Skype: A Web 2.

0 Communication Leader

A
White Paper
On
Skype: A Web 2.0
Communication Leader

Submitted By:
Group- 05 (Mavericks)
Anuj Chugh (09BM8011)
Amit Tiwari (09BM8078)
Manmohan Singh (09BM8084)

Vinod Gupta School of Management , I.I.T-Kharagpur

 Skype: A Web 2.0 Communication Leader
Introduction to Skype
Skype, an application that has enjoyed rapid growth and popularity since the launch of its
services, is software that makes it possible for people around the world to communicate via
voice, video and instant messaging (IM) over the Internet, and at a lower cost than traditional
methods.

The software application allows users to make voice calls over the Internet. Calls to other
users within the Skype service are free, while calls to both traditional landline telephones and
mobile phones can be made for a nominal fee using a debit-based user account system. Skype
has also become popular for their additional features which include instant messaging, file
transfer and video conferencing.

Based in Luxemburg and with offices around the world, it is responsible for 8% of global
international calling minutes, and with its users making 3.1 billion minutes of calls to
landlines and mobiles in the third quarter of 2009, Skype is a leading global internet
communications company. And of course, Skype-to-Skype voice and video calls are
completely free. In the third quarter of 2009, Skype users made 27.7 billion minutes of
Skype-to-Skype calls, and over a third of these were video calls.

Skype buzzes 24 hours a day, 7 days a week, worldwide. At peak times, there are up to 20
million people online. What’s most important, however, is what Skype can do. Voice and
video calling, IM and SMS are now available on a wide range of operating systems and
mobile devices. They connect business colleagues, saving them time and money and allowing
them to stay ahead of the competition. And they help keep friends and families together,
wherever they are in the world.

How things were done prior to Web 2.0

Till just a few years ago, the basic communication modes used to be landline phones, mobile
phones, pagers etc. With the advent of Web2.0 and explosive growth in its use, our
communication systems have gone a revolutionary change. Web2.0 has changed the way the
world communicates. Building upon the popularity of the Web2.0 companies like Google,
Yahoo, Microsoft, eBay have come up with their products to gain the communication market
space.

Business model/ Revenue model

Skype's business model is a good example of a “Freemium” business model. Everyone can
use the basic service (calling other Skype users) for free. With zero barriers to entry for the
users, Skype's user base has been growing constantly. Although most Skype users stick to the
basic free-of-charge service, a minority of users pay for premium services (calling users
outside the Skype network). The number of these premium users is large enough to make
Skype profitable.

Vinod Gupta School of Management , I.I.T-Kharagpur

 Skype: A Web 2.0 Communication Leader
• From user services:
o What’s free: Skype-to-Skype calling, video calling, Chat/IM, Multi-
Party/Conference calling, File Transfer
o What’s Paid: Subscriptions (unlimited calling), SkypeOut (pay-as-you-go),
Online Numbers, Voicemail, SMS
• From a partner perspective, licensing opportunities. The Skype-Nokia and Skype-
MySpace relationships are two examples. Hardware royalties are another source.
Carrier relationships, such as the 3 Skypephone are a third source for what are
effectively licensing revenues.
• The third leg of revenue generation comprises some advertising opportunities that
have arisen.

Yet Skype has inherent fundamentals that have made it profitable for the past six quarters:

• Negligible customer acquisition costs (mostly word-of-mouth; compare with Vonage

– a competitor of Skype, whose customer acquisition costs are in excess of $250)
• Negligible capital expenditures and network maintenance costs (being peer-to-peer
it’s Skype’s users who invest in capital items, such as PC’s, routers and Skype
hardware, and in network maintenance through their Internet subscriptions)
• Pre-funded accounts which result in negative working capital where subscriptions and
Skype credits are paid up front but the revenue is recognized on a pro-rated quarterly
basis– Skype has no revenue collection costs
• Strong free cash flow conversion ($1.00 of EBITDA for Skype is almost $1.00 of free
cash flow)

The results: Skype’s profitability has grown to the point where they achieve 20% “segment
margin” an amount that Skype contributes to eBay’s overall profitability (segment margin
makes no allowance for allocation of eBay corporate costs).

Any other issue or problem

• Service in People's Republic of China

Since September 2007, users in China trying to download the Skype software have been
redirected to the site of TOM, a joint venture between a Chinese wireless operator and Skype,
from which a modified Chinese version can be downloaded. The TOM client participates in
China's system of Internet censorship, monitoring text messages between Skype users in
China as well as messages exchanged with users outside the country. In October 2008, it was
reported that TOM had been saving the full message contents of some Skype text
conversations on its servers, apparently focusing on conversations containing political issues
such as Tibet, Falun Gong, Taiwan independence and Chinese Communist Party. The saved
messages contain personally identifiable information about the messages senders and
recipients, including IP addresses, usernames, land line phone numbers, and the entire content
of the text messages, including the time and date of each message. Information about Skype

Vinod Gupta School of Management , I.I.T-Kharagpur

 Skype: A Web 2.0 Communication Leader
users outside China who were communicating with a TOM-Skype user was also saved. A
server mis-configuration made these log files accessible to the public for a time.

• Security

Another concern about Skype has to do with security. Not with the confidentiality of
Skype-based phone calls: Though the company has never released details, it claims that it
uses 256-bit encryption. So far nothing has come up that would contradict that, so
individual users need not worry. The concerns are rather about a design feature of Skype
key to its success: its ability to pass calls through firewalls. Are employees that install
Sykpe on their office PCs opening up holes in their company’s firewalls? Could hackers
use the data stream carrying a call to infiltrate corporate or other networks? Could a
supernode be taken over by a malicious operator? Moreover, the Skype software is now
being installed into mobile phones and other devices, which opens up a whole new area
for the security discussion: Wireless devices, particularly those with computer-like
functions such as PDAs and smartphones, are already considered weak links in corporate
networks. Anti-social elements like terrorists can use it effectively without falling into the
hands of government security agencies, they not being able to track the phone calls made
over the globe.

• Customer service

There have been complaints about Skype's poor customer support. As of September 2009,
Skype does not provide any official means to contact customer support, apart from indirect
assistance through its web portal only and contact email addresses. Skype is also unable to
update user billing information.

• Privacy
Skype's client uses an undocumented and proprietary protocol. It has been reported in several
media sources that high-ranking officials at the Austrian interior ministry said that they could
listen in on Skype conversations without problem. Mobile Skype users (and other non-PC
users) have their location and number of 'friends' revealed without their knowledge. Many
users around the globe have reported such issues with privacy setting on their Skype
subscriptions. All such problems lead to degradation of the trust the users repose in the very
popular service.

Legal Issues

Recently, Skype was hit by legal issues due to which the business came close to closing
down. Skype of uses peer to peer technology for VoIP. This technology is proprietary piece
of software code licensed to eBay (parent company of Skype) by a company called Joltid.
Joltid claimed that eBay had violated unspecified terms of the applicable licensing agreement
and was therefore suing eBay to regain exclusive rights to the code. eBay however denied
breaking any of the provisions of its contract with Joltid and warned that if eBay lost its legal

Vinod Gupta School of Management , I.I.T-Kharagpur

 Skype: A Web 2.0 Communication Leader
rights to the software then Skype business could be shut down.
The case is now wending its way through the UK court system. The issue has forced Skype to
develop a replacement technology should it lose the right to retain the license. eBay has said
the substitute software would be expensive and could fail. Worse, Skype could lose the case
and be forced to shut down. Some 481 million users place free calls from their computers
through Skype, which posted sales of $551 million in 2008. eBay expects Skype's sales to top
$1 billion by 2011. The suit, then, comes as Skype is at its strongest, yet most vulnerable. A
decision enjoining the leading VOIP (voice over IP) provider from serving millions of users
would be disastrous to its business, particularly as it is trying to become independent.

Future - the road ahead

While eBay prepares to unload Skype via a sale or IPO next year, it is busy looking for new
ways to make money off its 405 million global users. They already account for an estimated 8
percent of international calls, and many of them are increasingly paying for SkypeOut calls to
regular phones. Its revenues last year were $551 million, but it wants to get to $1 billion by
2011. To get there, it might have to start thinking local.

In fact, it has already started trials in Europe and New Zealand with Yellow Pages businesses
that turn business phone numbers on the Web into free calls. The idea is that Skype is used by
405 million global subscribers to make free and cheap calls. Why not position it as a
complementary tool to help find and drive calls to local businesses too? This was the same
idea behind the launch of SkypeFind, but takes it a step further.

Essentially it broadens this to the larger Web, where most local search activity is already
happening. What the idea requires is that phone numbers that show up throughout local
search results be hyperlinked to launch a Skype call.

The SkypeFind feature is basically a local business directory within the Skype client which
nobody uses but currently there is a browser plug-in that works with Skype 4.0, the latest
version that turns any phone number on the Web or search result into a clickable Skype call.
In order to use the feature, you need to pay the normal SkypeOut rates.

The idea Skype is playing with is to make those calls, or at least some of them, free to
consumers. Instead, a Yellow Pages company would buy up the calling minutes in bulk and
either offer it as part of the fees it charges businesses to list their numbers in its directory or
charge the businesses on a click-to-call basis. How they decide to price it will probably vary
depending on the type of businesses being called. Lawyers and plumbers, for instance, would
be more likely to pay for phone leads on a click-to-call basis. For other businesses, the Skype
feature would act more as a retention strategy.

Click-to-call ads have been tried before, but this turns the actual phone number into an ad.
Click it, and you call the business you were looking for, and the call is paid for by either the

Vinod Gupta School of Management , I.I.T-Kharagpur

 Skype: A Web 2.0 Communication Leader
business or the Yellow Pages partner. The $32 billion Yellow Pages industry is quickly
moving to the Web and Skype has the ability to light up any business phone number found on
the Web.

Presumably, the Yellow Pages partners would only pay for numbers in their directories, so
Skype would have to come up with a way to indicate which calls are free and which ones are
not. And there is no reason to limit this to local calls. As people continue to use Skype
increasingly for free long distance calls, making money from local calls might be the key to
getting to that $1 billion in revenues.

Any suggestion/proposal for improvement or any new revolutionary idea

• According to Telco 2.0TM Voice & Messaging 2.0 report, there are different kinds of
communication, even within a single phone call, and they provide different
opportunities. Skype bolted a VoIP and IM client together in an uneasy alliance,
rather than creating a truly new experience that could have solved the problem.
• According to their Broadband Business Models 2.0 report, different distribution
systems for digital goods compete. In particular, special affordances and capabilities
of the system i.e. Internet should play a significant role.

Skype is making money from the users themselves, by selling metered telephony, and using
the free VoIP as bait. The Internet is being primarily used to avoid the PSTN. The revenues
should be attached to the other IP-enabled parts of the Skype client.

The challenge is to create a model where the money isn’t coming from the minutes. To do so,
the money has to come from merchants who want to interact with the users. The users have to
be attracted by a combination of cheapness, ease of use, and some convenience that they
can’t get elsewhere. And the businesses have to be attracted because they can interact with
the users in some way that they can’t find elsewhere.

Only select international and mobile calling remains expensive, as most users find themselves
offered unlimited cheap landline telephony. Skype need to also solve the mobile part. It’s
really difficult to interact with a call centre, from the opening operations like, press one, the
laborious maze of menus and the insecure dictation of credit card details to complete the
transaction.

Skype is too close to traditional telephony, and the other parts (IM, file transfer, video) needs
to be quite integrated in a proper manner. Skype should make the user interface more multi-
modal that means the Skype window should be for shared content and experiences.

Skype should start dealing with major call centre technology suppliers and vendors so that the
IVR menu would be visually pushed down to the client, so that they can immediately jump to
the option they need so that there is no need to ask if the individual wants Spanish, as that
would be obvious from the settings and preferences within Skype.

Vinod Gupta School of Management , I.I.T-Kharagpur