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					       Case Analysis

            Prepared for:

        Dr. Alok Chakrabarti
 New Jersey Institute of Technology
Management Strategies for E-Commerce
      Fall 2007 – MIS 625-851

           SEPTEMBER 30, 2007

              Prepared by:

             SAAD ALSHEHRI
           AMY FARINA (STEED)

        For over a century communication through wired means has utilized the all too familiar
invention of Alexander Graham Bell. The long solo reign at the top for the common telephone
has enjoyed periodic technical enhancements, but nothing too strikingly different from a
consumer‘s point of view. The invention of the personal computer, networking protocols and
then Internet has paved the way for innovations in the communications industry that is leading
to nothing short of a revolution. The latest trend has been a technology called VoIP. Voice over
Internet Protocol is somewhat of a misnomer – simply because this technology includes voice,
text/data, and video communication capabilities.
        What awed mankind during Bell‘s time was hearing a simple voice over a wired line.
Today, far superior technology within the same realm continues to fascinate, as it transmits
voice and data over the Internet, the unified global network that connects us all. This excitement
over the possibilities has strong business implications and creates opportunities to be
capitalized on serving public interest. In the new digital economy, the focus is on the consumer
and catering to their wishes is every eBusiness executive‘s opportunity, and responsibility…


        …Two such visionaries who capitalized on technological innovations, more specifically,
the VoIP trend, are Niklas Zennstrom and Janus Friis; co-founders of Skype. The peer-to-peer
(P2P) VoIP network they created started from decent seed capital and adequate human
resources. While these two pillars contributed to the structural integrity of an organization bound
for success, it was essentially public acceptance that put Skype on the eCommerce map. The
company offered a free service using a cost effective collaborative platform catering to the
public‘s excitement over the technological possibilities in communicating with friends, loved
ones, and business associates. In recent times, user accounts has grown 131% (first quarter of
2006 to second quarter of 2007)1, reiterating public acceptance of Skype‘s service.
        Voice over Internet Protocol is on track to becoming a disruptive technology2 because it
challenges the long reigning supremacy of the public switched telephone network (PSTN).
Traditional landlines, and to some extent, cellular services, stand to be affected in a significant
way. The consequences of this innovation are not completely technological as there are P&L
implications to any business in the industry. The associated cost of providing communication
services is a product of every industry‘s infrastructure and available resources to an
organization. VoIP has fewer dependencies on physical capacities, which opens up
opportunities to provide similar services at lower costs. In Skype‘s case, the assumed
dependency on physical infrastructure was reduced further than the aforementioned based on
the technological model. However, the proprietary protocols developed by Skype were non-
conforming to established standards, and as a result had difficulties with interoperability while
carrying notable risks. The company‘s physical structure was based on a peer-to-peer setup as
opposed to a client-server paradigm. The benefits of this, as outlined by the case study, are that
there are no variable hardware support costs for servers.
        Good business sense dictates that savings on cost, when passed onto the consumer,
provides a competitive edge. Skype‘s pricing plan followed this ‗best practice‘ when it came to
the two premium (revenue generating) services that it offered, SkypeIn and SkypeOut. In
addition to the significant savings the consumer experiences as a result of VoIP technology,
Skype was positioned to provide a 28%3 and 52%4 savings from its main competitors, Vonage
   Case Study: Skype - Exhibit 2, Harvard Business School

    Page 2 of 17
and Cable Vision respectively. Contributing to this competitive advantage was the scalability
factor derived from the technological paradigm and the incentive variable of additional
communication capabilities.
         EBay‘s acquisition of Skype in September 2005 spoke volumes on the landscape of
conducting business in the new digital economy. The status quo of industry boundary lines
pertaining to mergers & acquisitions was essentially challenged. Comparatively, this high level
strategy mirrors that of an aggressive portfolio of investment funds. Whereby, unique selections
of publicly traded companies regardless of industry concentration are culminated to maximize
the ROI. The question of relevancy to eBay‘s course of action in this manner has strong tie in
with the leveragability factors associated with eBay‘s primary vision. Per the case study, the
three benefits reflecting management‘s point of view, clearly notes where Skype ―fits in‖ to be
advantageous to some of eBay‘s core business competencies. Essentially, the acquisition of
Skype adds value for eBay with regards to consumer orientation, expansion, and operational


         The external or macro-environmental factors have the potential to enhance or subdue
business performance. Although there can be at times, volatility associated with a forecasted
assessment of such qualitative factors, a reasonable outlook can be derived in order to support
any short-term and perhaps even long-term strategy. The degree to which the political,
economic, socio-cultural, and technological factors affected Skype increased over time as a
result of public awareness and subsequent acquisition by eBay. As a standalone business prior
to the acquisition, Skype had significant global potential, but eBay‘s vision, deep pockets and
strategy for expansion introduced the leveragability factor that stands to benefit both business
models inclusive of other businesses in eBay‘s current portfolio.
         Because both Skype and eBay have an international outlook, the Political playground
yields mixed assumptions contributing to the potential success. Assuming no other ‗disruptive
technology‘ enters the arena challenging VoIP, variations on the regulatory front seen from
country to country will become less significant over time, provided that expansion efforts are
realistic. The more liberal regulations providing the greatest opportunities are inherent to
developed countries at present and Skype‘s presence together with eBay in places like North
America has tremendous profit potential. In the case of emerging democracies, a favorable
regulatory environment is time dependant, but VoIP‘s presence in a significant way is inevitable.
The outlook on Skype‘s ability to capitalize in such places is a very positive one given the
magnitude of eBay‘s reach. Countries with more conservative views, where the political is often
intertwined with the socio-cultural issues, the possibilities are less optimistic. As noted in the
case study, several Middle Eastern countries have denied VoIP traffic into their communications
environment. Additionally, 45 countries restrict internet presence5 and as such, the implications
for Skype are not too favorable.
         Examining the Economic variable surrounding Skype reveals very little risk to efficiently
conducting business. The technological peer-to-peer model combined with Skype‘s ability to
leverage eBay‘s resources ensures pricing competitiveness. This sort of perk will be appealing
to a mixed global economy where personal communication costs vary as a result of the political
and regulatory environment. Skype‘s low cost to consumer has very high perceived value since
the savings over the long run can be significant; as a result, it contributes to additional
discretionary spending available to the consumer. This is obviously very crucial to sustainable
growth not only for Skype, but also for a booming economy. Should the economic front change
for any reason, Skype is positioned to navigate through the thick and thin without much
business impact. In effect, as long as there is a need to communicate, the low cost service will
prove to be the dominant force. Skype is also creating market value by instituting a developer
      Module 9: MGMT 625-851, Chakrabarti, Alok

  Page 3 of 17
program. Allowing other businesses to seize third-party opportunities encourages economic
         The Socio-Cultural factor‘s impact on business efficiency ultimately translates into the
ability to target certain demographics. Communications is a universal need; as such the
limitations are not as great as those seen with niche markets. However, on a global scale, the
target demographic for Skype is somewhat of a niche because of the aforementioned political
implications. This does not mean however that there is a lack of social acceptance. As noted,
―Syrians go to Lebanon for the weekend to check email‖6. To point, mankind will transcend
boundaries if the available commodity is socially acceptable. Adding in the low cost variable and
additional capabilities Skype‘s service offers, the outcome is extremely socially engaging. In
developed and emerging markets, these implications carry a greater weight.
         The Technological availability factor is very concentrated and scattered globally. And
even in places where technology is vastly available, a key ingredient needed for Skype‘s
success is not as common as it is in North America. As noted, ―By 2006, 66% of Europeans
consumers will be online but only 10% will have broadband access‖7. While this sounds
discouraging initially, a second thought reveals a more positive outlook. Similar to the political or
regulatory outlook for emerging democracies, technological availability is merely time
dependant. The available time is a good thing for Skype and is definitely needed. The
proprietary protocols the company developed are seen as dangerous and risky. Before scaling
themselves globally, benefiting from the first mover‘s advantage, more specifically, brand
advantage associated with eBay, Skype can work towards gaining technical acceptance through
development enhancements. Another benefit associated with VoIP industry acceptance relates
to an enhanced target demographic. Skype and eBay will enjoy a larger customer base if they
gained the trust of businesses as a reliable communications service provider. In effect, the B2B
model will be an added bonus. Additionally, 10% is not across the board and each region shows
different growth rates. For example, in 2007, the UK‘s 84% of households with Internet access
had a broadband connection (up from 69% in 2006). In Northern Ireland, of all households with
Internet access, 78% had broadband connections.8


         In the Harvard Business Review article entitled, Why Business Models Matter, the author
Joan Magretta relates that often the business model and the business strategy are
misunderstood as being one in the same. She goes on to point out that the importance of a
business model is to ask the fundamental questions like ―How do we make money in this
business? What is the underlying economic logic that explains how we can deliver value to
customers at an appropriate cost?‖ She says it is this question of ‗How?‘ that creates a story,
and that story considers all the players of a PEST analysis as well as the feasibility of the model
itself. The story or business model can fail if it cannot pass two important tests, a narrative test
(does this model make sense?) and a numbers test (does the P&L add up?). The following is a
discussion of Skype‘s business model, its story, as well as its strategy. The business strategy,
says Magretta, is tied primarily to how the organization differentiates itself from its competition
as well as its marketing methods to promote itself. We will examine both Skype‘s business
model as well as its evolving strategies in the VoIP industry.
         The Skype story starts in 2003; the voice over Internet protocol (VoIP) market was just in
its nascent application stages. A report by Forrester Research in September of that year pointed
to business solutions as the industry mover and stated both Microsoft and IBM as the
dominating players by ―racing ahead of companies in voice over Internet Protocol technology,


     Page 4 of 17
bringing the power of live communications to enterprise desktops.‖9 It was during this same
period of business applications seeking new and innovative ways to take advantage of the VoIP
technology that Skype emerged. Skype entered quietly with a consumer product that did not
need to ‗leverage a business solution‘ but rather provide an alternative consumer solution.
          The Skype story or business model was a simple plan to attract users by offering a free
basic service that would offer an alternative to long-distance phone bills. They kept this
business model inexpensive by relying on word-of-mouth advertising; using the established
Internet backbone; and by using their customers computing power via peer-to-peer (P2P)
networking. Skype‘s revenue would come from services such as SkypeOut, SkypeIn or other
premium services. The business model would keep Skype-to-Skype user calls free. These
charges related to Skype‘s premium service were variable depending on use, rather than a fixed
price, to provide the most flexibility to its customers. Most of the costs associated with Skype
were incurred by gateways that were needed to convert IP traffic back and forth to regular
telephone signals used by public switched telephone network (PSTN) lines (or POTS lines).
          Since Skype‘s business model focused primarily on the technology, it was able to
provide quality service for its consumers by leveraging its own proprietary protocols so that it did
not suffer the problems of other rival VoIP providers like Vonage, using Session Initiation
Protocols (SIP). Additionally, Skype‘s P2P self-healing network did not use the client server
model that others in the industry used; this meant no external hardware servers had to be
maintained. This aspect of their business model tied directly to their understanding and belief
that the tremendous growth of the broadband consumer market would serve as a backbone,
which made business model sense! Skype‘s P2P network relies heavily on user‘s connections
speeds for quality of service; the company would need to bet on healthy predictions of growth in
the consumer broadband connection market to ensure quality of their product. However, as
simple as this plan was, it did not provide a one-size fits all for every consumer. The technology
was designed to be onerous on those who did not have the protection of a NAT router by
making these connections ‗supernodes‘ where traffic would be filtered for host caches (a
method of tracking the nodes of the P2P). This portion of the story did not make sense and was
one of the reasons Skype traffic was blocked from many universities where these supernodes
started to pop up due to the100 MB connections available.
          The Skype story also had issues with the varying regulations from country to country.
Because many nations taxed their state-owned communications carriers, wide-spread public
use of Skype would eat into their national tax numbers. Another concern that Skype had not
initially addressed was their encryption of voice traffic. This business model became an issue
which led to several countries blocking VoIP traffic10. However, Skype‘s CEO Zennstrom
comments on the business model change with regards to censoring countries like China, ―I may
like or not like the laws and regulations to operate businesses in the UK or Germany or the US,
but if I do business there I choose to comply with those laws and regulations. I can try to lobby
to change them, but I need to comply with them. China in that way is not different.‖11
          Additionally, Skype‘s story did not have a solid customer support business model to
handle problems when they arose. Their support blog left many users feeling confused or
frustrated when services such as SkypeOut did not work as well as they had hoped. Much of
this problem had to do with the low cost solution provider role in that they did not plan to provide
support services which could have been offered on a ‗pay per use‘ basis like their other
services. Other issues not foreseen in the original plan were related to customer exploitation via
Spam over Internet Telephone or SPIT. Skype has been seeing a growing number of these
types of chat messages and perhaps could include in their business model a ‗opt out‘ or ‗do not
call‘ registry. Other issues affecting consumers was a part of the P2P network itself; Skype‘s
self-healing P2P network worked well even with various upgrading patches from Microsoft to its
   Skype Case Study

     Page 5 of 17
nodes/supernodes, that is, until this year12. Due to an uncalculated combination of events in
their algorithms, the entire Skype system came to a screeching halt; abet this is the first time
this has happened.
         Skype also had other issues with its original business model. Once it pulled out of its hat,
the technological gambit, it had nothing left up its sleeve. This problem was somewhat
addressed by adjusting their business model to include an ecosystem that would support a
‗cottage industry‘ of developers. Skype‘s development team was small, thus, there was a need
to provide an API to developers to encourage further application tie-ins to Skype. This business
model change did not come without some risks. The idea that products developed for Skype
using these tools would be sanctioned by Skype could negatively taint their image. In addition,
Skype could find itself in competition with these service offerings by developers which might
negatively impact future developer‘s views of using the Skype API for their development
platform. Since consumers were Skype‘s primary focus, Skype understood the need to
continuously develop its own offerings; consequently creating services that allow users to
connect using a single username no matter where they are, make calls via WiFi networks13 and
provide devices dubbed ‗Skype Gear‘ through discount retailer Wal-Mart14.
         Skype‘s low or no cost solution and use of superior P2P technology gave them a
competitive edge that had lead to their tremendous growth; however what was their business
strategy or long-term plan? Although co-founders Zennstrom and Friis may or may not have
planned an acquisition by eBay, it was one of the best opportunities for this duo and Skype‘s
long term growth.
         When Skype was acquired by eBay in 2005 it had mixed reviews by critics. Most could
not understand the rational of eBay‘s management when they cited the three reasons for the
acquisition: reducing ecommerce friction, pay-per-call, and cross marketing. These reasons did
not make sense to those critics, nor did the business model. Many viewed the acquisition as
eBay‘s need to supply growth to its shareholders.15 Questions as to why eBay could not have
simply licensed Skype or negotiate cross-marketing plans were reasons why skeptics found
fault with eBay‘s managements justifications. Strategy, however, played the part on both sides
of this acquisition. Skype needed the capital and would benefit from the large eBay user base.
EBay, knew as well as Skype, the expanding broadband market provided the backbone for VoIP
technology, slated to have tremendous prospects. The Skype acquisition would give eBay a foot
into this high growth industry16 that contenders like Yahoo, Google and Microsoft were pursuing
aggressively17. Additionally, Skype was favorably viewed in Europe which could provide eBay a
level of acceptability in that Skype was not an American bred company. At the time of the
acquisition, eBay CEO Meg Whitman stated the projected revenues for Skype during 2005 and
2006 would be $60 million and $200 million respectively. While this did not seem to far from the
already established growth of Skype, Analyst Christa Quarles noted in a Wharton Business
article, ―While we believe the company does have a competitive advantage by offering low-cost
phone calls, we do not feel that this is a sustainable strategy to generate revenue over the long
run"18 She is specifically referring to the US examples where many low-cost phone plans
(Vonage) or fixed cost bundles (Cable providers) are providing the same service.
         With eBay and Skype working on a long-term strategy, Skype continued to see
tremendous growth during 2006, if not monetarily, definitely in its user base. For example,
during the entire 2006 calendar year, SkypeOut calls for North American subscribers were free
in a ploy to build a larger US consumer base.19 To build consumer base further, Skype has
added new pay-by-the-minute services like SkypePrime. By March this year, Skype had over
   Skype Case Study

     Page 6 of 17
196 million registered users (up 107% from the previous year) and on September 22 Skype
reached its 20 million user base in North America.
          Even though revenues did not make the benchmark Whitman originally set ($195 million
for 2006 versus Whitman‘s $200 million estimate), its first quarter revenues for 2007 was $77
million (up 119% from last year and 22% from the previous quarter)20. However, the volume of
SkypeOut minutes from the first quarter of 2006 compared to first quarter 2007 remained flat
and there was only a small rise in Skype-to-Skype minutes. What this could mean is that more
Skype users are spending less time using the service or they are switching to new Skype
services like Skype Pro for which there is no tracking. Another note on this issue is that last
year‘s ‗free SkypeOut‘ calls could have erroneously inflated the volume of growth.21 Thus as
2007 started off with a growth in revenues, growth in its user base has slowed.
          There are many reasons for the slump in Skype‘s growth compared to overall growth in
industry. First, more and more non-tech users are choosing to use cable bundles in order to
save money on voice, Internet and cable, along with the convenience factor of a ‗single unified
bill‘ rather than use VoIP service alone. Skype‘s main direct competitor in the market, Vonage
has also seen a slowdown in growth. Although Vonage remains the leader in US consumer
VoIP providers, Paul Kretkowski of VoIP News highlights Vonage‘s vulnerabilities and
opportunities in his comment, ―consumers see it as just a cheaper phone service. That‘s a
deadly position when Skype undercuts you on price while cable companies fly overhead with
triple-play (TV, VoIP and high-speed Internet) packages. Still, Vonage has two million registered
users, and as Russell Shaw notes, there are 223 Americans with broadband connections,
meaning nearly that many potential VoIP customers. But will the cable companies get there
first?‖22 It should be noted that Vonage‘s decline could also be due to the bad press it has been
receiving in the market from its pending patent litigation with Verizon Communications Inc.
During second quarter 2007, the new customer tally for Vonage is down approximately 65%
from first quarter. Meanwhile, Verizon is up 25.5%23 in total broadband consumers for the
second quarter. Vonage may end up in a situation like VoIP provider SunRocket if it cannot turn
around its churn of current subscribers and lack of new ones. Skype would benefit in Vonage‘s
North American market as consumers look to fulfill their VoIP needs if this should happen.
However, Skype, like Vonage, does not have the infrastructure to deliver the same level of
customer support as the heavy cable hitters; as pointed out in Kretkowski‘s article ―they are
equipped to respond to problems with transmission over the network, because they own the
network.‖ Currently, as of 2007, CableVision and Time Warner Cable each have approximately
1 million VoIP customers and are growing. See Appendix A for details on Skypes revenue
growth for 2006 and first quarter 2007 and Appendix B for industry revenue growth over the
same period.
          The outlook in the North American market is not the same in the European market.
According to GigaOM, consumer VoIP subscribers will reach 40% in Europe by 2011, compared
with the US forecast of only 20%.24 The article highlights the main reason behind this slow
growth in the VoIP market in North America as the slow push from telecoms and cable
providers, while big hitters like Vonage are said to have ―fallen on hard times‖. This is where
Skype comes into play. Although the company has also seen a slow down in North American
growth25, Skype is very popular in the European market. Skype‘s strategic move to WiFi
enabled calls will accelerate growth within the European market26. Furthermore, ―Analysis
predicted that cellular VoIP revenues would surpass those of fixed-line VoIP by 2012,
generating some $25.9 billion in the U.S. and Europe.‖27 The line graph in Appendix C is from

     Page 7 of 17
GigaOM and shows growth estimates of subscribers for the VoIP industry in both the US and
        As we step back from the picture painted of Skype‘s business model, its evolution over
time and its new strategic moves in the market place since the eBay acquisition, there is a very
real threat from direct competition, industry changes, and substitutes. Most users use their
telephones for local and national long distance, as opposed to international calls. This gives
VoIP providers like Cable and Telecom companies an edge over Skype since they already have
the interconnection without a special ‗SkypeOut/In‘ plan. Additionally, other key contenders who
provide substitute products like cellular carriers offering ‗unlimited or weekend‘ calling plans,
(available for use after peak hours and on weekends or bulk packages) allowing mobility, are
not to be taken lightly. However, the largest threat to the VoIP subscriber market is the Cable
providers. Cable providers bundle their offerings making switching to VoIP easy and offer
combined services to create a perceived value package. They even obfuscate the VoIP services
with terms like ‗digital telephone service‘ to add a comfort level to the non-tech savvy consumer.
        The VoIP industry has amazing growth potential; it will be difficult for Skype to sustain
edge given the now aggressive Cable industry players. Even as direct competitors like Vonage
struggle to maintain their market share, Skype will need to focus its energies on differentiating
its product to overcome the perceived value packages that Cable companies offer. It is
important that Skype no longer relies on word-of-mouth advertising and aggressively seeks to
further its market share by creating value relationships, innovation and product differentiation,
and superior quality.


        The following SWOT analysis breaks down the Skype business model into several
platforms for high-variety strategy and strategic vision (See Appendix D for figure on Platform
Thinking). Vision is the term often used with strategy since it requires setting goals and plans on
obtaining these goals. Relevant platforms outlined are part of the strategic leverage that is
needed to be successful in any market, including eCommerce. These platforms are used to
manage technology companies with the objective of adapting to the global economy where
innovative changes are frequent.

       Strengths                          Weaknesses                          Opportunities                                 Threats
Intellectual Capital – Process Platform
Proprietary signaling protocols      P2P network relies on the            Skype could prioritize its traffic over   Algorithm used may contain
are closed. Protocols allows         connection speeds of its users and   network lines. IPv6 packet (An 8-bit      additional unknown flaws as it
Skype to traverse firewalls and      broadband connections are            field that describes the packet's         did prior to August 16th and
NAT routers. Packet information      needed or performance suffers.       priority) could help to eliminate edge    caused the Skype network to
is encrypted                                                              cable competitors have since they         crumble again, this could be
                                     If enough supernodes go down         own the lines they can give their         used to question Skypes future
P2P network with supernodes          then the entire system goes down     traffic higher priority.                  reliability.
that act as intermediaries           as it did on August 16 when a
between login server                 significant number of supernodes                                               New entrants could grab
                                     rebooted due to a patch and the                                                Cellular/WiFi market or existing
Skype already plans for Cellular/    network had a peak traffic29                                                   cable providers could enter
WiFi phones hitting market by                                                                                       cellular market as well.
2009, customers will switch
between cellular and WiFi VoIP
Consumers - Customer Platform
Low cost solution to international   Little to no switching costs.        Skype can leverage its                    Service interruption can cause
calls.                                                                    technological innovation to provide       loss of consumer confidence in
                                     Consumers wanting an integrated      superior services to cable or             product.
Strong consumer base in EU           solution can get one from cable      telecom providers.
                                     bundles                                                                        Consumer convenience factor
Consumer loyalty to product,                                              WiFi integration already in place as      of bundled Cable packages
iconic.                                                                   new market takes off


     Page 8 of 17
       Strengths                           Weaknesses                           Opportunities                             Threats
Competitive - Product and Brand Platform
Direct PC-to-PC/Phone Competitors – SIP (ex: Vonage)
Vonage is having financial and        Vonage is the leader in the North     Vonage is experiencing a high         New entrants into market will
legal issues which are negatively     American market, can leverage this    amount of customer churn and          tap into available consumer
impacting its North American          massive user base by improving its    slower new customer growth, Skype     base in North American and EU
Sales                                 position.                             can take advantage of the market
                                                                            situation to acquire Vonage           Other providers besides direct
                                                                            customers with the right marketing    competitors needs to be
Cable Providers – Bundle/Triple-play Quadruple-play packages (ex: Comcast)
Able to utilize existing customer     Lack of innovation in VoIP.           Innovating new services and           Telcos and stand-alone
base by offering additional                                                 features into their VoIP services     services innovating and
savings with bundled services.        Customers feel confused by            would provide a competitive           providing services and features
                                      marketing of service as the ‘same’    advantage over stand-alone            that cable providers cannot
Not identifying in their marketing    as what they were used to with        solutions                             offer.
that this is VoIP, calling the VoIP   PSTN lines. Customers not
service ‘digital telephone service’   understanding when the power is                                             Competing on costs with Telcos
instead gives customers the           out the line is out.                                                        and stand-alone providers like
impression this is not any                                                                                        Skype will drive down profits
different than their current phone    No in voice because they want to,
system (reliability factor).          in voice to maintain their customer
Telcos (ex: Verizon)
Telecoms were slow to market,         Telecoms need to put in new           Lack of innovation in market by       Telecoms have a large
not as interested in cannibalizing    equipment and switching networks      telecoms, no new services and         consumer base, this could be
their existing market. Investment     over to new system. Ops costs         features over stand-alone providers   leverage as a foot into areas
in new equipment can yield long       involved makes them slower to         like Skype                            where Skype has not yet
term debt, this equipment may         grabbing into market and thus lack                                          reached.
become outdated or market             of interest.
share may not be realized
leaving no immediate solution for     Telcos will need to cannibalize
paying investment by telecoms         their own customer base.
Global Platform
EU favorably views Skype              Skype is blocked in certain           As VoIP gains in acceptance along     Substitutes and direct
                                      countries due to restrictions on      with broadband connections, the       competition continue to grow
Skype provides superior plans for     VoIP traffic.                         available consumer base grows.        due to market potential.
all users regardless of country                                                                                   Continuous competition will
                                      Skype’s business model must           Skype is not seen as a sole US        drive down costs and profits for
                                      include levied taxes according the    company and this provides             Skype
                                      country and its national reguations   opportunities for growth


         Skype‘s business model revolves around three classes of products that are made
available to the total customer base. This customer base is comprised of home consumers,
small businesses, and corporate entities. This consists of approximately 54 million users, with
2.7 million registered to pay services. The Skype product portfolio ranges from a free service
that allows patrons to make free calls between other Skype subscribers as well as pay services
including, to an inbound and outbound voice calls available to and from standard public
switched telephone network (PSTN) users. With a global reach, a competitive pricing strategy,
and a solid user base, Skype has emerged as one of the leaders in the VoIP service industry.
         As we have studied, it is of paramount importance for an organization to pay close
attention to its relational capital in terms of its customer base as well as its partners and
investors. Skype is no exception and in many ways has a tremendous burden to shape
business strategy and services provided to best foster their consumer capital. From a customer
standpoint, Skype offers an entry-level, free solution to try their VoIP services with other Skype
     Skype Nation:
     Skyp Blogs:
     Skype Launches Premium Services:,120481-page,1/article.html

     Page 9 of 17
members. From Skype‘s standpoint, the hope is to attract these try-before-you-buy type
customers with their free service and hook them on the technology, eventually leading to an
upgrade to premium pay services. Although some may debate the statement; Skype has done
an excellent job creating a platform that magnetically attracts customers to their product by
providing ease of use leveraging the customer‘s existing investments.
        This platform is more than another Internet appliance that delivers VoIP solutions to the
end user. Skype was able to produce a product that was compatible on virtually any computer
regardless of hardware manufacturer or operating system. Not only was their product essentially
physical platform agnostic, but the company did not charge for the download and install on the
end user‘s system. Furthermore, Skype would operate using the customer‘s existing internet
access. The approach made the product highly attractive across the board, especially for those
technically savvy and looking to benefit from the free service Skype provided out of the box.
Therefore, not just the end user benefited from Skype‘s product but the third-party markets
could also easily take advantage of the Skype technology.
        The case study uses the term, ecosystem to describe the overarching community that
Skype created by bringing its product to market. The paragraphs above target the end user of
Skype; however the end user is not the only member in the Skype community. Third party
software and hardware developers are able to leverage the technology to create applications
and products that fully integrate into the Skype service. Examples include voicemail
applications, standalone phones, and headsets that allow for the Skype user to expand their
current service and un-tether themselves from the computer. All these full features provided
further appeal to bring the products to the mass market.
        In addition to the third party market for Skype‘s products and services, Skype itself has
explored development of new products and services in-house to add to the host of premium
services offered. The case study uses the example of creating services such as voicemail,
information services, and payment services internally. The issue lies in the fact that the fairly
open interface has allowed for others to compete directly with Skype for the same products and
services. This leaves the company with a dilemma in regards to its long term strategy of
whether to continue to invest in these developments or allow the third party groups to control
developments using the core Skype framework.
        As with most technologies, the benefits of bringing that technology to fruition also have
their share of second order issues that arise once its use becomes commonplace. The case
study lays out several issues that negatively affect the Skype community. The first is customer
support; an area that Skype has never heavily invested in. Customers who seek support find
themselves exchanging emails with customer support personnel who do not promptly and
proactively support the customer. For many customers, especially those used to real-time tech
support could easily be turned away from the product because of lack of support. Similarly,
another issue mentioned in the case study was the fact that Skype technology rides the public
Internet; therefore it is at the mercy of a myriad of service problems including lag (delay),
service disruption, quality of service (QoS) issues and outages.
        The final relationship that warrants significant attention is Skype‘s external relationships
to the phone carriers who provide the gateway between the Skype service and the telephone
user. This relationship which includes SLAs and contracts, help to keep the overall cost of using
the telephone system gateways to specific price points that allows Skype to offer competitive
prices. Although initially this sounds much like pay-for-service via contract type relationship,
many of the gateway service providers are also in the same business area competing with
Skype to provide VoIP services to customers. This is a relationship that requires significant
monitoring and adjustments to maintain the level and cost of service required.
        Initial analysis of Skype‘s management of its relational capital yields some basic
conclusions to where their current strategy and business process is working and where Skype
may need to change course. As mentioned above, Skype has created an attractive product that
draws in both home and commercial customers to their product with minimal (if any) direct
marketing. The design of their host application using open architectures that allow for third party
plugins, adaptors, and peripherals expanded their appeal and relevance in the marketplace.

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Subscribes also have the opportunity to experience the service Skype offers using peer to peer
exchanges among other Skype users without a fee; with the hope that the subscribe decides to
purchase additional services. The raw number of subscribes to premium services clearly show
that this philosophy works. With respect to managing relational capital, Skype needs to focus
more is on three main issues; customer service, partnerships, and a decision on whether to
continue to develop additional services in house. A more focused effort on supporting their
subscribers regardless of the type of Skype service being used. This includes better diagnosis
of issues, delivery of solutions and voice (live technician) support. The perception of a solid
technical support backbone is shown to the free service customer, the better the chance to
convert them to paying customers. To achieve this level of customer service, Skype does not
necessarily have to have organic talent to serve these needs. Skype could partner with
established customer support companies such as Geek Squad and others to deliver these
services. Another partnership Skype may want to explore would be with the telephone gateway
providers themselves.
        Although the case study doesn‘t specifically call out any existing partnerships, it would
be wise for Skype and the gateway providers to find common ground and both beneficially profit
even if both companies provide similar services. One final partnership suggestion would be to
potential partner with some of the third party product developers to build, ―Skype-Certified,‖
products that would ensure the customer that those particular products would work with their
existing service and guarantee the quality of service expected. This leads to the final
suggestion, a major decision Skype may need to make to address the issue raised in the case
study regarding the burden placed on internal developers within the company. If Skype intends
to remain a small company with minimal overhead and staffing internal development of certain
―pay‖ services may not be beneficial. As the case study states; not only is development costly it
may be developing a service that the company intends to profit from, while simultaneously a
third party may be developing a comparable product to with they intend to deliver for free. Skype
currently has one of largest worldwide networks, with some of the most competitive rates in the
industry; with some renewed focus their relational capital the company could very well remain
the industry leader for year to come.


          In addition to current observations of rapid market growth, e-commerce businesses like
Skype and eBay also realize that technology is getting cheaper steadily and high-speed internet
connections are on their way to becoming vastly available. As a result, such businesses have
their eye on expansion and growing market share. As mentioned earlier, the first mover
advantage is crucial to success in the new digital economy, and both Skype and eBay stand to
benefit from eBay‘s global brand advantage. Furthermore, eBay's acquisition of Skype will cost
both companies very little compared to the expected return on an investment of approximately
$4.1 billion. As it relates to Skype and eBay‘s business models, an assessment of the
technological, strategic, industrial, and consumer points of views reveals more of these benefits
and their contribution to internal and external growth.
          From a technological point of view, eBay will benefit from the advantages of Skype's
VoIP technologies which are low cost calls compared to mobile and land lines calls; and the
flexibility and enhanced ways of communicating that include audio, video and instant
messaging. This acquisition provides the online auctioneer with a real-time communications
platform, and the potential to expand into the voice business. For example, eBay can now
enable live auctions, accessible by subscriptions over the Internet, and have customers make
bids from all over the world.
          Helen Upsher of said "eBay's acquisition of Skype is a good example
of the creation [of] a converged [set of] applications. EBay is an on-line auction house that
provides its bidders images and data about items for sale as well as conducting the auction over
the web. Skype is an internet telephony service. Combined, the two businesses will offer a
service whereby someone bidding for a particular item can click a button on the screen and talk

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directly to the person offering the item for sale. It does not take too much imagination to
envisage similar applications driving improved efficiency and productivity across all shapes and
size of business."34
         At the other end of the spectrum, Skype will benefit from eBay's strong position in the
ecommerce market and capital resource availability to expand its services and to renew itself
from just a provider in the VoIP market to a complete communications platform business. Skype
can now continue developing features and functions that consumers find relevant. According to
Paul Emery, Director of Skype's developer program, the company's strategy is to advance its
change from an intriguing curiosity in the VoIP market to a full-fledged communications platform
and announced a handful of developer tools. First up is Skype's first Web service, which will
enable external applications and services to access the company's new Unified Directory.
Access to the Unified Directory's premium listings, users and public conversations will enable
Skype developers to build greater numbers of communications applications that leverage the
platform. Speaking at the company's North American headquarters Emery said "Skype, an eBay
subsidiary, has more than 6,000 community developers and about 50 professional development
partners. Together, they have produced more than 130 integrated applications that garnered
more than 32 million downloads this year, he added".35
         From a strategic point of view, the acquisition will support both eBay and Skype
strategies for expansions and growth. EBay will be able to move into new global markets and
offer its ecommerce services by benefiting from Skype's large number of international users.
This will allow it to expand its PayPal business as well. EBay also is aiming to monetize online
ads by using Skype to initiate ―click-to-call‖ IP phone contact that would be paid by the
advertiser, taking away business from the traditional toll-free ―800‖ number providers. The
addition of a voice calling feature to its existing online network will allow Skype to charge fees to
merchants for generating sales leads. Additionally, Skype can benefit from offering other
services and products such as what it does with offering PayPal to its users. The acquisition will
also strengthen the Skype brand, especially in the U.S. market and help the company's services
become more attractive for corporate use, especially with improved network security features.
         The industry perspective is that large companies are better able than small ones to
maintain profit margins and to withstand pricing pressures and market fluctuations. As the
market grows, and new players attempt to seize any available opportunity, consolidation trends
among existing businesses will increase. As pointed out earlier, maximizing ROI for any
business venture could possibly mean a diversified strategic business unit (SBU) portfolio. Such
strategy will offer protections for small firms from large competitors and open the way for new
markets and services to emerge continually and simultaneously. Similar to many technology
companies, Skype had to grow bigger to survive the tough competition in the communication
market like MSN, and Yahoo! who also offered similar VoIP services. With such large
competitors, it became clear to Skype that getting bigger was a priority with regards to growth,
facing market threats, and successfully playing against emerging alternatives such as MSN
Messenger and Google Talk.
         From the consumer‘s point of view this acquisition may mean more to eBay users than
to Skype users, at least initially. The transaction will support eBay's business, because it will
enhance the ways that online buyers and sellers can interact. An example would be to offer pay-
per-call services to place auction bids. On the other hand, Skype is positioned to offer its
costumers, Wi-Fi phones for Skype™ software, making Internet calling on the move a reality. By
enabling consumers the option of making Internet calls without a computer, Skype is freeing
people from their computers and saving them money. Stefan Oberg, General Manager
Hardware for Skype stated: ―We want to give people the freedom to move around while talking
and have access to Skype wherever they are – whether in front of a computer or while moving

 Page 12 of 17
around the home or office. Now people can make wireless Internet calls and enjoy the great
Skype cost savings and sound quality free of a computer.‖36
         Finally, Market value is added by this acquisition. For eBay customers the addition of
voice interaction application is an immediate value-added component to the services. For
Skype‘s 220 million users the company is planning to launch a certification program for
professional developers, designed to better meet growing demand from users looking for
specialty applications. Those efforts will coincide with plans to simplify its developer tools and
broaden its e-commerce platform. That involves incorporating more payment options for users
who want to play games or buy widgets and applications developed on the Skype platform.
During his presentation, Emery, Director of Skype's developer program, also showed off several
successful application mashups already developed by companies like JiWire, the Wi-Fi hot spot
directory service, and TownKings, one of Germany's largest social networking sites. JiWire,
based in San Francisco, was recognized as the winner of the company's U.S. Mashup Award
for developing an application that lets users find available Wi-Fi hot spots through the Skype
client's chat box. Emery said Skype hopes to double or triple the number of such applications
within the next year.37


         Given the recent global adaptation to emerging technologies such as VoIP, and online
consumer spending through e-Marketplaces, the outlook for commerce is increasingly becoming
dependant on technological leveragability. Brick and Mortar organizations have started
virtualizing and this occurrence is happening at a very rapid pace. As such, there is no primary
formula for determining success. As an example, this was evident through eBay‘s decision to
acquire Skype. The focus was on creating opportunities and taking advantage of one piece of
the virtual puzzle to compliment another. In the process, the status quo was challenged and
new ways of strategic thinking was introduced.
     Skype‘s business model and strategy to become the leading singular provider of VoIP
services is threatened by direct competitors, indirect competitors (like Cable and telecom), and
substitute products like cellular. However, the market is vast and as the broadband market in
Europe as well as other parts of the world continues to climb, Skype is positioned to take
advantage of this growth. Our team felt there were several recommendations that we could offer
and things Skype could do to improve its service offerings and entice more users to its product.
Listed below are some ideas:

          Pay per use for support - helping frustrated customers who may or may not be tech
          Opt out / Do not call registry - to tackle SPIT.
          Realistic international expansion strategy; to be done in sequence, simultaneous or not,
           taking advantage of both business models‘ global reach. International diplomacy, as with
           China can be time consuming.
          Gain technical acceptance as to cater to corporate entities more aggressively by
           expanded the B2B model.
          Skype backed third party plugins and accessories, in order to maintain brand advantage
           and control of the products that are ‗certified‘ by Skype.
          Skype needs to maintain competitive advantage through its low cost service strategy.
           Thus in order to continue to be the low cost service provider, niche market segments like
           B2B should be done by a separate unit. This would be another ‗off-shoot‘ of eBay rather
           under the Skype image. Since this business unit would not be married to Skype, this
           new model it could offer business solutions specifically targeted and focused towards the
           B2B market without impacting the Skype consumer base.

 Page 13 of 17

The three charts below provide a breakdown of Skype‘s growth during the 2006 year and into
the first quarter of 2007.

                                 Skype: Revenue Doubles, Growth Slows38

                                             Table 1: Skype Revenues 2006-2007
                                                              Q1 2006 Q2 2006 Q3 2006 Q4 2006 Q1 2007

                 Revenues (in millions)                        $35.16      $44.16      $50.02     $63.42    $77.01
            Current quarter vs prior quarter                      42%       26%         13%        27%       22%
          Current quarter vs prior year quarter                    NA         NA         NA       156%      119%
Percent of revenues from international (outside U.S.)             87%       86%         84%        84%       85%
                         NA = not applicable (eBay completed Skype acquisition in October 2005)
                                                     Source: eBay

Table 2: Skype Registered User Growth 2006-2007
                                                 Q1 2006     Q2 2006      Q3 2006      Q4 2006    Q1 2007

Registered users (millions)                      95          113         136          171         196
Current quarter vs prior quarter                 27%         20%         20%          26%         14%
Current quarter vs prior year quarter            NA          NA          NA           129%        107%
NA = not applicable (eBay completed Skype acquisition in October 2005)
Source: eBay

Table 3: Skype VOIP Traffic Volumes 2006-2007
                                           Q1 2006 Q2 2006 Q3 2006 Q4 2006 Q1 2007

Skype to Skype Minutes (in billions) 6.9               7.1         6.6         7.6        7.7
Year on year growth                        NA          NA          NA          46%        11%
Skype Out Minutes (in billions)            0.7         0.9         1.1         1.5        1.5
Year on year growth                        NA          NA          NA          189%       131%
NA = not applicable (eBay completed Skype acquisition in October 2005)
Source: eBay



 Page 14 of 17

The below graph, ―North American Total VoIP Service Revenue‖ illustrates VoIP growth
overall and is provided to illustrate Skype‘s position in this growing market.

                     Source: North America Total VoIP Service Revenue

Page 15 of 17

                Source: GigaOM

Page 16 of 17

         The source of this figure is an article in the below listed California Management Review
entitled Leveraged High-variety strategies: from portfolio thinking to platform thinking. In this the
author Sawhney outlines arguably one of the most prominent core competencies in product
lines, that of the ―the concept of leveraged high-variety strategies – strategies that allow firms to
achieve high variety and high growth, without a corresponding increase in costs or complexity.‖
Sawhey outlines that the ―key to leveraged high-variety strategies is platform thinking—the
process of identify and exploiting commonalities among a firm‘s offerings, target markets, and
the processes for creating and delivering offerings.‖

        We feel that Skype could use the VoIP commodity market to leverage into niche
industries like B2B.

―Module 3‖ of Management of Technology Course by Dr. Alok Chakrabarti
Sawhney, Mohanbir and Emanuela Prandelli. ―Communities of creation: Managing
distributed innovation in turbulent markets‖. California Management Review. Summer 2000.

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