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What Happened To Skype

Skype: A Rise from Estonian Tech to $2.75 Billion

  • Skype was developed by four Estonian tech developers and two Scandinavian entrepreneurs in 2003 as an alternative to using the phone
  • It grew quickly, reaching 11 million users in its first year
  • The software used Voice Over IP technology and was based on knowledge learned building Kazaa, a peer-to-peer file sharing platform
  • EBay bought Skype for $2.6 billion in 2005, but because there were no synergies between eBay and Skype, John Donahoe sold majority of its stake to private equity firm Silver Lake in 2009 for $2.75 billion
  • Under eBay, Skype grew in terms of users and minutes paid to call from Skype.

Skypes Decline as Zoom and Teams Rise: How Microsoft Lost Its Grip on the Video Communication Market

  • Skype had over 200 million registered users in 2007
  • By 2009, this number grew to nearly 500 million and by 2010 it reached 560 million
  • 2011 saw Microsoft purchase Skype from Silver Lake for $8.5 billion
  • Steve Ballmer planned to incorporate Skype into existing products but failed to capitalize on it
  • WhatsApp quickly gained traction with its simplicity and ease of use while Skype became bloated, slow and complicated
  • In response to Slack, Microsoft released Teams which was successful at taking users away from Skype
  • However, when Covid-19 hit, Zoom and Teams became more popular than Skype
  • Teams’ usage surpassed 300 million monthly active users this quarter while Skype’s future remains uncertain.

Skypes Struggle to Compete in a Crowded Market Despite Popularity

  • Skype is still active and used by 36 million people daily
  • Microsoft’s goal with Skype is to provide a good experience regardless of platform
  • Though it has scale, profits remain thin
  • It had potential but now competition makes it difficult for it to stand out
  • Its original goal was to allow free communication over the Internet, which it achieved.

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Remember this?You might know this iconic ringtone, but probablyhaven't heard it in years.The blings and ringtones and so forth.It's nostalgic to me.It all started here in the tiny country ofEstonia, only 12 years afterthe collapse of the Soviet Union.A group of childhood friends teamed up with twoScandinavian entrepreneurs to transformthe way we communicate across borders with an appcalled Skype.Skype came out in the early 2000 as a way forpeople tocommunicate mainly by voice calls over theInternet.It was basically an alternative to using yourphone.Right now, this is completely commonplace.Back then, that was not the case and Skype wasthe first to really bring this to the masses.This is the story of Skype and how it went fromhundreds of millions of monthly users to anostalgic sound of the past.CNBC explores Skype's past its present and what'snext for the company after itwas one of Microsoft's biggest acquisitions in2011.Skype was launched in 2003 after Scandinavianentrepreneurs NiklasZennström and Janus Friis teamed up with fourEstonian tech developers and formerschoolmates Jaan Tallinn, Priit Kasesalu, ToivoAnnus and AhtiHeinla. Heinla left Skype in 2008 and now runsStarship Technologies,a robot delivery business.As the Chief Technical Architect at Skype, hehelped design it from the ground up.It took a relatively short amount of time, I thinkabout nine months, to develop the initialconcept. We were smart engineers.We learned on the go.None of us had any telecoms background.I think that was the key thing about why it workedso well.It didn't look like telecom.It didn't behave like one.So there were such outsiders, so they thoughtcompletely differently about whatthey could do with Skype.Jaan Tallinn was a founding engineer at Skype, andhe went on to start the Centre for the Study ofExistential Risk at the University of Cambridge.At the time we started Skype, we already had likea bunch of experience from a previous project,things like Kazaa and a few other projects thatdidn't go anywhere.Even more importantly, before that, we hadexperience programing computergames for a decade.The group used knowledge.They learned building Kazaa, a peer-to-peer filesharing platform that at the time was one of theworld's most downloaded Internet softwares tobuild Skype.Skype stands for Skype peer-to-peer.The software initially used Voice Over IPtechnology, which allowed users to make andreceive calls over the Internet, and it caught onquickly growing to over 11 million usersin its first year.The fact that Skype is going to be big becameclear.Like pretty much in the first day.One thing that we did borrowed from Kazaa wasthis online counter, like how many usersare currently connected?And then this like when we launched Skype, westarted calling our friends and come on, comeonline. We need to need to make the number go up.And suddenly we saw like the numbers that justlike going up like crazywithou, without any any help from our friends.It really captivated people.10,000 people downloaded and installed our app onthe first day.It was a very big number back in 2003.It immediately signaled to everybody that this issomething really successful.This is something that that will really catch onand and very soon it was not 10,000, but it was100,000. It was a million.It was 10 million and so forth.It snowballed from there.In the same year the app was launched, laptopsales surpassed desktop sales for the first time,and by 2005, Skype had 59 million registeredusers and had been downloaded more than182 million times worldwide.One thing that really helped Skype to besuccessful is that it is a product that you as aconsumer can not possibly use alone.You have to tell somebody else that, hey, youknow, you get this app as well because then youcan talk to me for free over the Internet and wecan see each other and so forth.So that meant that people naturally talk to eachother immediately.I never really experienced anything that easy touse,even if the quality wasn't that great beforethat.Like it was just so dead simple.Skype's early success made it attractive toinvestors.In 2005, eBay bought Skype for $2.6 billion underthenpresident and CEO Meg Whitman with the idea ofintegrating online shoppers andsellers.A lot of people after the acquisition startedcriticizing eBaythat, you know, why did they do this?You know, was the acquisition price too high?They completely didn't understand the complexityof the product, how difficult it wouldbe for them to actually make it work with eBay.Despite skepticism, Whitman praised theacquisition.What we bought was the leader in voicecommunications in every country of the world.We think we bought a tremendous business inaddition to some really interesting synergies withPayPal and eBay. And as a result, we feel like wepaid a fair price.It's true that under eBay we can say that Skypegrewin terms of users and in terms of the number ofminutes people were paying to call from Skypeto landlines and mobile phones.That's great. But ultimately what happened isthat there were no synergiesthat Meg Whitman had imagined.In 2008, John Donahoe took over as president andCEO of eBay and he wantedSkype gone.And the only question was, was there synergy witheBay's other businesses?And the answer to that is no.I thought it was a ludicrous idea, and I stillthink it's a ludicrous idea.I mean, there's a reason why it didn't work outand they had to spin out the company and sell itagain.Ebay decided to sell Skype briefly exploring IPOoptions, but settling on selling themajority of its stake to private equity firmSilver Lake in 2009.The deal valued Skype at $2.75 billion.Ebay retained a 30% stake in the company andgained $1.9 billion incash.Once eBay realized actually there isn't that manysynergies with Skype.They mostly left Skype alone, which was great,because they just Skype kind of continued to growlike crazy.Under eBay, Skype did grow at the end of 2007,Skype had over200 million registered users with over 50 millionconnected monthly users.Connected users are defined by Skype as thenumber of users that login in a givencalendar month.By the end of 2009, Skype had nearly 500 millionregistered users, with105 million of those being connected.By 2010, Skype had 560 million registered usersand over 207billion minutes of voice and video conversations,once again making it attractiveto investors.Google and Facebook were rumored to have interestin the company, but in May 2011, it wasMicrosoft that announced the purchase of Skypefrom Silver Lake for a whopping $8.5billion, meaning Silver Lake more than tripledits investment, while eBay gained anadditional $1.4 billion on its originalinvestment.So I expect Skype to be an accelerant of ourfinancial results.You know, the truth of the matter iscommunications is one of the thebig scenarios that's driving our financialsuccess.And Skype is going to accelerate that.Under then CEO Steve Ballmer, Microsoft's plansincluded incorporating Skype into itsexisting products, including the Xbox, Outlookand smartphones.As part of the announcement, then Skype CEO TonyBates announced Skype's goal to reach1 billion daily users.But things didn't work out as planned.They failed to capitalize on Skype 100%.Steve Ballmer was the king of buying things andnot knowing what to do with them.And today, Microsoft says it has 36 million dailyactive users.What happened with Skype is the story of everylargecompany with a lot of middle management.They didn't innovate on the product for a verylong time.Tony Bates can say whatever he wants to say inreality is that the whole thingblew up on his watch.In 2017, WhatsApp reached 1 billion users.By 2020, it had 2 billion.And like the early days of Skype, it uses VoiceOver IP to transmit calls.The reason WhatsApp worked was it was just simpleand it was easy and itwasn't really fussy.And Skype by then had become bloated, slow,complicated.In fact, I'll go as far as saying the Skypemissteps allowed WhatsApp togrow and become this big.In 2016, in response to Slack, a growing messagingplatform, Microsoftannounced Teams.However, when Teams launched in 2017, it became adirect competitor of Skype.Microsoft Teams has been successful at takingusers from Skype.It's provided a number of additional featuresthat Skype honestly does not have at thistime.But Microsoft's Corporate VP tells a differentstory.We see it as complementary on the coreinfrastructure, right?So the communications, the idea of having onecontact list, we think of the userexperience as being unique and distinct for thoseteams is focused increasingly more on somecommunities work, getting groups of people to dothat.Skype is more point to point family, much morefor international expansion.Microsoft is pouring a lot of engineeringresources into makingTeams a big destination for communication.It's not doing the same thing with Skype.For example, in 2021, Skype announced it wouldsupport up to 100 peopleon one call.But in the previous year, Teams announced itcould support up to 300 people on one call.And in 2020, when the Covid-19 pandemic madevirtual communication a priority,many people's go to were apps like Zoom andTeams, not Skype.A lot of users went to Zoom because it wasavailable.Skype was known as well, but they were already onthedownslope. With the move to Teams.In response to Zoom, Microsoft added updates toTeams such as breakout rooms andincreasing the number of meeting participants to1000.It also made some changes to Skype, includingallowing virtual backgrounds.But Teams still grew at a faster rate.In July 2019, Microsoft announced Teams had 13million dailyusers. By November, it was 20 million.That number soared in March 2020 during thepandemic to 44 million growingby 12 million over a seven day period.In that same month, Skype had 40 million dailyusers, but byApril 2020, Teams had 75 million daily users.Microsoft would not confirm how many daily usersSkype had in the same period.However, it told CNBC that Teams usage is at anall-time high and surpassed300 million monthly active users this quarter.So, how close are we to seeing Microsoft retireSkype?It's hard to retire a product with 40 millionusers becausemigration is risky.Migration could easily happen in the waytechnology is moving now.They know there are a lot of options and they'llfind another one.Today, Skype exists, but it's not the phenomenonthat it was in the2000s. Skype is a product with an uncertainfuture.Microsoft is where consumer brands go to die, justlike AT&Tused to be the place where all Internet servicesused to go and die.It's the same thing.20 years later and Skype's founders have moved on,going on to start their owncompanies. Ahti Heinla is the CTO and co-founderof Starship Technologies.He teamed up with another Skype founder, JanusFriis, to start the company.Starship specializes in autonomous robot deliveryand says it has done millions of deliveriesacross 50 locations around the globe.Niklas Zennström went on to head Atomico, aventure capital firm, and JaanTallinn spends most of his time discussing thedangers of unchecked AI development.I don't know what the future holds for Skype.I mean, I'm concerned about humans being wipedout, so it's unlikely that I will need we needSkype if that happens.One thing that is guaranteed is that there willbe massive changes now, so I'm not sure ifvideo calling will be a thing even like fiveyears from now.I myself use Skype right now fairly little.It is. I still have it installed on my phone, butmyprimary communication methods now are elsewhere.With apps like WhatsApp and Zoom being a clearchoice for many people.Can Skype make a comeback?Skype had a really good run and then perhaps likeasking too muchtoo for like a bigger, bigger run.Anything is possible.Microsoft is trying to make Skype happen in abigger way now.There's the Bing chat bot that has generativeartificial intelligence, which is all therage now. And you can talk to Bing in Skype.Will that make Skype explode in popularity ormake acomeback? I don't think so.Microsoft, as a rule, cares about beingprofitable.I would not be surprised to learn that Skype isbasicallypaying for itself, but not making a huge amountof money forMicrosoft today.Right now, not much is known about Skype's userdata or profitability, since Microsoft hassporadically provided data since its acquisitionin 2011.CNBC reached out to Microsoft for an interviewwith the current Head of Skype, but we're toldhe was not available.In a statement, it told CNBC more than 36 millionpeople use Skypedaily. Our goal with Skype continues to be todeliver the best possibleexperience to users, regardless of the platformthey choose.I think the challenge for Skype, like mostlarge social platforms, has been that despitescale,the profits remain pretty thin.There were years when Skype was not profitable andthat includes the timethat it was under the ownership of eBay.So has Skype fulfilled its full potential or didit just becomeobsolete?Skype is not obsolete.It has 36 million daily active users.That is small when you compare it with otherassets out there online.But we can't say that Skype is over with becausewe're going to get millions ofpeople mad at us. People still insist on usingSkype, fewer and fewerpeople, but some do.There was a time when a place for Skype, it hadeverything going for itand now other people have everything going forit.We wanted to give a lot of people, millions ofpeople, hundreds ofmillions of people, billions of people access tofree communication over theInternet. We absolutely accomplished that goal.