To:
Josh Silverman – CEO of Skype
From:
Brian Hayes, Keila McCarty, and Lesley Poberezny
Date:
December 11, 2011
Re:
The Future of Skype
EXECUTIVE SUMMARY
Skype was founded “to enable the world’s conversations” (About Skype, 2011).
Unfortunately, most Skype users take advantage of Skype’s free services, cannibalizing their
subscription revenues. “At some point free doesn’t work anymore” (Reardon, 2007). The
consequence of “free” combined with no advertisement (both on Skype’s software and of the
company itself to consumers) is flattening growth. Develop a sustainable revenue model by
defining product offerings and advertising the difference between Skype and its competitors,
concreting that difference and “The Skype Edge” in consumers’ minds. Integrate advertisements
into Skype screens and sell ads to generate further revenue. To increase subscription services
and Skype’s presence online, rebrand Skype as software functionality for websites, beginning
with social networking websites. Become the way the world’s youth have conversations by
getting Skype into schools and introducing users at a young age. Get net neutrality passed to
prevent competitors from blocking access to customers and don’t challenge them directly in
large business sales.
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Strategic Issue #1 – Developing a Sustainable Revenue Model
Skype seemed like a science fair project that caught on too quickly, certainly before
anybody stopped to think “what do we have here and how are we going to make money from it?”
As they didn’t do this analysis, we have. See appendix 1 and 2 for the SWOT analysis and
industry analysis using Porter’s Five Forces. A look at one critical issue serves as an example:
if one person can call another person on either a phone (which is billed) or a PC (which is free of
charge), most persons choose will choose PC. This choice cannibalizes Skype’s subscription
service.
A second example bolsters our argument. Early founders of the company were reluctant
to advertise on Skype web pages. They believed advertising reduced the value by cheapening
the appearance. However, many companies (e.g., Facebook) have produced a revenue-producing
website using advertising while maintaining an attractive web offering (Tehrani, 2011).
Recommendation
Skype provides multiple means to communicate, including chat, voice, file sharing and
video. This enhances the customer experience for its partners and increases Skype’s relevance.
Relevance is important to increasing ad revenue. To build on Skype’s incredible value as an
inexpensive communication tool for companies that want to provide additional value in their
services, such as social networking sites, tech support for businesses, education, etc, Skype
should:

Immediately perform an extensive product/market review to identify the markets it is
serving and their unique needs

Determine which markets have the prospect for sustainable revenue

Drive growth and revenue subscriptions through strategic alliances with partners
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Skype has to define its product offering to determine the value delivered from each
differentiated product and capture that value in an appropriate pricing model. It has to convey
the value of the differentiated components to the market through an effective
advertising/marketing plan. This can be accomplished with a Strategic Marketing Plan (SMP).
We recommend Skype hires the Marketing Division of strategic consultant Hayes,
McCarty, and Poberezny to help develop its SMP. The recommended consultants are experts in
helping define the unique proposition in which internet companies delivers to the U.S. public.
We also have international presence and understanding in the growing markets of Southeast
Asia, Brazil, and India as we pursue our strategic goals in Year 3 and further.
The SMP (Appendix 3) has to include expanding its subscription services and selling
advertising. It may be difficult to go from “free” to “pay”, but by partnering with internet
companies we believe there is an excellent chance to increase subscription services as well as
make Skype more relevant.
A look at the comparison graph (Appendix 4) serves as a pertinent, graphical description
of the features, and value, in which a relationship with Skype produces. It is important to simply
and clearly identify the unique values. It is a must a pricing strategy accompanies each unique
value.
Implementation
The internet marketing consultant (IMC) should be hired immediately to develop the
SMP. It should be noted the timelines in all the strategic recommendations can, and should, be
implemented concurrently. We see minimal conflict in implementing all simultaneously.
The SMP should be complete in 6 months (26 weeks) (Appendix 5). We understand
there is the temptation to kick down specific tasks to a lower level and consider them nonThe Future of Skype
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strategic. However, we believe Recommendation No. 1 to be so critical that many of the specific
task impacts the company strategically, and can either lift the boat, or sink the boat, if due
consideration is not given to its consideration, and maybe more importantly, its execution.
Strategic Issue #2 – Shrinking Revenue Growth
Though the revenue percentage and number of users has plateaued in the last few years,
Skype has still been making money. We went out and surveyed some of our co-workers and
friends over the last few weeks regarding Skype. The survey questions given to these coworkers and friends are in Appendix 6.
The surveys indicated:

Skype has lost its relevancy. Respondents reported that they used Yahoo and
other competitive offerings to communicate with friends and family that live far
away, not Skype.

Skype is not visible enough. It has no other “in” gathering users to itself and is
not partnered with other businesses that would help spread its recognition.

Competitors could easily grab more market share, locking up the profitable
revenue streams that Skype has had over the years.
Recommendation – Social Networking
In order to find new sources of revenue, they must partner with other companies in new,
innovative ways. The eBay acquisition, and spin-off, has taught the technologies must be
complementary. Skype operates as software, therefore partnering with web companies has the
most potential. We specifically choose eHarmony (20 million users) (Warren, 2010), LinkedIn
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(100 million) (McEvoy, 2010) and Facebook (800 million) (Statistics, 2010) to give them “The
Skype Edge.”
These combined social networking providers will increase Skype users from the current
540 million users worldwide to an estimated 1 billion. Tremendous advantages exist for both
parties therefore, partnering costs should be low. For example, Skype has a strong international
presence which would appeal to the social networking sites with a predominantly American
market.
The social networking sites gain the opportunity to truly link members in real time, from
chat, to voice, to webcam and conferencing. Each social networking site has its own value, but
for example, an eHarmony member might want to Skype first before meeting their potential date
face to face. A partnership with Facebook will provide the opportunity to tell Grandma by phone
“great pictures of the farm, Elsie the cow looks happy!” Grandma will not likely download the
Skype software, but somehow seems to find her way to Facebook. LinkedIn subscribers can have
video conferencing to talk about opportunities and changes for the future in the market.
Ad revenue drives traffic, cross-markets, increases the number of visitors to the page, and
the average time spent on each page. All are important metrics for increasing revenue. The user
registration models (where users are required to register and provide demographic data) provide
excellent advertising value.
Implementation – Social Networking
In 2007, Facebook had designs to make their website more relevant. To drive ad revenue
more time must be spent on each page. This is accomplished by relevancy. To drive relevancy,
Facebook wanted an easier way to post photos to their website. This was accomplished by
Parakey’s novel software, which in 2007 Facebook acquired (Statistics, 2010). Active users
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increased from 50 million in July 2007 to 100 million in July 2008, to 250 million by July 2009
(Statistics, 2010).
If these partnerships can drive a conservative 10% increase in traffic, then it is possible
the number of Skype Dial tones (the number of calls made daily) can increase from 20-30
million daily to as much as 100 million daily by Year 3 (2013). This is a 4-fold to 5-fold
increase in revenue. The acquisition cost is low, so gross profit margins, which have averaged
less than 40%, should be able to reach +50%, which would drive a net profit margins to +15%. A
Pro Forma statement for 2011 is shown in Appendix 7.
Ads can be sold to help increase the revenue stream. Skype was previously reluctant to
advertise for marketing reasons. However, Facebook and other websites have shown the
acceptance of advertising banners as a sustainable source of revenue. Some websites charge up
to 36 cents per subscriber (that would bring in $36 million in ad revenue, or a pay per click
model). This is an increasingly sophisticated business, but again, conservative estimates put ad
revenue between $50 million and $100 million dollars and an additional $7 million of net profit
(Appendix 7).
Recommendation – Education
Besides Skype partnering with Social Networking sites, we recommend they implement
Skype into education. “Catch them while they are young” and the students will carry their Skype
accounts and experience through to their adulthood. Our group started using different
messengers, like Yahoo, that were available to us years back and now we all carry them through
to our work, school, and even portably on our cell phones. It is something that has become part
of us as the way we communicate. Through this, Skype can become both the way the world’s
youth communicates into their adulthood and increase their relevance concurrently.
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Implementation – Education
Partner with Smart Board™ at schools to enhance students’ experience and create “the
Skype Classroom”. Smart Boards™ are becoming increasingly prevalent in schools. If Skype
were an option on the Smart Board™, students unable to attend class because of illness could
Skype into the session while home sick and not miss any lessons.
By creating a “Skype Classroom” at top teaching universities, students learning to be
teachers would incorporate Skype into their lesson plans, increasing the likelihood that they will
use Skype in their schools once they graduate. The video in Appendix 8 shows an example of
how Skype could be incorporated by having students Skype to other students from around the
world. This story proves that Skype is a good program to implement into education because it
will help students learn other languages and cultures in other countries.
Strategic Issue #3 – Net Neutrality
Net Neutrality, proposed legislation which would prevent internet services providers
(ISPs) from controlling internet content or access, could pose a significant threat to Skype if not
passed. This includes limiting the bandwidth to or completely blocking specific websites, as
Comcast did when they prevented their users from gaining access to file sharing websites
(Svensson, 2007). “Specifically, network neutrality would prevent restrictions on content, sites,
platforms, types of equipment that may be attached, and modes of communication” (BemersLee, 2006).
Recommendation
Net neutrality places restrictions on the way Skype can market itself in the VOIP industry
and how it can compete against competitors that are also internet providers themselves (AT&T,
Comcast, etc). In order to connect with their customers, Skype will always be dependent on
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those competitors because they own the last mile. VoIP competitors’ also providing internet and
those that are search engines offering email services have another method of garnering
customers. As Skype does not have that additional gravity drawing users, nor the additional
bargaining power it affords, they must position themselves differently in the market.
Skype should not directly challenge large ISP-VoIPs in competition for large business sales, as
they don’t have the bargaining power afforded by also being an internet provider, nor do they
want to erode those providers’ margins to a point where they would choose to limit their
customers’ access to Skype. They cannot appear to be enough of a threat to ISP VoIPs as to
goad them into blocking Skype.
By not engaging directly in competition for large business sales, Skype needs to target
other business segments, most notably international or widespread businesses. As their offices
wouldn’t use the same internet provider at all locations, Skype wouldn’t be impinging on ISPVoIPs’ business, but offering a product they do not.
Skype should also cater to small businesses that do not have the leverage of larger
businesses to ask ISP VoIPs for deals regarding bundled internet/VoIP packages. This would
also not be targeting the core of ISP VoIPs business, again not goading action on their part.
The biggest change and core business Skype should be chasing is to rebrand themselves
to websites as a software company. While Skype is a software company, they haven’t marketed
themselves as one, but rather more of a social networking website. By rebranding themselves as
a software company offering additional functionality to websites, they find a way to increase
their relevance online. As they previously marketed themselves as a social networking tool, this
is where Skype should make its entrance: social networking websites.
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The future vision of this rebranding would be for Skype to further their mission statement
“to be the way the world communicates” by becoming the way the world communicates online.
In one sense, they will become the PayPal™ of online communication. When users have an
account with PayPal, they have a safe, trusted method of transferring money online. They may
not have an account with a specific website, but they have an account with PayPal™ and trust
them to keep their funds safe. This means these websites don’t need to find their own methods
of protecting customers’ identities. For Skype, this would mean users have an account with
Skype and trust them to keep their information, conversations, and video streams safe. One
password gains you access to the world.
While all of these actions prepare for net neutrality, Skype needs to become more
politically active in order to rally support and get net neutrality passed. Cell phone providers
wouldn’t allow customers to keep their phone numbers when changing providers until consumers
approached the FCC and passed Local Number Portability (LNP), mandating that providers
allow their customers to do so (Portability, n.d.). Similarly, ISPs will not limit their own power
unless the FCC steps in and enforces net neutrality by making it law. Just as Local Number
Portability was first proposed by cell phone users, and gathered strength by spreading knowledge
of the law amongst said users, the knowledge of what net neutrality is and what it will do must
be communicated amongst internet users.
A potential consequence of Skype rebranding themselves as only a software company
would be the possibility of either a website or another software company purchasing them for
their functionality, mindshare, and brand name, or perhaps their strong foothold overseas. While
a website has previously purchased Skype, eBay wasn’t the best fit for them, as again they have
marketed themselves as social networking software, not as an eCommerce communication tool.
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The company most likely to purchase Skype would either be a social networking site looking to
capitalize on the brand recognition and software functionality or a software company hoping to
integrate said functionality into their software package.
Implementation
To capture international and widespread businesses, Skype needs to use its popularity
overseas to feed into American market. For example, approach a German company already
using Skype services to get their American constituents to begin using Skype, too. Investigating
what barriers are keeping their counterparts from using Skype could help improve offerings.
Small businesses need to get a taste of what Skype could offer their companies. To get
their foot in the door, Skype could offer a free month trial to small businesses applying for
business licenses in a few major cities.
Rebranding themselves as a software functionality for websites should begin with Skype
proposing their services to social networking websites (eHarmony, Facebook, LinkedIn, etc).
Finally, Skype must begin advertising on net neutrality and its potential consequences.
Americans are extremely protective of their freedoms. Making them aware of the potential for
that freedom to be limited by large businesses interested in protecting their profits will
undoubtedly goad them to action. Further, this movement needs to be taken globally, perhaps as
a covenant of the FCC International Bureau of the UN, whose purpose is “to facilitate the
formulation and implementation of co-operation between [themselves] and the business
community in a manner that ensures the integrity and independence of the Organization”
(Annan, 2003).
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SUMMARY
Preparing themselves for possible sale will require Skype to remain faithful to their true
identity as a software company and VoIP functionality tool. By remembering this identity and
marketing themselves within the VoIP industry as such, they can begin to not only identify their
niche (what they can do and what they offer than no one else does), but use that information to
design a profitable business model/marketing plan, as mentioned above. In targeting social
networking websites for partnership, educational programs for new users, and international and
small businesses to expand current users, Skype is identifying its core users and their needs.
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REFERENCES
About Skype. (2011). Skype.com. Retrieved December 3, 2011 from http://about.skype.com
Annan, K. (2003). Guidelines on Cooperation Between the United Nations and the Business
Community. The UN & Business. Retrieved December 4,
2011 from http://www.un.org/partners/business/otherpages/guide.htm#principles
Bemers-Lee, T. (2006). Net Neutrality: This is Serious. Timbl’s Blog. Retrieved December 3,
2011from http://dig.csail.mit.edu/breadcrumbs/node/144
McEvoy, T. (2010). LinkedIn to Create 100 New Jobs in Dublin. LinkedIn Press Center.
Retrieved December 3, 2011 from http://press.linkedin.com/148/linkedin-create-100new-jobs-dublin.
Portability: Keeping Your Phone Number When Changing Service Providers. (n.d.). FCC Guide.
Retrieved December 4, 2011 from http://www.fcc.gov/guides/portability-keeping-yourphone-number-when-changing-service-providers
Reardon, M. (2007). eBay: What to do with Skype? CNET News. Retrieved December 1, 2011
from http://news.cnet.com/eBay-What-to-do-with-Skype/2100-7352_3-6211053.html
Research. (n.d.). Interactive Whiteboards. Retrieved December 3, 2011 from
http://www.btinternet.com/~tony.poulter/IWBs/research.htm
SMART to Install One Millionth SMART Board Interactive Whiteboard. (2008). Media
Release: SMART. Retrieved December 3, 2011 from
http://smarttech.com/us/About+SMART/About+SMART/Newsroom/Media+releases/En
glish+US/Releases+by+year/2008+media+releases/2008/SMART+to+install+one+millio
nth+SMART+Board+interactive+whiteboard
Statistics. (2010). People on Facebook. Retrieved December 3, 2011 from
https://www.facebook.com/press/info.php?statistics
Svensson, P. (2007). Comcast Blocks Some Internet Traffic. Retrieved December 3, 2011 from
MSNBC: http://www.msnbc.msn.com/id/21376597/
Tehrani, R. (2011). What eBay Should Do With Skype. Internet Telephony, 10(11), 29-30.
Retrieved from http://www.tmcnet.com/VoIP/1107/publishers-outlook-what-ebayshould-do-with-skype.htm
Warren, N. (2010). Meet the Man Behind eHarmony. eHarmony. Retrieved November 3, 2011
from http://www.eharmony.com/
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APPENDICES
Appendix 1 – SWOT Analysis
Strengths








First Mover
Low user acquisition costs
Firm foothold in Europe and Asia – more
than 80% of revenue comes from outside
the U.S.
U.S. VoIP market continues to grow
Opportunities
Design a successful model for earning
revenue
Build on brand recognition to engender
customer loyalty and boost revenues
Skype has only 1% market share in the
growing U.S. market
Expand to new markets geographically
and commercial/non-commercial markets








Weakness
20 million online at any time, but mostly
using free services
No other “in” gathering customers to its
services
Group video chatting not available
Does not advertise or incorporate
advertising into their program
Threats
Shrinking growth as market becomes
saturated
Governmental regulation of
communications (FCC)
“Last mile” connecting Skype to
consumers is owned by its competitors
Quality of and access to Skype services
dependent on internet access and quality
Appendix 2 – Porter’s Five Forces for Industry Analysis
Threat of New Entrants
The technology industry is highly competitive, entrepreneurial, and moves quickly.
Many of the technologies of yesterday are gone today and new technologies will pop up
tomorrow, replacing today’s.
Therefore is a high threat of new entrants and new technologies which may disrupt
Skype’s market, just as mobile phones have disrupted traditional landlines and smartphones and
tablet PCs have disrupted desktops and laptops.
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Bargaining Power of Buyers
The bargaining power of the consumer is strong. Skype offers an inexpensive way to
communicate. Skype relies on being the low-cost alternative to traditional phone calls, so
consumers who are willing to pay more for additional conveniences have plenty of alternatives.
The consumer can choose from many outlets to communicate, all at various pricing
levels, from the traditional landline, to mobile phones, texting services, etc.
Threat of Substitute Products or Service
The threat of substitutes are high, whether it is the alternative VoIP for landlines
(Vonage) or Desktop computers (Windows Live, which boast twice as many subscribers
worldwide) or any of the other various ubiquitous software and online search companies which
have a mindshare of the connected consumer.
In addition, there exist an increasing number of companies which operate on the internet
and can easily develop and download a communication client, similar to Skype. This offers an
abundance of director competitors to Skype.
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Bargaining Power of Suppliers
Suppliers have less bargaining power with Skype. Skype creates their own proprietary
software which does not lend itself to relying on suppliers.
Appendix 3 - Cost of SMP
Skype Employees
Skype Dir. of Marketing, 250k salary & benefits, 160 hours (8% of yearly capacity)
Skype Mgr. of Marketing, 150k salary & benefits, 160 hours (8% of yearly capacity)
$21,500
$12,500
Outside Consultant
Internet marketing consultant 6 months (960 hrs) x 2 consultants x $200 per hr
Total Cost
$384,000
$418,000
Appendix 4 – Online Marketing Trends
Online Marketing Trands, June 2011
( http://www.onlinemarketing-trends.com/2011/06/skype-timeline.html)
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Appendix 5 – Implementation Timeline
Week 1
Week 2-4
Week 5-15
Week 16
Week 17-25
Week 25
Week 26
Implementation Timeline
Contract with the IMC to set goals, guidelines and timelines
Joint Strategic Planning Sessions between IMC and Management
IMC research, polls, and develops strategy
IMC presents initial findings to Joint IMC/Management
Revise and rework SMP accord to Joint IMC/Management. Seek go/no go of SMP
Present Results to Management
Present Results to BOD
Appendix 6 – Sample Survey Questions
Question 1: Have you heard of Skype?
Question 2: Do you use Skype? If so, what functions of Skype do you use?
Question 3: If you do not use Skype, does anyone you know have it?
Appendix 7 – Pro Forma Statement
Skype Pro Forma Income Statement from Partnering with Social Media Websites
(millions)
2005
2006 2007 2008 2009 2010*
Revenue
72
194 381
551
718
812
Cost
50.8
140 228
290
338
400
Gross Profit
21.2
54
153
261
380
412
Operating Expenses, Interest, Tax, etc.
68
173 (1,252)
219
749
399
Net Profit
(47)
(119) 1,405
42
(369)
13
2011
1,137
568
568
409
159
2012
1,592
796
796
573
223
Skype Pro Forma Income Statement with incremental revenue from advertising
2011
2011 2012
Revenue
1,137
1,187
Cost
568
593
Gross Profit
568
593
Operating Expenses, Interest, Tax, etc.
409
427
Net Profit
159
166
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2013
2,228
1,114
110
802
312
Appendix 8 – Skype in Schools
http://www.youtube.com/watch?v=WrVm5njFXZ8&feature=fvsr
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