are made online by customers. Skype does not have to send any bills to
customers for collection of monthly subscription fee etc (Courtney, 2009).
[See Appendix 3 for Financial Statements from 2005 to 2009]
Marketing and Branding
“Our product is our brand.” said Henrique Penha, Director of Experience Design at Skype.
As the director of experience design, Penha’s job is to enhance and monitor the experience
every Skype user has. A part of the Experience Design team is responsible for Skype’s brand
identity.
According to Penha, the brand Skype stands in support of its mission statement and core
functionality. It is an easy to comprehend communication software that has been a viral
phenomenon ever since its inception. As the company is evolving and gaining a large user
base that goes beyond early adopters, Skype’s brand is moving towards the relationship
marketing era, wherein, Skype tries to add a human element to all its endeavours. The core is
moving from functionality to an emotional connect with the users (LaPierre, 2009).
The Skype Brand Book – Think explains in detail the core values and intentions of Skype as
a company. Skype’s marketing strategy has ensured its success. Skype has prioritized its
brand positioning in the minds of average internet users by ‘getting there first’. Skype as a
brand stands out due to a number of reasons. Primarily because its services have been
consistent and reliable.
It would be right to point out that Skype’s core function – getting people to communicate is
the inspiration behind its brand having a humane touch after all. In fact, it goes a step ahead
7. in understanding the fact that Skype is not just a means of communications, but a part and
participle of the everyday life of users (Monollos, 2014).
Image: Customer Based Brand Equity Pyramid
A customer-oriented approach has indeed helped Skype gain popularity among students,
family members, corporate personnel and more. Marketing as a field has moved towards the
Human era which implies that almost every user has his or her very own Skype story to tell.
One Direction band’s former member Zayn Malik commented shares "romantic chats on the
internet" with his fiancée Perrie Edwards (it says here): "We miss each other. We've got
Skype as well. That helps," he told Metro (Arthur, 2013). To get into the psyche of the tech
savvy generation, Skype also ventured into embedding itself into popular culture artefacts. It
has been used on Oprah Winfrey Show, Who Wants to Be a Millionaire?, CNN etc
(Courtney, 2009). Skype tries to foster its relationship with average customers, by
showcasing its functionality and utilitarian value on high profile shows, which are consumed
on a large scale.
8. Human Resource Management
As per a telephonic conversation (Tran, 2015) with a former Human Resource Business
Professional (HRBP) at Skype, the researcher got insights into the company’s human
resource policies.
Recruitment process: Skype’s aim while recruitment is to get the ideal fit for the job
profile in question. It goes through different recruitment processes to achieve this
objective. Depending on the seniority of the position offered, Skype holds one-on-one
interviews or panel interviews for candidates. For positions such as software developer,
the candidate may be asked to do coding on the spot based on instructions provided, to
judge his or her ability and presence of mind while facing a situation at workplace.
The interviewer’s task is to determine whether an applicant would adapt to the
company’s work culture. The person must possess adequate work experience, not in
terms of tenure but mainly with regard to the quality of work done by applicant. This
is a way of ensuring exclusivity. The panel also tries to gauge if the interviewee is
humble or disruptive in nature. They seek employees who can think of out-of-the-box
solutions for issues as well as share a healthy rapport with colleagues.
Employee Reward: Unlike most private start-ups, Skype (before acquisition) used
employee incentives to motivate employees. The perquisites offered at Skype exceed
expectations of employees in more ways than one. These perquisites are added
benefits that are provided apart from ridiculously high salaries to employees.
Such heavy incentives are provided owing to the extremely demanding nature of work
at Skype. To be able to manage 20 million plus users at all hours of the day calls for a
dedicated workforce that is always online. The researcher was told by Kim Tran that
she worked about 18 hours a day on an average.
Being the HRBP of the company she further commented that the rewards provided to
employees were both intrinsic and extrinsic. Employees were showered with
‘refreshers’ or heavy stock options when they performed well. A share in the
ownership of company served as a great incentive for employees.
Employees enjoyed the work stress as it promised them high rewards, which were
incomparable to other companies.
Kim Tran has also served as Senior HRBP at Google, which is known to be one of the
best places to work for (n.a., 2015). She suggested that instead of offering the
attractive, non-monetary facilities that Google offers; Skype provides more of
monetary rewards. This could be due to the fact Google has a much younger work
population with an average age of 28 years; such a dynamic and youthful workforce
requires physical activities provided at their workplace, such as a gymnasium,
massage therapy, basketball ground and more sports in-house. Whereas, Skype has a
work force with an average age of 35 years, that is at mid-senior level in their
personal career. A slightly older demography of employees wants more monetary
benefits, such as company stocks, business class travel tickets, annual family holidays
and performance bonus.
According to Kim, Skype is a quick money-making machine for any employee. Once
you join and perform, you will be showered with lots of gifts and benefits.
9. Performance Appraisal Scheme: Skype has a bi-annual appraisal system (January to
June, July to December) which is as simple as it gets. It is a clear and concise model
which many companies are adapting to nowadays. It is called a “Stop, Start and
Continue” model that seeks to ask just a couple of questions but leads to minimal
organizational conflict.
Questions: 1) What does the employee aim to achieve in the next 6 months? 2) Does
the employee want any development for his or her career growth? This is a Self-
Assessment appraisal type that leads to a clean and just procedure, leading to lack of
criticise – defend scenario (Margerison, 1976). However, this calls for the employee’s
understanding of the future and current needs of the job and organization [insert
presentation citation]. This was a healthy way of evaluating employees as neither the
managers or subordinates detested it. They believed that it is in fact for their own
benefit and more importantly the brevity of the model did not hinder the daily
activities of the employees.
Once the line managers gather the answers from their team members, the employees
are provided with accurate courses and training to achieve their goals. Special
courses, depending upon the need indicated by employee are carried out for him or
her, sponsored by Skype. The courses are offered to all employees, regardless of their
designation in the company.
Employee Voice Systems: Skype much like any other firm offers a number of
employee protection policies. One can report any misconduct experienced on several
voice platforms, through HRBPs.
Mergers & Acquisitions
Skype, as stated earlier, has had a turbulent trajectory, especially with regard to ownership
and senior management attrition rate. Skype was acquired by eBay in 2005, partially in cash
and shares. EBay valued Skype at $2.6 billion - $1.3 billion in cash and 32.8 million shares of
eBay stock. The strategic rationale behind this move was to provide a platform for
communication to the auctioneers and bidders on eBay (Mitchell, 2011). However, there was
a lack of synergy between the companies. Gradually, Skype became one of the value-trap
business ventures for eBay. After losing considerable amount of money, eBay sold 70% of
the firm to a group of private investors.
A majority of the share was acquired by Silver Lake Partners, Index Ventures, Anderseen
Horowitz and the Canada Pension Plan Investment Board.
Skype as an individual product was still popular owing to its reliable and consistent services.
However, due to lack of concrete revenue streams, Skype decided to make an Initial Public
Offer on the U.S. Securities and Exchange Commission in 2010 (Malik, 2010). Skype noted
in S-1 (n.a., 2010):
“[W]e have historically derived a substantial portion of our net revenues from a single
product—SkypeOut. For the pro forma year ended December 31, 2009 and for the six months
ended June 30, 2010, 86% and 87% of our pro forma net revenues and net revenues,
respectively, were derived from the use of SkypeOut. Due to this dependence on SkypeOut as
10. our primary source of net revenues, we are subject to an elevated risk of reduced demand for
our SkypeOut product.”
After the IPO was made, big players such as Google and Sony were contemplating the
acquisition of Skype, however, none of their offer values even came close that of Microsoft.
Skype was reporting annual losses of $7 million though it still had higher revenues ($860
million) (Mitchell, 2011).
Microsoft successfully acquired Skype in 2011 for a whopping $8.6 billion, primarily in cash.
Microsoft stated that it allocated the value of Skype based on goodwill worth of $7.1 billion,
identifiable intangible assets of $1.6 billion and unearned revenues (such as, prepaid Skype
Credit) at $222 million.
Microsoft stated in its annual report that Skype is designed to connect people using different
devices. Skype has merged with other online services offered by Microsoft, such as Bing,
MSN portals and channels, Office 365, Windows Phone Store, and Xbox Live etc. Microsoft
aims at extending Skype’s brand as well as enhancing its own portfolio of real-time
communication products. It seems like Microsoft is making better use of the service and
company than eBay ever did.
Recommendations
The researcher recommends Skype to hold its ground as a brand in itself. It is evident from its
timeline that as a company Skype has operated better in autonomy. It must maintain and stick
to its identity as a free calling service provider. Being under the larger umbrella of another
giant company can help Skype guard its financial stability but existing merely as a subsidiary
of the giant will hamper its core competencies in the long run.
Skype’s strength is its humongous user base. It has attained the critical mass number of users,
yet the profitability of the VoIP service provider remains clouded. Therefore, it is suggested
that Skype remains in the acquired company’s protection, but maintains its synergy with the
acquiring firm.
11. References
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[Online]
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[Accessed 26 March 2015].
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[Accessed 12 March 2015].
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Available at: http://articles.economictimes.indiatimes.com/2015-01-
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Porter E, M., 2008. The Five Competitive Forces that Shape Strategy. Harvard Business Review, n.a.
n.a., pp. 78-95.
Powell, T. D., 2015. Strategic Innovation. Cardiff: Cardiff University.
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