The Future of Skype Brian Hayes, Keila McCarty, Lesley Poberezny Strategic Management Bus 794 Prof. Tanvi Kothari

Strategic Vision Mission & Vision To enable the world’s conversations Real-time communication platform for the Internet that is leading the communication transition from hardware to software. “The Skype service has been tremendously popular as a free service. But at some point, free doesn’t work anymore. It’s not a management problem. It’s a business model issue.” -Jordan Rohan, analyst, RBC Capital Markets Brian’s Slide When Janus Friis and Niklas Zennstrom founded a software company in Luxembourg in 2003, it was to enable, as they called it, the world’s conversations. However, enabling the world’s conversations and developing a sustainable business model are two entirely different things. http://news.cnet.com/eBay-What-to-do-with-Skype/2100-7352_3-6211053.html (site where the quote came from)

Simple Timeline Main Competitors 2003 – Skype Founded 2005 – Skype acquired by eBay 2009 – Skype sold to investment group, eBay retains 35% Main Competitors Brian’s Slide The case would indicate that Skype’s main competitors are the “VOIPs” or voice over internet companies like Time Warner, ATT, and Comcast. But more and more, the competitors are Google, Apple with their FaceTime ap, Facebook chat, and Cisco’s webex. Even the late night infomercial MajicJack competes!

Past Strategies Minimal Advertising, Maximum Buzz A software company Increase platform offerings and subscriptions FREE, FREE, FREE Brian’s Slide As of 2009, Skype had a three phase strategy. Phase 1, largely complete, was to become operation on 1 platform (PC), 1 revenue stream (SkypeOut), in one market (Europe). Phase 2 (2010, 2011), is to develop access to skype on many platforms (PC, cell, etc.), diversify revenue streams, and many conversation modes (voice, video, chat, …) increase target markets (U.S.) Phase 3 Any mode of communication, any platform, anywhere Notable exceptions to past business strategies was the absence of revenue from selling advertising

SWOT 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 Keila’s Slide First mover – Skype not only has the midshare, it has the verb. “Google” = look up online Low costs – each additional user requires very little additional infrastructure Growing market as more and more communication done online and less via traditional means – snail mail and copper telephone

SWOT 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 Keila’s Slide Skype is failing to earn additional revenue from their premium services. ONLY a VOIP software company. Yahoo/google – email, AT&T/Comcast – internet provider to businesses, etc Group video not available - prevent companies from purchasing.  Advertising i.e. on messaging screens

SWOT Opportunity 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 Commercial and non-commercial markets Keila’s Slide

SWOT Threats Flattening 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 Keila’s Slide Governmental regulation of communications (FCC) can change the rule affecting revenue and profits. Last mile – because they aren’t an internet provider (as other hardware, VOIP, and Publically-Switched Telephone Network (PSTN) providers like AT&T are). Governmental regulation of communications (FCC) can change the rule affecting revenue and profits. DOES THIS INCLUDE NET NEUTRALITY?

Strategic Issue #1 Current Revenue Model 4 out of last 5 years lost money Cumulatively almost $2 billion Skype’s model cannibalizes own revenue Brian’s Slide As the intro slide stated, what was skype’s business model (?). After its founding in 2003, it made money only one year and eBay was quick to shed it after losing a billion dollars AND failing to integrate its business into eBay’s own. 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

Develop a Sustainable Revenue Model Recommendation Develop a Sustainable Revenue Model Define Product Offering Advertise – Differentiation! Increase online presence with partnerships Increase subscription services Maximize amount of time users spend online Brian’s Slide Skype seemed like a science fair project that caught on too quickly before anybody stopped to think “what have we have here and how are we going to make money at it?” Skype has to define its product offering. It has to determine the value it delivers from each differentiated product and capture that value in the appropriate pricing model. It has to shed or minimize its cannibalization. It has to convey its value to the market through an effective advertising/marketing plan. This plan 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. (the chart above is from June 2011. http://www.onlinemarketing-trends.com/2011/06/skype-timeline.html

Skype Offerings Company Voice Call Phone Call Video Call Instant Messaging Desktop Sharing File Sharing Skype X Google Voice Apple (Face Time) Facebook Chat GoToMeeting Cisco WebEx Brian Slide

Develop a Sustainable Revenue Model Implementation Develop a Sustainable Revenue Model Immediately perform extensive product/market review Determine which has prospect for sustainable revenue Through strategic alliance with partners will drive growth and revenue subscriptions Will drive usage and proportional revenue Brian’s SkypeOut, in which PCs can call traditional landlines for a low rate, is already a success. Although this success is limited in U.S. We believe the market is bigger. An extensive market review will determine which technical and marketing hurdles exist for broader appeal. Skype is a natural and inexpensive communication tool for companies which want to provide additional value in their services, such as social networking sites, tech support for businesses, education, etc. 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.

Shrinking Revenue Growth Strategic Issue #2 Shrinking Revenue Growth Limited Skype Relevance Limited channels (partners) Competitive offerings could potentially lock up profitable revenue streams Lesley’s Slide The second issue the we noticed was happening to Skype was the idea of the revenue growth shrinking. They were still making money, but not as much as they saw when they first started in 2003. The team and I asked around our jobs and other social environments the last few weeks and asked our friends if anyone has ever used Skype before and they had heard of it, but never saw the needs to use it. To them Skype was not relevant. They said they used Yahoo and other competitive offerings as mentioned earlier to communicate with their friends and family that are far away. When speaking with these same people as well, they thought that Skype should be more visible because some did not even know about them when asked. They have limited channel partners meaning they are not partnered with anyone like a eHarmony or LinkedIN (will explain shortly.) Finally, these competitors in the market that were mentioned before could grab more market shared and lock up the profitable revenue streams that Skype has had over these years. The following recommendations this group came up with will lead Skype to where they should be in the future.

Recommendation Increase Relevance Social Networking Facebook LinkedIn eHarmony Lesley’s Slide We want to rebrand to market online businesses so they don’t need to develop the functionalities Skype offers. The first recommendation is to increase the relevance of Skype by partnering with social networking sites. By doing that we want to rebrand to market online businesses so they don’t need to develop the same functionalities Skype offers. The sites have become more popular over the years and more visible that if there were a Skype option with Facebook, LinkedIn, or eHarmony, relevance of the site would increase and more and more people would start using Skype, not only for the FREE section, but the paying sections as well. Facebook – currently have IM, but having the video chat as well you can see those friends overseas that you might have not seen in a long time LinkedIn – If you ‘Like’ a company on LinkedIn and they want to interview you for a possible open position they could conduct the first “phone interview” over Skype where you would be able to talk to them face to face. This way when you do go in for that “first interview” you are not as nervous because you know what the person looks like you are meeting and that usually calms the fears. eHarmony – Keila came up with the idea of how this would ease the first date jitters. When you meet on eHarmony or Match, you set up a date to meet in a common place, but now you could set up a Skype Date to ease the fears of the first date jitters. She even said it could be a Super Bowl Commercial!

Implementation Partner with the following social networking websites Dating Sites (eHarmony, Match, etc.) LinkedIn and Facebook This will increase Skype users from 540 million to 1 billion, profitability from $13 mil to $159 mil Lesley’s Slide Pro Forma By partnering with these social networking sites, the pro forma below shows that there would be increase in Net Profit from 2010 (when we ended) to 2011.

Implementation Selling Ads Revenue/profitability is incremental to existing revenue structure Additional $7 mil increase in net profit (from $159 mil to $166 mil) Lesley’s Slide Pro Forma 2009 – From data 2010 – Projected data 2011 – Implement recommendations w/o selling ads 2011 B – Implement recommendations w/ selling ads As the pro forma showed us before that we would have increase in net profit from 2010 to 2011 if the idea was implemented, Skype could also increase their net profit if they would sell ads on these sites. For instance, when you are currently Instant Messaging to your friends on Yahoo, there are ads that pop up in regards to clothing stores you might have shopped at in the past online, shoe stores, or any other accessories. This is something that could be censored by parents if they have any concerns. This sort of selling would even help out the company by increasing their profit by $7 mil.

Recommendation Increase Users Increase Relevance Education Schools Catch them while they are young Introduce them to other cultures Enhance their learning experience Lesley’s Slide The second recommendation is to implement Skype in to education. If you start implementing the software at a younger age, they can carry it through to their adulthood. In other words, “catch them while they are young.” Our group started using different messengers that were available to us when years back and now we all carry them through to our work, school, and even social on our cell phones. It is something that has become part of us and Skype can become part of the school and that is how you can receive more users, yet increase the relevance at the same time. By using Skype in the schools, students will grow up with it and later in life it will be the form of communication they use. For instance, I started using Yahoo Messenger years ago and now that is all I use. I used it when I was working, to communicate with my friends, and even my school mates. It is something that is stinking with me now and will stick with me later on.

Implementation Education Partner with interactive whiteboards (e.g., Smart Board) at schools Create the Skype Classroom at top teaching universities Lesley’s Slide Partnering with Smart Board at schools would help to enhance the experience. Currently, Smart Boards are growing in education and more and more schools are getting away from the green board and chalk and moving on to this electronic board that all you need is your finger. If Skype were an option on the Smart Board, students that are not able to attend class because of doctor appt. could Skype in to the session while waiting in the waiting room and would never miss a beat. The second idea is to turn the classroom into a “Skype” Classroom where the whole class in via Skype. This could start at top universities and then from there Skype could figure out where they want to market next (D1, D2, or D3 schools). Today we have a video that shows two girls practicing Skype in their classroom to prepare for an actual Skype video chat overseas. Lets watch!

Strategic Issue #3 Net Neutrality Proposed Legislation not allowing ISPs to control content or access Comcast – prevented users from gaining access to file sharing websites Keila’s Slide Net Neutrality – would not allow ISPs to control content or access. Specifically, network neutrality would prevent restrictions on content, sites, platforms, types of equipment that may be attached, and modes of communication

Recommendation Net Neutrality Do not engage large ISP-VOIPs directly in large business sales Become more politically active Target International/Widespread Businesses Small Businesses Websites Prepare for sale Keila’s Slide Large businesses – In order to connect with their customers, Skype will always be dependent on their competitors because they own the last mile. Skype may not be a solution for large businesses because they don’t have that IN or that bargaining power. International/Widespread businesses - internet/phone providers not be consistent across locations & countries In the meantime, because they can’t challenge AT&T directly, they may want to groom themselves for sale ???

Implementation Advertise on net neutrality & potential consequences Use popularity overseas to feed into American market Offer free month to new small businesses applying for licenses Rebrand to websites as a software service Keila’s Slide Use popularity overseas to feed into American market – approach German company already using your services to have their American constituents begin using Skype

Overall Implementation Timeline Year 1 Define product offering/establish advertising schedule Have a contingency plan for passage/non-passage of Net Neutrality bill Begin partnership strategy Social Networking, Education Year 2 Review of Year 1 initiatives (NN, advertising) Survey/Questionnaire (with regard to education) Establish rate schedule (selling) Year 3 Review of Year 2 Prepare for public offering or buyout Group slide Each of us will do one year. Lesley – Year 1 Keila – Year 2 Brian – Year 3 Will that work??????

Questions?