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					The Skype Revolution

        Akash Argawal
      Patrick Adusei-Poku
         Robert Melius
        Robert Winters

  MIDS 409 Fall 2006 (Section I)
                                  The Skype Revolution
           Skype, a Luxemburg based company, was founded in 2003 by Niklas

Zennstrom and Janus Friis. Believed to be the world‟s fastest growing Internet

Communication offering, Skype was acquired by eBay on October 14, 2005. The

company promises modern global communications by providing users with free calls

to people all across the world, as well as extensive video and voice calling features

which are not available on traditional telephones. Skype generates revenue via its

premium offerings – making and receiving calls to and from landline and mobile

phones, voicemail, call forwarding and personalization, such as ring tones and

avatars1. By developing strategic alliances with hardware and software providers such

as Intel, Motorola, Sony, and Hewlett Packard, Skype has evolved into a major player

in the global communications market. People in virtually every country around the

globe are currently using Skype.

           Globalization has become one of the most pertinent advancements of our

time.        As a result, the need for cost efficient and convenient modes of

communication is continuously increasing. Skype has taken advantage of this need by

offering a suite of products and services and that make global communication user-

friendly and affordable. Users can talk to anyone on Skype over the Internet for free,

and the company promises that this service will always be no-charge. However,

Skype charges the user for certain features that make the service more convenient.

Since not every person uses Skype, SkypeOut is paid service that allows the Skype

user to call ordinary landlines and mobile phones. Calls to the US and Canada are

free and international rates vary by location, but are competitive.       Conversely,

SkypeIn allows Skype users to have their own regular phone numbers, so that friends

can dial a local number and connect with the Skype user anywhere in the world. The

Skype user can get up to 10 SkypeIn numbers in different places, to avoid forcing

friends in different locations to incur long distance charges.       A three month

subscription to SkypeIn costs the user approximately $13 and includes a free

voicemail subscription. Skype also offers voicemail as a stand-alone service, charging

$6.50 for three months. SMS messaging is also a popular paid feature of Skype, and

has recently been added to the offering for Mac users.2

          Free features:

          Calling landlines and mobiles within the US and Canada
          Calling other people on Skype
          Video calls on Skype
          One-to-one and group chats
          Conference calls with up to 5 people
          Forwarding calls to other Skype names

          Paid Features

          International calls to landlines and mobiles
          Receive calls from phones with SkypeIn
          Send and receive voicemails
          Forward calls
          Send SMS messages

          “Cool Features that cost a little”


           Pictures for your Skype profile
           WeeMee profile pictures
           Gift certificates
           Headsets and webcams

           Skype offers a variety of phones, ranging greatly in price and features. At the

lower end of the spectrum, US Robotics manufactures a Skype phone that sells for

$25 and offers basic calling features and usability3. The phone plugs into a USB port

on the computer and is a popular seller. However, users who desire a wireless calling

experience would benefit from NETGEAR‟S WiFi Phone, which sells for $250. This

phone works anywhere that WiFi access is available, even without a PC. All of the

user‟s Skype contacts are shown on the phone‟s display, indicating who is currently

online. This phone is also highly demanded and is currently out of stock on the

Skype website.

           Skype Credit is the payment system of the company. A variety of global

online payment networks are available from which the user can choose, such as

PayPal, Click&Buy, or Moneybookers 4 . MasterCard and Visa are also acceptable

methods of acquiring Skype Credit. By forcing the user to purchase larger blocks of

credit for the service (as opposed to allowing the user to pay for a single call), Skype

is “locking in” the customer as well as avoiding costly fees associated with

micropayments. In addition to this business strategy, Skype keeps their overhead

down by adopting a do-it-yourself methodology towards the user.

           Skype offers its technology at over 18,000 internet hot spots around the world,

such as airports, hotels, and coffee shops5. There are over 7,000 of these “Skype

Zones” in the United States alone. This paid service allows Skype to generate

revenue when customers are on the go, and do not necessarily have their computer or

Skype handset with them.


           Skype offers an array of useful features that simplify the art of electronic

communication. Although it is quite innovative and popular, Skype is not without

competition. Amidst the numerous internet based software communication packages,

Yahoo Messenger and Windows Live Messenger (the successor to MSN Messenger)

pose as Skype‟s two main competitors. In an effort to outperform their rivals,

software companies race to provide the most ground-breaking, user-friendly features.

The technology war between internet communication tools is no different.               In

comparison to Yahoo Messenger and Windows Live Messenger, Skype possesses

both similarities and differences. Although several features are shared by each of

these entities, Skype serves as the pioneer with regards to internet based voice


Tough Rivalry

       Collectively, Skype, Yahoo Messenger, and Windows Live Messenger have

several common features. Each of these devices offers cost-efficient methods of

communication which include: instant messaging, voice-messaging, PC-to-PC,

phone-to-PC, and PC-to-phone calls. Also, all three software products are Macintosh

compatible.    Currently, Skype, Yahoo Messenger, and Windows Live Messenger

provide all but pc-to-phone calls free of charge. However, as of January 1, 2007

Skype-to-phone (mobile and landline) calls within the United States and Canada will

assess a nominal fee.2

       Instant messaging enables users to converse non-verbally through the

utilization of computers and/or mobile phones. All that is required is an active

internet subscription; instant messaging is unlimited and can be done even if only one

party is currently logged on to the program. Group chats, a feature found in Skype,

Yahoo Messenger, and Windows Messenger, allows several users to communicate

within a single environment, or room.11,12,13 This particular feature is somewhat of a

new-age „party line‟; a concept that originated when landline telephones were the

essence of remote verbal communication.

       Voice messaging, like instant messaging, also takes place between two or more

computers logged onto a respective internet communication program, such as Skype.

The added value of voice message communication is that it permits voice-to-voice

interaction and allows the computer‟s keyboard to be used for other tasks.

Windows Live Messenger Video Messaging15

Before additional companies began to provide the same service, the initial benefit of

voice messaging for Skype was that it afforded a low cost alternative to landline and

mobile phone international calls.

           PC-to-PC, phone-to-PC, and PC-to-phone calls all add extra convenience to

internet communications. Each of these three features utilizes voice messaging, and

with the exception of PC-to-PC calls, at least one individual does not need access to a

computer in order to communicate with another individual. These services are also

offered free of charge by the three competitors.

Skype PC-to-Phone Calling16

           Video Messaging, which raises the high technology bar to even greater heights,

is still not a feature Skype can tout; Windows Live Messenger offers its users the

same capability. With video messaging, users have the ability to see and hear one

another while they converse.24,25 Although participants are required to use computers

while communicating, the use of video messaging is a great feature for people who

must engage in international correspondence. Students and professionals alike have

the added benefit of audiovisual interaction with others, when face-to-face contact is

not possible.

The Skype Advantage

           In an effort to stay ahead of its competition and employ the first mover‟s

advantage, Skype continues to focus on innovation. Its latest creation is the WiFi

mobile handset, which Yahoo Messenger and Windows Live Messenger have yet to

adopt, or better yet, plan. The Skype WiFi Phone makes subscribing to Skype more

beneficial because it provides all of the cost free Skype (PC-to-phone, phone-to-PC,

and PC-to-PC) network features free, without the use of a computer. 17 The only

current limitation imposed on the WiFi handset is that it only works in areas with

WiFi access. As technology advances, and more public buildings and areas become

WiFi access areas, Skype WiFi handsets will be able to function virtually anywhere.

In addition to the new WiFi Phones, Skype also offers a multitude of accessories

which compliment Skype services, some of which include cordless phones, web

cameras, headsets, speakerphones.

             The Future of Skype...the WiFi Mobile Phone

           Skype is now attempting to break another barrier in the field of

communications.            It   has    revolutionized       the     Global    System   for   Mobile

Communications (GSM) technology by the creation of the innovative Skype WiFi

Phone 26 which enables individuals to make or receive Skype-based calls with a

mobile a phone rather than a computer. This is a very new and ambitious concept

created by Skype in an arena where numerous GSM and code divisional multiple

access (CDMA) phone manufacturers and service providers already exist.

           With the Skype WiFi Phone, an international tourist can travel in Paris and

receive calls from friends back home in the US via a local-based Skype phone number.

This handy feature eliminates the current inconvenience of the need to arrange a time

to call when a person is at his or her computer. Similarly, the Skype WiFi mobile

device makes outgoing calling much more convenient for Skype customers, since it

can be executed from anywhere, and is not restricted to a computer. A universal cell

phone is long overdue in the marketplace and Skype is one of the first to make it

practical for those who demand it.

           Skype prides itself on being a free service to users in its community, i.e. Skype-

to-Skype users can call each other for free. However, these calls always required at

least one computer. With the creation of the WiFi Phone, Skype aims to eliminate

this problem worldwide and grant all of its users the advantage of unlimited mobility.

This breakthrough technology has recently been introduced only in US, European

and Japanese markets in collaboration with companies like SMC, FON, The Cloud, 3

and Buffalo.

How it works...

          The Skype WiFi Phone is a mobile phone that enables the user to connect to

the Skype network without using a computer. The basis of this technology lies in the

fact that the phone uses a WiFi network to connect to the Skype network through

pre-installed Skype software, and hence allows the users to use Skype services. This

wireless network could be just about anywhere; at home, work or on campus.

          A user needs to simply switch on his or her Skype phone, which automatically

detects the wireless network and connects to the Skype network using the users‟ ID

and password. Both items are required to be entered once, and are then placed in the

handset‟s memory. The Skype WiFi phone also displays the amount of credit left to

make calls. Once the network is connected, the user simply has to browse through its

list of contacts, select one, and then press the „dial‟ button and talk using SkypeOut


          In Europe, Skype WiFi technology is a result of the collaboration between 4

giants, Skype, SMC, FON and The Cloud. FON27 has the largest WiFi Network in

the world, and is also the world‟s fastest growing WiFi community. The Skype Phone

uses „Le Fonera‟, which is a wireless router provided free with the bundle. The router

has 2 channels of security, one for one‟s personal home network, and the second for

the Fonero network. The Fonero network applies the simple idea of FON, where a

user can rent out their network and receive a 50% „network‟ income from Fon. Fon

charges other users to access these networks. This ultimately develops a large and

ever-growing area of user networks which are shared commonly by other visiting


          Together, Skype and FON have teamed up with SMC, a leading networking

solutions provider. Cloud has also teamed up with these companies in order to

provide them with its range of wireless hotspots all over Europe, and thus increase

the usability of the Skype WiFi Phone in the European markets.

          Similarly, in London, Skype and 3 have lined-up another deal in which 3 offers

a flat rate fee to its customers; included is the option of free calls to all Skype-to-

Skype customers. This will add another 14 million users of 3‟s network to the Skype

group. 28 Furthermore, in Japan, Skype has teamed up with Buffalo and uses the

AOSS (AirStation One-Touch Secure System) and FreeSpots, which has a huge

network of over 4400 wireless hotspots all over the business hubs in and around


          The basic business strategy of Skype is very aggressive and is intended to

provide an extremely reliable and widespread network region to all of its WiFi Phone


How much does it cost to get Skype mobile? $159/£ 99/euros

The Skype Bundle consists of:

                          i. SMC Phone

                         ii. FON WiFi router (La Fonera)

                        iii. Hands Free Kit

                        iv. 500 minutes of SkypeOut calls

                         v. 12 months of free Skype voicemails

SMC Phone19

La Fonera WiFi Router16

          As mentioned earlier, the SMC phone is simply like any other GSM phone,

but it does not support GSM technology. Instead it works only in a WiFi

environment. It is compact, lightweight, and has a simple design with Skype software

preinstalled. Currently, the Skype WiFi Phone is only available in English user

interface, and is available to US, European and Japanese Skype customers via Skype


Some of the important facts about the innovators:

          SMC Networks is one of the largest providers of broadband connectivity

devices and LAN hardware.        Globally, SMC Networks brings to the market a

growing range of economically affordable, high technology products, some of which

include Gigabit and Fast Ethernet Switching, wireless networking, broadband

connectivity products as well as traditional wired network adapters.

          FON, founded in 2006 in Madrid, Spain, is currently on a mission to stimulate

the growth of WiFi Internet access through its WiFi sharing community of

“Foneros”, by way of their WiFi routers „La Fonera‟. These devices have been

designed to enable Foneros to share its home access points with the FON

Community. In exchange, Foneros are given access to free WiFi networks anywhere

in the world.

Customer experiences with the limitations of the Skype WiFi

      Although Skype‟s WiFi technology sounds like the technology of the future, there

are some drawbacks which may hinder the complete success of this product. Some

of the associated shortcomings are as follows:

      1. Skype cannot be used to make emergency 911 calls.

      2. The Skype Phone does not have a built-in web browser, only Skype software.

          Hence, it can only be used within a WiFi network that does not require a web-

          browser based sign in. If this technology has to be widely accepted in the US,

          where most hotspots require a web-based sign in, like T-Mobile or AT&T, the

          phone needs a web browser version which will provide flexibility to the user.

      3. The Skype WiFi Phone is often assumed to be associated with GSM

          technology; however, it is technology which works ONLY in WiFi

          environments. Consequently, if there is no WiFi access available, the phone

          will not work. Since high speed WiFi networks are non-existent in many

          places outside the US, Europe, Japan, and other developed countries, Skype

          WiFi technology is certainly limited in its applicability. Further, this also leads

          to the fact that the user should know where to find the hot-spot to use the


      4. One very important limitation of using any Skype product is the fact Skype is

          believed to have a very poor customer feedback. From dropped calls, to calls

          which get connected but no voice passes through, to corrections of faulty

          payments made online, customers are usually frustrated for lack of the support

          Skype provides if the situations such as these arise.

      5. Voice quality of Skype WiFi calls has room for improvement, and sometimes,

          echoes and other distortions cause problems. However, overall the voice

          quality is acceptable.

      By and large, the Skype WiFi Phone is an innovation that, if accepted by users,

has incredible potential to connect the world with easily accessible and FREE

connectivity services that Skype has always promised its users. This can possibly

change the way of audio and visual communication technology forever.

Some other recent upgrades and launches by Skype...

          In another innovative move, based upon the requests by Mac users, Skype has

launched its new version of Skype software with the capability of a 10-way

conference facility and has also integrated this edition with Apple‟s version of the

Skype, “Widget”21. Calls will be free to all Skype users and will be charged via

SkypeOut for those using landline and mobile phones. This facility gives users a

much broader communication base and a multi-user nature.

          In addition to the new conference facility, Skype has also launched SMS

messaging services for its Mac users. This feature works in a very simple way by

allowing users to select a SkypeOut contact from its list of phone numbers, and uses

these contact number to send them a text message. This is Skype‟s method of

extending and main use of the text messaging phenomenon, which is still such an

important part of the experience of using a mobile phone. Skype has big plans for

this option since it feels that this type of option will enable a user to get even more

addicted to the experience of Skype.22

          Size of Company, Customer base and Revenues
          Skype software has been downloaded about 300 million times; however, there

are approximately 140 million regular users. It is estimated that Skype generates

about an average 9 cents in sales a month per customer. The goal of the company is

to acquire a loyal base of customers to whom they could sell premium products such

as ringtones, and business web-calling services.

             Skype is a profit generating firm that is on course to generate revenues of

around $200M this year. The following excerpt sums it all;

             Our Skype business continued to grow at an impressive pace, driven by rapid user growth and

continued innovation of Skype’s hardware and software ecosystem. Skype net revenues totaled $50 million

in Q3-06, representing a 13% increase from the $44 million reported in Q2-06. Skype had 136 million

registered users at the end of Q3-06, representing a 20% increase from the 113 million users at the end of

             Figures released by eBay (owners of Skype) indicate revenues $316,00021 a day

with 87% of this coming from outside the US. These data are very impressive for a

company known for enabling free voice calls. However, not all features of Skype are

free. Some features such as voice calls from PC-to-PC over the internet are free.

Other free features include video calls on Skype, conference calls with up to 5 people,

forwarding calls to other Skype names, etc. Skype paid features include international

calls to landlines and mobiles, sending and receiving voicemails, sending SMS

messages from Skype and receiving calls from phones with SkypeIn. Its appeal lies in

its competitive rates compared with the regular phone services. For example, Skype‟s

global rates are 2.1 cents per minute to over 20 countries. There are also some

“freebies” which cost a little. These are features like ringtones ($1.20), pictures for

21 (Skype Revenues)
your Skype profile ($1.20), headsets, webcams, etc ($10), etc. There are various

means by which customers pay for Skype services. Methods of payment include

PayPal, which is a safe, fast and easy way to pay online, MasterCard or Visa, bank

transfer, or a feature known as Click & Buy which enables customers to use their

credit or debit card, or set up a direct debit from their checking account, to buy

services quickly and securely.

       Skype generates the bulk of its money primarily through partnerships with

companies. There are six kinds of partnerships which include: hardware partnerships,

online partnerships, retail partnerships, software and technology partnerships, carriers,

and finally, partnerships with mobile and WiFi providers. Hardware partners include

Intel, NETGEAR, Philips, and Linksys, just to name a few. Then there are online

partners such as PCHome, HGC, Pacific Internet, etc. Retail partners include

RadioShack, eBay, Sainsbury‟s, etc. Firms such as Xandros and Voxpilot are some of

the software and technology partners with some of the carrier partners being Colt

and TeleGlobe.

       Another means by which Skype earns revenue is through the affiliate program.

This program works as follows; “Just set up an account with one of our Affiliate

Network Partners, and use the graphics or texts they provide to link to

Whenever someone from your site buys or subscribes to one of Skype‟s premium

services (SkypeOut, SkypeIn, and Skype Voicemail), you will earn a commission”.

This amounts to a 5-10% commission on purchases of Skype premium services.
No free lunch

Skype basically uses two well established marketing strategies:

      1. Customer lock-in

      2. Let the customer do it on his own (DIY)

Regarding 1: Skype utilizes Customer lock-in by giving away things for a shoestring or

for free, Skype is quite conservative and in good company. Mobile operators have

done this for years by giving away mobile phones, free minutes and reduced

subscriptions.     The Skype business model is quite simple: get customers in by

providing an easy to use tool, let the customer do everything by itself (buy a device,

get BB access, download, install, and find your communications partners), and if you

have enough customers, start selling them something in addition. Guess how many

people have pre-paid $10 just to try SkypeOut. Guess how many people will pay an

additional $10 to get a number. $10 is not very much, but from the point of Skype:

"many a mickle makes a muckle".22


          Skype technology proves to be a revolutionary driving force and raises the

standard for internet based communications. Skype once served as the pioneer of

several innovative features, but now faces competition from well-known names such

as Yahoo and MSN. In an effort to continuously improve the high tech methods of

communication, Skype recently introduced the first WiFi mobile phone. While it has

its limitations, this nifty device enables Skype customers to communicate with other

Skype patrons free of charge. Skype also markets cordless landline phones, pocket

PCs, and routers that are compatible with its software. Whether free or pay-per-

minute, the array of features offered by Skype makes both domestic and international

communication affordable and convenient.      Although Skype is a relatively new

service, it continues to be an industry leader and is sure to provide even more unique,

advanced features in the near future.