Yesterday long time acquaintance Andy Abramson put up a post Skype on Three-Me Too, Me Also, No Longer Me Different where he states “Now 3 no longer has the same Skype service in the UK…” and concludes with “…. now Skype is back to being just a IM based calling service online with a few hooks to the PSTN”. I beg to differ.

Andy is talking about 3’s Skype service that was launched in late 2007 using a hybrid solution that allowed IM and call signalling data to be handled over the data channel while the actual voice call went over the carrier’s GSM voice channel. It provided a way to make free calls to Skype contacts worldwide while using SkypeOut for calls to the PSTN outside the home country. In fact I was on a 40 minute call with a 3 user on the INQ phone earlier today; however it’s lifetime as a service appears to be coming to an end.

Skype on 3 also was significant in building a customer base for 3 who was a fledgling 3G service trying to enter a U.K. market dominated by somewhat larger players. At the time all the reviews were positive; it was well received by a younger demographic keen to expand their social networking circles. Initially the service was offered on “brew”-based 3 Skypephones; later it also became available on the “brew”-based INQ phone with its social networking features. However, for infrastructure It did require “gateway” servers using iSkoot’s software that had developed this protocol. And, as pointed out in an iSkoot presentation at the initial eComm 2008 there were royalties paid to both Skype and iSkoot associated with the monthly subscriptions involved. From the carrier perspective, the economic key to providing this unlimited calling service was that Skype-to-Skype calls had no termination charges as they go direct to the end user contact without any requirement for termination by another carrier.

In the spring of 2010, Verizon launched its Skype mobile service using a similar protocol to much fanfare. Skype’s carrier-specific arrangement with Telus was very different with respect to the services offered, especially the Skype client and the associated Android phone.

But times are changing; the key for addressing these changes is how 3, working with Skype, can make a transition that keeps their customer base while offering Skype calling through alternative arrangements:

• Brew-based phones have been outsmarted by smartphones from Apple, Android and RIM. I would imagine today’s demand for an INQ or 3 Skypephone has diminished to a level that does not encourage further manufacturing.
• Skype has since launched full Skype clients on iPhone and Android phones, offering not only chat and voice but also video calling.
• Not only do these clients  use the data channel of wireless carriers for voice and video but they also support Skype’s SILK codec for optimum voice quality.
• Data plan rates have come down by orders of magnitude from charges four years ago; the launch of iPhone helped drive these down.
• There is carrier and Skype overhead in running the iSkoot servers at 3.
• I would imagine, partly based on some anecdotal information, that many of 3’s customers who had 3 Skypephone and INQ phones have migrated to other phones. While both iPhone and Android phones are market players in the U.K. that same youth demographic actually has been strongly attracted to BlackBerry and its BlackBerry Messenger feature.

The bottom line is that the entire mobile market has evolved and 3’s initial Skype calling service has been left in the dust. Skype says these services are still operating in U.K., Australia and Ireland, probably due to the current size of the user base yet they will go away in the near future.  However, at some point I would imagine 3 would have to be working on a strategy to phase out its initial Skype service and transition their customers to newer platforms.

As for “No Longer Me Different” it is too simplistic to say Skype only offers IM and voice services duplicated by others. From both Tony Bates’ post, Tony Bates Weighs in on Microsoft’s Acquisition of Skype, and the accompanying infographic, expect to see a heavy emphasis on Skype’s video calling where there has been no duplication that combines the available resolutions (VGA, HD), frame rates (30 fps, 22 fps) and minimum network upload speed requirements by any other service provider. Of course there is also the other strength of having over 170 million active users that remains a key differentiator.

While 3 has definitely demonstrated the demand for Skype services on mobile platforms, both the market players and underlying wireless carrier infrastructure have changed over the past four years. The questions that arise include:

• How long will Verizon continue with its Skype mobile offering? We have already seen Verizon’s plans for offering Skype over its LTE network using Android phones where the focus was on video calling.
• While Verizon’s service could be replaced with Skype for Android on its Android phones, what would happen to its BlackBerry customers who would not have a native Skype for BlackBerry client?
• Can Skype address the battery drain issue on both Skype for iPhone and Skype for Android to provide users with the same user experience as Skype mobile in terms of recharging frequency?

It’s easy to want to position a perception that other players can be competitors of Skype; however, the real challenge for MicroSkype is how to build a business that justifies a $8.5B purchase price, not how to skirmish over services whose usefulness and viability has been overtaken by the evolution of the market participants and carrier infrastructure.

Full disclosure: the author has made the only 3 Skypephone call on the Rogers network back in early 2008. Ten minutes cost me about $100 as Rogers did not have an iSkoot server available.

Overnight Microsoft announced they had closed their acquisition of Skype, following the final EU Commission regulatory approval last week. Key points:

• Skype will remain as an independent business unit within Microsoft under the leadership of former Skype CEO Tony Bates who becomes President of Microsoft’s Skype Division. It’s a new tact for a Microsoft acquisition.
• Microsoft anticipates the integration of Skype into many of its current products – the most obvious being Skype for Windows Mobile and Outlook integration (as well as other Office products). But there are opportunities foreseen for Windows Live offerings as well as its Microsoft Lync enterprise offering.
• Whereas Skype had little enterprise presence other than small businesses and employees who would use it at work, it will be an interesting challenge to see how Skype becomes integrated into Microsoft Lync. There are challenges on the Microsoft side not simply from a technology perspective but also from a business perspective, for example, the costs and burdensome licensing associated with their server-based products.

Tony Bates has put out his vision statement, including a video and an supporting infographic, for Skype’s direction within Microsoft:

Microsoft is committed to the ubiquity of the Skype experience – communication across every device and every platform will remain a primary focus. And we’ve only scratched the surface. We’re at the starting line of integrating world-class talent, innovative technologies and products. By bringing together the best of Microsoft and the best of Skype, we’ll deliver amazing new experiences for consumers and business around the world.

Leading up to the closing we have seen some subtle activity on the Skype side:

• Most notably new releases of most Skype client software that incorporates advertising. Skype intends to place ads in a discrete manner during Skype-to-Skype calls made by users who are not generating revenue through Skype credit, a Skype Calling Plan subscription or a Skype Premium subscription. As mentioned by Skype CEO Tony Bates at a recent forum event, one of Skype’s goals is to generate major revenue through this advertising initiative.
• Skype has continued to offer upgrades for all its supported platforms over the past two months, not only supporting the claim that Skype’s brand would be damaged should they stop supporting platforms other than Windows but also supporting Skype’s initiative to provide more incremental upgrades every two to three months.
• A strong emphasis on Skype’s unique ability to drive video communications in a way that encourages easy adoption (more in a future post).
• Last night Skype released hotfix upgrades to Skype 5.6 for Windows that removed a Google Product Bundle offering, comprising the Google Toolbar and the Chrome browser, during installation. (Will we be seeing a Bing product bundle soon?)
• While Skype has made some top level management changes over the past few months, they appear, with a few minor exceptions, to have kept their operating staff, whether on the developer side or marketing side.This brings an experience base that is critical to meeting Tony’s goals in a timely manner.

And some questions:

• Will we see a Skype for BlackBerry? Can Microsoft leverage its relationship with RIM to resolve this issue? (This has been a most requested feature on one LinkedIn forum discussing what users want to see on the Playbook.)
• How will Skype now encourage third party application development? Will there be support for using web-based tools meeting the IETF’s RTCWeb initiative? What is the road map for SkypeKit?
• Will we see Skype Online numbers for Canada?
• And, in the longer term, will Skype pass the “AmberMac Test”?
• Can Microsoft become as ubiquitously associated with leadership in real time communications as they have been in the evolution of desktop operating systems?

About thirty years ago I worked for a company that had developed Magnetic Resonance technology that was evolving from chemical analysis applications into the medical imaging field. This company initially attempted a partnership with GE who were the leading medical imaging company of the day, especially with CT scanners but were just dipping their toes into learning magnetic resonance technology. However, my employer of the day did not have the financial or other resources required to jump from a business selling $100K to $500K systems to a research market into a business selling $3 million systems into a medical market (with all its regulatory implications). In the end GE simply acquired the company’s magnetic resonance division and has now become a leader in the MRI market. I see a similar opportunity here for the combination of Skype’s technology resources with Microsoft’s financial and business resources along with their market reach.

One final comment: over the past five and a half years I personally have come to meet many Skype employees. Their common thread and over riding motivation was their participation in an initiative that was revolutionizing real time communications on a world class scale. It has been a pleasure to work with them across several projects. Let’s hope they can continue to thrive under the Microsoft umbrella; they are a key resource to the success Tony envisions. Congratulations are due to all the members of the Skype team that made this transaction possible.

It will be an interesting ride. Can they execute? What will happen with the user experience? Will it drive a significant return on a $8.5 billion investment?

What’s your take? What are the opportunities and what are additional questions beyond the list above? Look forward to your comments.

Just as I finished writing this post, Dan York put up his views over at Disruptive Telephony:

My interest was not only in the “across all devices”, which has been a large part of Skype’s goal for some time… but also in the use of “real-time communications”. For a while that was a phrase that only the more technical-minded folks used, but now increasingly “real-time communications” seems to be the phrase of choice for many. I, for one, applaud the usage.

Read Dan’s post for another perspective on the acquisition.

Update: Phil Wolff at Skype Journal: Skype: New owners, new customers, new channels.

Full disclosure: The author is an involuntary participant in the Canada Pension Plan – a beneficiary of this acquisition. Now CPPIB is looking at investing in a retail chain called “99 cents” stores.

Check out the statistics that arose out of last week’s panel discussion: Skype call information; Skype for TV – coming soon to a family room near you and the change in Skype’s employee per lawyer ratio over the past year.

My previous post, Skype: Evolution from “Wildly Popular and Deeply Troubled”, covered a recent panel discussion, held last week at the Fortune Brainstorm event, on the subject of the transition of Skype as it passed through three owners: eBay –> Silver Lake consortium –-> Microsoft. I highlighted several topics where three key players, including Skype CEO Tony Bates, gave their perspective on why various business decisions were made that resulted in these ownership changes.

But there were also some interesting statistics and other information re Skype’s ongoing operations that came out during the discussion:

• Skype released five products over a six week period in June/July this year, more than had been released in the previous two years.
• It appears that, while Tony Bates was announced as CEO in early October 2010, he actually started becoming involved with Skype operations in August (an advantage of being a private company – you don’t have to announce key executive changes when they actually occur). This information came out during the discussion about the release date for the Skype for iPhone video calling upgrade .
• Skype had over 7 million downloads of Skype for iPhone 3.0 with video calling on its December 30, 2010 release date.
• When Tony joined Skype he found as his favorite statistic: “Five people who actually touched product and wrote code for every lawyer in the company.” Today that ratio is now 25:1 and rising, according to Tony’s comment. This explains why several issues have persisted over the years including:
• the lack of Skype Online numbers for Canada (which could easily be resolved to address a Canadian regulatory issue),
• the delay in releasing Skype for iPhone to Canadians due to an intellectual property issue
• the tight credit policies such as the fact that a credit card can only be used with one Skype account. If I want to use a credit card with my wife’s Skype account, I need to use a different credit card.
• the constant concern over U.S. regulatory issues as Skype rolls out a Skype for Business program in the U.S.
• Skype expects to see “Monthly Active Users” (“MAU’s”) rise to over 200 million by year end from its current 170 million MAU’s in the last quarter.
• Skype active users average over 100 minutes of engagement (in a Skype voice or video conversation) per month.
• The average video call lasts 27 minutes and is rising; an interesting statistic that helps to confirm what Skype Chief Technology Strategist Jonathan Rosenberg pointed out in his “The Rise of Real Time Social Sharing” presentation at eComm America 2010.
• Will Skype be in your family room soon? Skype for TV has already been embedded into over 50 million TV Skype-enabled TV sets (and BluRay players) worldwide, including high end models from Samsung, Panasonic, Sony, Sharp and Vizio.
• In spite of the occasional service interruption, over 35% of Skype’s user base is small business that uses Skype as their primary communications service “with the fall-back that the cost piece is so compelling”.

Bottom Line: It’s a bit of a hodge-podge of information but it all contributes to a better understanding of not only how Skype is ending up as an autonomous business division of Microsoft but also what developments are happening on the business side that have contributed to the variety of new products and releases that have appeared over the past six weeks.

Related articles

• Skype CEO Tony Bates talks about making Skype video calling ubiquitous (blogs.skype.com)
• Microsoft’s Skype acquisition expected to close by October (winrumors.com)

Over the past six years of covering Skype, there have been three “Masters” – the original founders – Niklas Zennström and Janus Friis (2003 to 2005), eBay (2005 to 2009) and the Silver Lake consortium (2009 to MS acquisition). And, once regulatory approvals and due diligence are completed, Microsoft will become the fourth later this fall.

But we’ve never heard the full background to some of these transitions. We knew there had been a major intellectual property issue – “you can’t drive the car without the engine”; we heard presentations on the Skype business model as Skype was presented to the investment community by eBay. But what happened behind the scenes that resulted in the many business decisions made to justify these ownership changes has never come out as one complete story.

At this past week’s Fortune Brainstorm Tech event in Aspen, a most interesting panel discussion revealed some of the history and reasoning behind this evolution, starting with, on John Donahue’s assumption of the eBay CEO position in 2009, eBay’s decision to “carve out” Skype as a non-core asset. On the Fortune event panel were three key players in this evolution: Skype CEO Tony Bates, Silver Lake Managing Director Egon Durban and Andreesson Horowitz cofounder Ben Horowitz.

It’s most interesting to watch the entire video but some highlights:

• Dealing with the dichotomy of a “wildly popular and deeply troubled” company that was in full blown litigation with its founders.
• How Skype continues to operate as an independent company and its sole responsibility to Microsoft during the due diligence period leading up to the closing of the Microsoft acquisition, expected in October, 2011
• Why Silver Lake, working with Andreesson-Horowitz, was able to execute on the two steps necessary to acquire Skype, in the process rescuing a “terrific asset that continued to perform, [had] fantastic network effects and continued to produce great product” from a “horrible cataclysmic outcome”. But seeing Skype as “resilient notwithstanding”, these investors recognized a unique opportunity that required a unique solution.
  • Yet they came up with a solution that would eventually give eBay investors a net gain on their initial 2005 investment in Skype.
• The internal Skype business issues that the Silver Lake consortium recognized and why they hired Tony Bates out of a senior executive position at Cisco to take over the reins.
  • In the course of this there is a lesson on how a private equity takeover can be highly successful and grow a business built around existing key resources. It’s a stark contrast to the more often publicized “slash-and-burn” approach of many private equity acquisitions where employee and product cuts become the recipe for repackaging a business investment for a subsequent sale.
  • There are some interesting comments mentioning one additional key asset, beyond the technology and user base, that made the Skype acquisition a “magical opportunity” when Microsoft was considering the acquisition last spring.
• What Tony Bates has done behind the scenes that has resulted in the release of five new products over the past six weeks¹– more than had been released in the previous two years.
  • What Tony Bates sees as a bigger revenue opportunity than SkypeOut calling.
• How the pending Microsoft acquisition of Skype will result in an entirely new business model for how Microsoft embeds an acquisition into it overall operations.

Bottom line: starting with the Silver Lake consortium acquisition, the Skype business case study is unique in how a wildly popular yet deeply troubled, engineering resource rich company can be converted into a an asset that will continue to be the “gold standard” for worldwide ad hoc communications in both the consumer and small business markets.

Watch the video; it’s a compelling – and revealing – story ….

Fortune: Lessons from Skype

¹Five new products:

• Comcast as a new platform for Skype calling
• Launch of video on Android phones
• SkypeKit public beta launch
• Mac 5.2 client announcement (post forthcoming)
• Facebook Video Calling

Related articles

• Skype CEO Teases In-Call Ads (mashable.com)
• Microsoft expects Skype buyout to close by October (electronista.com)
• Skype CEO promises brand will stay intact despite Microsoft acquisition (thenextweb.com)

Last month’s announcement of Microsoft’s acquisition of Skype certainly triggered speculation, misplaced blame and other conspiracy theories on the blogosphere. It often sounds like a reporter wants to use Microsoft as the most convenient excuse for a post or article. It’s superficial, to say the least. Until Microsoft completes the acquisition, Skype operates as an independent but fully operational company, complete with warts.

Having participated in the major restructuring of a NASDAQ-listed company (and some subsequent acquisitions) and the acquisition of one of my previous clients by a NASDAQ-listed companies (as well as having supplied due diligence information for acquisitions of some of my previous employers’ customers) I’ve had a chance to walk through these exercises.

This post is simply my perspective on the challenges involved in closing such a deal and the short term benchmarks I am looking for in order to measure the impact of the acquisition.

First, some public facts,

• Last fall Skype announced the appointment of Tony Bates as its new CEO. Tony brings many years of business leadership experience with a major (and disruptive) player in the IP-communications space. He has certainly participated in, or been an observer to, some of Cisco’s acquisitions.
• Skype signed a long term lease for new office space in Palo Alto and moved there last December.
• Skype has been on a hiring spree for the Palo Alto office with respect to product managers and developers/engineers.
• On May 10, 2011 Microsoft and Skype announced that Microsoft would be acquiring Skype for $8.5 billion, acquiring a Luxembourg-based company, using cash that Microsoft has kept in Europe (or at least has not repatriated to the U.S.).
• Microsoft has built up a significant Bay Area presence at its Mountain View campus and is in the same time zone as Redmond.
• Last week the FTC filed a notice of early termination, without comment, effectively announcing there would be no objection on their part to closing of the deal.
• Until the deal closes, Skype CEO Tony Bates is and remains in charge, making the key decisions re ongoing business operations; it’s still an independent company reporting to its current investors. (Microsoft could incur legal liability were they to interfere in Skype’s decisions prior to the close.)

Today has seen a plethora of third party posts about executive changes at Skype. However, in the course of an acquisition by a publicly listed company, Skype’s hands are tied by the securities regulators as to what they can say. The only response has been “As part of a recent internal shift, Skype has made some management changes”. On the other hand my first hint of change came when one executive wrote two weeks ago, in his Skype Mood Message, to the effect that he would not be anywhere near Palo Alto at least until August 1.

We spoke with one [current investor] just now who reiterated what other unnamed investors have said in the press this morning: That the decision was 100% Tony Bates’ call. Until the Microsoft deal closes, he has to run Skype like a stand alone company, and these were all executives he’d been considering firing for performance for some time. The timing had more to do with how long it took to go through the process than anything else, this investor said.

And, he noted, that these were all people on the business side of the house, not the technical side of the house. That indicates he was trying to fix part of the company [that] wasn’t working, rather than a wholesale firing of people who stood to get big payouts.

But I’ve seen all this before at other restructurings and acquisitions. In the course of closing the transaction C-level management figures out – some before the close, some after:

• the resources you need and what is duplication, what needs to be merged
  • what is critical to maintaining Skype as an independent business unit and the internal business relationship with other Microsoft business operations
  • how to maintain a culture that encourages innovation and nurtures employee morale
• what policies need to be brought into line with respect to human resources, financial reporting, IT services. marketing and other corporate infrastructure services
• performance of due diligence on all contracts, agreements and outstanding legal disputes – this is the most challenging aspect as these will always raise issues that need to be resolved before closing – and
• clearing regulatory hurtles. While the U.S. FTC has cleared the transaction, there would have to be some EU regulatory clearance required, given that the actual transaction will occur between a European registered company (Skype LLC) and a European subsidiary of Microsoft.

But overriding through all this is the need to not only continue the Skype business operations but also determine how to put together the team and resources that will grow the business. Of significant importance is ensuring the ongoing business operations – as measured by revenues and expenses – do not impact the initial financial basis for the transaction at the time of close.  When I was involved in a restructuring and an acquisition the final question that had to be answered for any of my proposals was the impact on sustaining and growing the business.

In particular, Microsoft CEO Steve Ballmer will be under tremendous pressure to have success with Skype. After all, there is an $8.5 billion investment – the goal has to be both to recover this amount as profits and to generate shareholder return on the investment. This is achieved by not only continuing and enhancing the current user experiences vertically with upgrades and new services but also leveraging Skype technology through horizontal integration  into Microsoft Office, Lync, and Windows Live offerings. The bottom line is that any decisions during the transition and going forward will have to provide answers to that ultimate goal. And, if Tony Bates is to remain President of the Skype business unit at Microsoft after the close, he is going to have to live with his decisions during the closing period.

My real short term benchmarks will be Skype’s delivery of new and upgraded products over the next few months. Here’s what’s on the line:

• Developing a Skype for Mac 5.x that addresses a plethora of user interface issues, the most important of which is making the user interface consistent with the Skype for Windows 5.x user interface.
  • Skype Journal has an update on the Skype for Mac chat style contest.
• Evolution of Skype for Windows – beta version 5.5 with deeper FaceBook integration announced this morning.
• Launch of Skype for iPad – an iPad-specific version that takes full advantage of the iPad’s display format and iPad 2’s video features – a heavily used Google search keyword is “Skype for iPad” -  demonstrating the demand and expectation is there.
• Upgrades to Skype for iPhone (restoration of the keypad on Skype-to-Skype calls) and Skype for Android.
• Launch of Skype for Windows Mobile 7
• Launch of third party applications and hardware that incorporate SkypeKit
• Skype for Business customer success stories; we simply have not seen any since the Skype Connect launch last fall.
• Actual launch of announced services such as: Go To Meeting integration for collaborative desktop sharing, Skype for TV for Comcast cable customers.

Bottom line: It’s real easy, and naive, to blame Microsoft for recent outages and other Skype service interruptions.  When it comes to the Microsoft acquisition of Skype, we are simply going to have to wait out the process – securities regulations place limits on how much information can be made public. Investors and users have to hope the right business decisions are being made during this period; it’s really a matter of C-level management bringing the appropriate skills and experience to the table. This is a situation where trust in the C-level executives to make the right decisions is paramount. In the interim, Skype remains an independent business operation with its CEO in total charge.

But at least the above benchmarks provide some short term benchmarks that are indicators of how Skype will continue to support and upgrade services to its user base. And these benchmarks contribute to passing the ”AmberMac” test.

Update: Shel Israel expresses his perspective in Microsoft Acquires Skype.

Related articles

• Steve Ballmer & Tony Bates Talk About Skype-Microsoft Deal (gigaom.com)

While visiting relatives a few weeks ago I had the chance to participate in a Skype call with a remote family member. While they were using Skype for Windows, this suggestion applies to Skype for Mac also.

Basically both parties had Skype open during a video call when I hear one party say, “I’d like to put some information in the chat but I guess I can only do that after the call.”

They did not realize that you can carry on a chat during a call since the default is for the conversation pane to bring down that big blue-black blind that covers the text dialogue with participants’ avatars. Here’s a visual:

During a Group Video Call yesterday, once again the participants did not realize that one could click on the Chat icon to expose the text portion of the conversation pane. It’s even more challenging with Skype for Mac 5.x since the icon is a barely visible up arrow (second icon from left in the image). One more reason to have a call bar on Skype for Mac 5.x that is consistent with the call bar in Skype for Windows 5.x.

Looking forward to what comes forth with Skype for Mac 5.x now that that the Skype for Mac style contest is near closing. But a modification to Skype for Windows 5.x that addresses this issue would also be helpful.

Related articles

• Skype for Mac 5 – From Ecstasy to Agony (voiceontheweb.biz)
• Skype for Mac 5: Returning to Ecstasy – Step 1 – Consistent Terminology (voiceontheweb.biz)

Where have all the Skypers gone? Long time coming back
Where have all the Skypers gone, one day ago?
Where have all the Skypers gone?
Skype crashes have closed them, everyone.
Oh, when will they ever come back?
Oh, when will they ever come back?

Paraphrased with apologies to Pete Seeger.

It’s a popular 60’s folk song that comes back to mind when one wonders how large a “small number” is?  The initial post from Skype about this service interruption (which has had three updates) read:

A small number of you may have problems signing in to Skype. We’re investigating the cause, and hope to have more details to share soon.

What was termed in Skype’s blogs as a “small number of you” appears to have become a significant portion of Skype users online. Have a look at this trend chart (based on Users Online data collected by Hudson Barton at Borderless Communicator):

June 6 represents a typical pre-interruption day. June 7 shows the impact of the outage on Users Online. June 9 shows a shortage of about 4 million users throughout the day (will be updated as the day progresses).

But there is one other Skype statement that I have to dispute:

If you were disconnected from Skype earlier, you shouldn’t need to manually sign back in to Skype – it should reconnect automatically when it’s able to do so.

Personally I found that when I went to Skype on my two Windows PC’s and clicked on the application, it effectively crashed with the dialogue box shown on the right. I checked with a couple of other users (one in France, one in North America) and they had the same experience. Automatic reconnection was not happening.

Based on the rare previous experiences when I had seen this, something was causing Skype for Windows to crash when one attempted to go to the Skype client once the interruption had commenced.

But there is one other learning from my experience with Skype (especially with project I was managing a few years ago). There are many installations of Skype, especially in business environments, where Skype has been installed on a PC yet rarely used, if ever. However, Skype is sitting in the background, logged in (because the default setting of Skype is to log on when Windows opens) but never used.

Somehow I suspect that these users of Skype have been either logged out or their Skype has crashed and they don’t realize it. These users need to somehow shut down their Skype and relaunch it; but given their lack of awareness, they may not come back online until the next time their PC is rebooted which may be several days from now. Just my “gut” hunch but definitely worth considering.

Bottom line: if these trends continue this interruption may effectively be a Refresh to tell us how many “truly active” real users are online. I’m sure Hudson will keep an eye on the situation and see what bears out by the weekend. In any event it’s a challenge for Skype to get these 4 million users back online using Skype.

Question: Is 18 million (or ~ 65%) of users  – the Users Online deficit at 18:30 GMT Tuesday – a “small number”?

Meanwhile I’ll dig out my old Kingston Trio (or was is Peter, Paul and Mary) recording of “Where Have All the Flowers Gone?’

Related articles

• “Skype Has Stopped Working”: Another Service Interruption (voiceontheweb.biz)
• Skype Login Disruption Update: User Friendly Fixes Becoming Available (voiceontheweb.biz)
• Skype is Having Another Outage Today – Appears Widespread (But May Be Recovering) (disruptivetelephony.com)

My plans for this morning were severely interrupted when I attempted to use Skype around 8:00 a.m. (GMT-4) and I got the error message shown on the right. On further investigation it turns out that Skype has had another service meltdown, at least when using Skype for Windows 5.3.

Initially I checked my Windows Task Manager and found residuals of Skype.exe (two instances, in fact); I then “Ended” those processes and “SkypePM.exe”. Knowing that Skype was totally closed I then attempted to re-launch Skype for Windows. I could see all my Contacts; however, my “Recent” tab showed no “Recent” Contacts –totally blank. After another unsuccessful attempt I then rebooted my PC, got the usual list of “Recent” contacts in the “Recent” tab. However, no Contacts were showing as being Online.

At that point I checked Google News and found there were several posts about an interruption and references to Skype’s Twitter feed.

Initially I had to reset my own status from Offline to Online but even then the only contact showing as Online was “Skype Test Call” – which worked. I sent some test chat messages to various contacts whom I knew should be Online. Eventually I started receiving responses and a few contacts showed up as Online.

At that point none of my Group Chats appeared to be working; however, after another half hour I found that not only were my Group Chats operating again but they had restored messages which had been exchanged during the outage period.

The Bad: another Skype service interruption, so soon after last week’s. Hudson Barton’s Skype Statistics showed as few as 12 million online at a time when over 25 million are usually online. (Not a “small number”!) When I attempted to use Skype on another Windows laptop, I got the same “Skype has stopped working” message as shown above; in this case re-opening Skype did work without the need to reboot that PC.

The Good: Restarting Skype for Windows appears to now address the issue. Missing messages from Skype chat sessions were recovered once the service was restored. Also, of note, is that my Skype for Mac client continued to work through all this although messages to Contacts using Skype for Windows were again not getting through.

Hopefully the Skype engineering team can sort out what is behind these interruptions. Not having Skype access totally interrupts the workflow of over 20 million users. Frustrating!

Yes, you can try other services. But the act of one acquaintance trying to call me via GTalk was not exactly the smoothest experience and definitely not ad hoc! And, while voice quality was acceptable, there was a definite degradation without the SILK support.

Dan York, at Disruptive Telephony,  has a couple of posts:

• Skype is Having Another Outage Today – Appears Widespread (But May Be Recovering)
• Skype Is Back For Me – But Only 2 Million Users Are Online (versus normal 25+ million)

Related articles

• Skype down. Again. (thenextweb.com)
• Skype hangs up on users yet again (go.theregister.com)
• Skype Goes Down (Again), Users Inexplicably Blaming Microsoft On Twitter (techcrunch.com)

Earlier today I blogged about the Skype Login Disruption that occurred this morning. Seems like Skype’s developers got onto the issue pretty quickly with the announcement on Skype’s Heartbeat Blog this evening:

• An update of Skype for Windows is available immediately.
• An update of Skype for Mac will be available tomorrow is now available.
• Updating Skype for Linux will continue to require a manual update.

Update: May 27: Skype’s Heartbeat blog reports on the Skype for Mac 5 upgrade. Also ensure you have Skype for Windows 5.3.0.116, released early this morning to address an auto-installation issue with last nights update.

Kudos to the Skype developers for getting on top of the issue and doing the software updates so quickly and to Skype corporate for communicating the issue and the fixes as they became available.

Hopefully each fix such as this builds a little more robustness into Skype.

Oh, and it had nothing to do with the Microsoft acquisition.

Related articles

• Skype faces second big outage, already has fix (electronista.com)
• Skype Outages Worldwide & How To Fix App Crashes For Windows/Mac [News] (makeuseof.com)

Seems like the robustness of Skype has been mildly challenged once again. About an hour ago it became apparent that some Skype users were having issues with logging in. Skype has identified the problem according to their Twitter account.

And a later Tweet:

In the interim Skype has released, on its Heartbeat blog, a temporary, if mildly challenging technologically , fix:

Skype is aware that a select number of users are experiencing problems. They have identified a manual fix so people can follow these instructions if they continue to have issues logging on:

Windows Vista and Windows 7

1.    Close Skype.
a.    Right-click the Skype icon in the system tray (at the bottom right of the screen)
b.    Choose Quit.
2.    Ensure that “Show hidden files and folders” is switched on.
a.    Click Start, select “Run” and press Enter.
b.    Type “control folders” and click OK.
c.    Select the View tab and ensure “Show hidden files and folders” is enabled.
3.    Locate the shared.xml file.
a.    Click Start, type run and press Enter.
b.    Type %appdata%\skype and click OK.
c.    Delete the shared.xml file.
4.    Restart Skype. The shared.xml file will be recreated.

Windows XP

1.    Close Skype.
a.    Right-click the Skype icon in the system tray (at the bottom right of the screen)
b.    Choose Quit.
2.    Ensure that “Show hidden files and folders” is switched on.
a.    Click Start and then Run…
b.    Type control folders and click OK.
c.    Select the View tab and ensure relevant entry is enabled.
3.    Locate the shared.xml file.
a.    Click Start and then Run…
b.    Type %appdata%\skype and click OK.
c.    Delete the shared.xml file.
4.    Restart Skype. The shared.xml file will be recreated.

Mac OS X

1. Quit Skype.
2. Go to the folder ~/Library/Application Support/Skype/
3. Delete the file shared.xml (it will be recreated once you open Skype again, this is fine).
4. Start Skype.

Please note that the ~ sign means your home folder. You can find your home folder by opening Finder and selecting Go > Home from the menu bar or pressing Command (Apple), Shift and H keys at the same time.

Skype’s unofficial “real users” tracker Hudson Barton shows how this issue has slowed down Skype Logins this morning:

We’ll provide an update once the issue has been resolved. During the time that I wrote this post the number of users online has risen from 23+ million to over 24.7 million.

But the voice conversation system has gone a long way in terms of reliability since the 1930’s. My mother’s cousin was hired by Bell Canada upon graduating from Engineering Skule^TM in the 1930’s because he had figured out a way to prevent the phone system from breaking down due to streetcar vibrations. Apparently when installing the initial phone network in Toronto in the 1920’s and ‘30’s, they would install the phone lines in the streetcar track beds. And breakdowns in the business core of Toronto were frequent.

Hopefully with each of these issues Skype becomes just a little more robust as a result of the fixes.

At least Skype is onto the issue and keeping us informed via both their PR agency and Twitter.

For over a year the author has been a keen user of Skype for Windows 5 as a Skype client that has simplicity, yet flexibility. It’s easy to manage contacts, follow conversations, handle video calls as well as archive and search conversation history. Yet, with the release of Skype for Mac 5, there has been a “Skype for Mac 5” fever outbreak on the Internet due to its lack of consistency with these features. Bottom line is that users are confused and, in many cases have gone back to Skype for Mac 2.8. On the other hand the Skype for Mac team says they are listening.

In the previous post in this series, Skype for Mac 5: Returning to Ecstasy – Step 1 – Consistency, after pointing out how widely Skype for Windows 5 has been accepted, I went on to discuss some consistency issues including the use of the left Contacts pane. It is primarily used for managing Contacts and selecting a Contact or Group with whom the user wants launch or monitor conversation activity, whether chat, voice or video. One key recommendation here was that, in Skype for Mac 5, not only individual Contacts but also Contact Groups should be managed in this pane.

This post focuses on the right Conversation pane which, for the most part, manages and, as appropriate, archives content associated with the user’s conversations such as chat text, call detail records and file transfer information.  During Skype for Windows 5.x voice and video conversations it also displays, in the upper part of the pane, not only other party’s Skype profile graphic or video associated with the call participants but also user “controls” to manage how the call proceeds:

• a Call Bar beneath the image allows the user to manage the call activity, such as adding people, bringing up a dial pad, opening a chat window, sharing a desktop or file and, via the Call Quality Information  tool, monitor associated hardware and Internet connection conditions. This latter tool has been discussed previously with a recommendation to adopt all the features of this call bar in Skype for Mac 5. Also note that, from the CallBar, there is an obvious icon from which you can open a chat window below the video image.
• during a video call you can select whether you want to continue to view the video within the Conversation pane (with an option to zoom in on the image), in a separate “pop-out” window or Full Screen. There is also an option to capture a snapshot.

Recommendations for the Conversation Pane

1. Use the right pane solely for conversations; move all the Contact management activity, especially Contact Groups, to the left Contact pane.
2. Invoke all the features of the Skype for Windows call bar, including the Call Quality Information tool; this has been a most useful tool during calls in ensuring that all the audio and video hardware is working during (or prior to) a call.
3. Include the larger blue Chat icon, not a barely visible down arrow to open the chat window.
4. Invoke the Snapshot/Zoom/Full screen/Pop-out feature bar. When in an HD video call with Full Screen Skype is approaching a telepresence effect that will be even more useful with newer (HD) webcams that can pick up an entire small board or meeting room.
5. Invoke these changes while leaving available the existing View options to have a small Call Control bar that remains visible while in other Mac desktops and to have a list of contacts online. Useful options but they should be “Mac” enhancements to the feature set of Skype for Windows 5.
6. As with Skype for Windows 5, invoke a “Home” screen for viewing some conversation history information and manage the User’s Skype profile.
7. I’m neutral on whether to invoke Facebook; occasionally I find it useful.
8. Keep the indicator on the left of the panel for expanding the video image to the full width of the Skype window.

Bottom Line: Users are not only looking to have all the primary Contact, Calling and Conversation features available across Windows and Mac (and potentially Linux) platforms but they are most comfortable when there is consistency between the User Interfaces. In some cases there is a feature that is currently available in Skype for Mac 5 (such as viewing Full Screen) but it’s the User Interface triggering “button”  or icon that should have a base level of uniformity across all platforms.

One may say that most users have only one platform but I am in a family where some members run on Windows while others run on the Mac. Also during cross platform calls it is features such as the Call Quality Info or Sharing icon that I ask the other party to use or seek out when they are having difficulty with, say, their hardware or features such as screen  sharing.

Other posts in this series:

• Skype for Mac 5 – From Ecstasy to Agony
• Skype for Mac 5: Returning to Ecstasy – Step 1 – Consistency

Other views on this issue:

• Ignore the Code: Skype 5 Ideas
• Dan York, Disruptive Telephony: My 3 Main Issues With Skype 5.x For The Mac
• Balance Network: Skype 5 for Mac Redesign, “A little more than just a Chat Style”
• Attack of Design: Skype Beta for Mac’s Usability Failings
• Hudson Barton, Aaytch: How To Fix Skype-for-Mac 5.x
• Andy Abramson, VoIP Watch: Skype Has Another Set of Outages Yesterday
• Keith Lang: screen shot on how to organize Contacts
• Jaanus Kase: Skype 5 for Mac: spatial arrangement and inconsistent single-window design

And, for those design masters: enter the Mac chat style competition; competition announcement

Related articles

• Skype for Mac 5.0 Goes Gold: Incorporating Beta Feedback and More (voiceontheweb.biz)
• What’s New in Skype 5 for Mac? (appreaders.com)
• Skype’s "Easy Conference Call" – A Hidden Gem (voiceontheweb.biz)
• Skype for Windows 5.2 Released: Subtle Window Dressings (voiceontheweb.biz)

Cross-published guest post by Phil Wolff, Editor and Publisher, Skype Journal.

Phil’s interview with Tony provides significant background about what Tony brings to Skype as both his technology expertise and business management experience, the four key values that are the foundation for his leadership focus during his first year as Skype CEO and where he sees Skype moving ahead at a high level.

http://www.youtube.com/watch?v=eXddBMj1N8s

Skype Journal: How did you come by your geek cred?

I was part of the team, the very small team that ran the ARPANET gateways in the UK, I call it the right place at the right time. And my story about how I’m self-taught is that I’m from London and I lived at the end of the Tube line and it took roughly an hour and twenty minutes to come in every day and an hour and twenty minutes to go home. That’s a long time where you’re kinda sitting there and so I immersed myself in manuals and texts. Strange story about that, back in those days, manuals were a lot better then they are today. I self-taught UNIX through basically DEC manuals.

And I really got involved in the infrastructure side of the Internet and so when people say a bit about being a geek, you’re seeing a bunch of RFCs around things like route reflection. Route reflection is an esoteric thing but it’s one of the things along the way that kept the Internet going.

There were some other jobs after that. I helped start RIPE which is the main name registry similar to the Internic and so on. I wasn’t the first guy there but I was like number four and I worked on a thing called a route server. But I always knew I wanted to build product. And so after that I did Internet MCI which is how we transitioned the NSFnet which was a lot of fun and it was all different then. It was when in those days the nexus of the Internet was actually in Virginia, So PSI was there, UUNET was there, Sprint was there, MCI was there. And we actually used to meet, a bunch of kids, geeks and we would actually trade SLA agreements. We would go to the Tortilla Factory once a month and I would buy a circuit, you’d buy a circuit and that was how it worked. And in those days there was no settlement and all the discussions we have today.

But I always kinda felt that the missing thing was how were these things going to evolve and scale.

When I joined Cisco I worked in the CTOs group and we had these guys called “consulting engineers,” very smart people mainly more pragmatists who had been building. And I kinda ended up being the de facto product manager for the high end router space and we were redefining it and there were a lot of people involved. But my first big project was working with a thing called 12000. The twelve-thousand was the real first carrier class box.

And then to cut a long story short so this doesn’t go on forever, the real big thing I got involved in was this thing called the CRS1 and what was brilliant about that was all aspects about building a system: which was hardware; we created this new operating system called IOS XR, which I drove and led and this you know; put it this way, pretty much any time that someone connects to your website you get sent one of these packets, it comes across one of these devices so it’s part of the infrastructure.

And the only other bit that may be relevant for this is that along that way I got really enamored with video. I was asked to integrate Scientific Atlanta because we’d acquired Scientific Atlanta, and now we got bigger and I was general manager and I had most of the carrier business, a big portfolio, and what I loved about the technology was the complexities of it and the complexities of the multiple forms of capture to display. And I also loved the fact that it took me to a place that I hadn’t been before. I had been basically a plumber, I had been selling plumbing, building plumbing. But when we acquired Scientific Atlantic at Cisco, the dialog changed – we now were actually in the home. We were in the ARPU part of their discussion.

And the other thing that happened because of that passion around video and the fact that I had been so focused onto the early generation of the Internet I had the opportunity to be on the board at YouTube. And that was my first real shot into that kind of “consumerland,” consumer Internet. Loved it, it was over before it started, it was great fun. Founders are fantastic people, Chad and Steve. If you ever get a chance to meet them, they’re wonderful guys.

And from there, I was just building my portfolio, growing my leadership, and John Chambers asked me to take on enterprise 18 months ago, and this opportunity came up.

SJ: And out of the all the companies – Why Skype?

Well, it’s a great story. I’m very goal-driven. My wife will tell you that we…

SJ: In terms of personal career goals?

Goals in general. I’m just being very candid. Some career, some material, some more social. I mean, I believe that goals work. I think that it’s a myth that there’s some Harvard study that wasn’t empirical that said that they did a measure of people one year of one graduation class and those who had goals, who had wrote down goals were more successful than those who didn’t write down goals. Now again, goals are different for different people. But three years ago, I wrote down a goal that I would like to be a CEO before I am forty-five and I wrote down three companies and this was one of them.

SJ: Really?

And I’m not telling you who the other two are. But I will tell you is that each one of those was not in the infrastructure system space, was in the consumer internet space, because I think that the consumer internet side is the most disruptive space and continues to be. I was in the transition at Cisco where it was frankly academic-led to enterprise-led and it transitioned to consumer-led and I got to see that.

And the other thing, just for what it’s worth, I hope it doesn’t come across as cheesy, but I’ve been a big user of Skype for a long time and…

SJ: A little cheesy.

Yeah, but let me tell you the story of why it’s less cheesy. When I went to Tallinn. Have you ever spent any time in Estonia?

SJ: No.

You’d love it. Actually, a big part of the history is the disruption of what they’ve done. One of the questions they’ll ask anyone is – how long have you been using Skype? One way you can tell how long someone has been using Skype is asking if you have a unique handle, that maps to their unique handle. My Skype ID is TBates. I started using Skype in March 2004. There’s a great story here. So the guy who runs the database who has all the secrets, Asko, they asked him to run it, cause I was asked this question myself, and the answer came back – he goes wow that’s before I started using it. So yes, you can say that it’s cheesy but the reality of it is that I used it a long time ago.

I met Nicholas a long time ago. I developed an idea of putting p2p inside routing protocols at Cisco. We have a patent on that. And I pitched it to them and they said it wasn’t a great idea. ‘Cause of their core values. So I’ve been involved in that technology.

SJ: Skype vs. Cisco?

Just to give you a perspective, I was at Cisco for 15 years. So I was there when they were kind of in the low billion dollars which is slightly bigger than this and actually it’s kind of interesting, when I came to Skype, there’s a lot of similarities in culture. Right? We can discuss what Cisco is today but back then it was highly product-centric. There was a belief system in this case, that you can kind of equalize the world by making IP the center point of it.

In Skype’s case, it’s saying we’re providing a communications services platform that breaks down barriers on a global basis. And they used a very powerful disruptive technique to do that. One – it’s low cost, but two – it’s highly scalable. And so there are similarities there.

Culturally, there are also similarities, in the early days of Cisco there was a belief system that you could do anything if you had the right talent and the right engineers in place. Now that scales to a certain level and then you have to put processes in and so on. And Skype I think is at a very similar point in its life cycle. So for me, I was sort of lucky enough to go through that, so when you ask what’s the value I can bring, I have been through that.

I think there’s two other pieces which is leadership as you go through these transitions is critical and I learned that from John. And John created a bunch of cultural values that stick with the company. Those values are different, but the importance of those cultural values are very critical as we went through different parts of that long term journey.

And so I am in the process, and it’s an internal thing but I have to share it. It’s sort of establishing a bunch of cultural values that I think are very important to Skype. Different to the ones we had at Cisco. At Cisco we had “Customer Success”: customer is always right, no technology religion, results driven. So there’s a bunch and there’s a badge you get at Cisco.

I’m trying to focus on four key things:

Number one – product engineering led company. The way Skype will be successful is its products must speak for themselves. Its products and its services. And you know, I think we have some wonderful products. I think what we just did with the iPhone launch, just to bring you up to speed, we did the New Year’s Eve event with 11 million – 10 million upgrades, 1 million new users — in less than a week. And just the pure use cases are just unbelievable. And I think why? Because they’re multi-platform and they’re going to lead to more platforms. Just takes it to the next level. So that’s one key thing. But product engineering – that must lead. I don’t want to talk about the past. I want to talk about what I want to do. But that’s number one.

Secondarily, understanding that we’re truly a global company. One of the things that attracts me to Skype is that we were founded in the East. We were founded in Eastern Europe. Maybe we should do this at some point – maybe we should do this at some point, you should come with me; the energy and the way they think about life is just amazing. It’s not just that they disrupt – they see this as a platform that could change the world. Now to change the world you need a big platform. So you have to keep investing and so on.

But we also need to grow. And at some point you have to look at that talent pool and say if you go to Estonia and you get in a cab and you say Skype, you don’t have to say any more. And I’m saying Estonia, I’m not just saying Tallinn. So this is a population thing. So we’re sort of bringing East to West. Now why I like that concept is that we actually have the infrastructure and the capability to do it. The way people use Skype internally is they’ve already embraced “globalization” but not necessarily really realized the full power of it, so that’s number two: Truly global like no one else. Really be a global company. Most global companies today are headquartered in The Valley and they outsource. That’s not what I’m talking about. Completely distribute the company. That’s the second cultural value.

The third one is we’ve got to, one thing that I think is really important is incredible ideas. [And you’ve got some great ideas by the way. And I do want to mention, we are going to take up your Heartbeat idea. I think that’s a good one. Not committing right now! But I absolutely think that heartbeat not a good one right now, we have to put more data and status around it.] There’s probably ten things that you would like to do in the Skype product, probably five or six [of mine] are the same. If you go to Tallinn and you say to them, we should do this, I don’t know: ring tones, as an example, it’s been done. But what happened was for some reason the processes and things to get it to market and really get it to take off, so they just moved on. So cultural concept number 3 is ideas to real users much quicker. And I think I know how to do that. Because I’ve been through that process. Last year I helped develop 400 new products at Cisco. Different types of products Software products as well. Android tablet, business social software, obviously switches and routers and so on, so that I think picking up that pace…

Last one I think is a bit high level, but understanding that the role Skype plays is that we’re in a highly dynamic world, much more dynamic than it used to be. There’s a bit of a sense that it’s static – you win VoIP and then you win the next one. I think all those things are blurring – and so that’s the 4th concept. This notion of dynamics – what’s happening in the marketplace with the competitors and so on, I think we can translate internally and really move much quicker.

SJ: What does Skype need to become?

Look, I think there are a couple things. One is Skype in my opinion is the only truly global communications services company already.

One of the things that’s going to come out tomorrow is a Telegeography report. Wait, let me ask you a question, what do you think the numbers are going to be for 2010?

SJ: For international minutes?

For us, as a percentage of total.

SJ: 16?

25!

SJ: Congratulations.

What’s that really about? That’s still mainly people with good broadband, mainly people in the developed world with PC architectures. You’ve got to move to mobile, you’ve got to get to the third screen, I would say the living room, really. I think the world is made up of three, increasingly, three modalities of input and receive communications. These guys (holding up iPhone) for sure – that wave’s there and we’re in the heart of that right now with what we’re doing with our products. This, and I think the desktop is still a metaphor for what we’re doing – mainly for the web and the browser. And increasingly the living room. And that’s the other thing we’re going to be talking about tomorrow – is continuing partnerships around what we’re doing with TVs, and SkypeKit as a generalized kit can now be put into a lot of different devices.

So when you say what I think we can become, I think we can service a billion people quite candidly. I think offer a rich set of communications services in a way that leads to more wonderful experiences obviously. There are so many stories of the way people use it in terms of whether it’s outreach, in terms of education to kids, and so on or whether you’ve got someone who’s at war trying to get back home.

But I actually think that the broader play for us is that it can also start to become much more useful. The way people collaborate is becoming more video based. It’s much more immersive, people actually want to talk to each other. Customer service, there’s so many different examples of where video will become the next frontier. I think we’re leading in that. But I think we need to be multiplatform. That’s really what we’re doing in the next few years.

Word cloud from transcript via Wordle.

Thanks to Jenifer Caukin, Skype PR, whose voice you’ll hear about two-thirds of the way through the video.

See also:

• An Atlas of Cyberspaces: Historical Maps of Computer Networks. A range of the historical maps of ARPANET, the Internet, Usenet, and other computer networks, tracing how these pioneering networks grew and developed.
• Internet History, Computer History Museum.
• IETF RFC 2260: Scalable Support for Multi-homed Multi-provider Connectivity. January 1998
• IETF RFC 2270: Using a Dedicated AS for Sites  Homed to a Single Provider. January 1998.
• IETF RFC 2283: Multiprotocol Extensions for BGP-4. February 1998.
• IETF RFC 2796: BGP Route Reflection – An Alternative to Full Mesh IBGP. April 2000.
• IETF RFC 2858: Multiprotocol Extensions for BGP-4. June 2000.
• IETF RFC 3180: GLOP Addressing in 233/8. September 2001.
• IETF 4456: BGP Route Reflection: An Alternative to Full Mesh Internal BGP (IBGP). April 2006
• IETF RFC 4760: Multiprotocol Extensions for BGP-4. January 2007.
• 10 Questions for Skype’s new CEO. October 4th, 2010. I only got to a few of these.
• The Skype Hall of Presidents and CEOs. October 30th, 2010.
• First video message from Skype CEO Tony Bates. December 23rd, 2010, responding to the pre-Christmas network outage.
• Skype CEO: We apologize and will top you up. Caption contest. Announcing the outage was over. December 23rd, 2010.

What do you think of Tony Bates’ past experience, fit for the job, or his plans for Skype? Email tips@skypejournal.com. Chat with me on Skype. Call me at +1-510-316-9773 (my mobile), follow on twitter @evanwolf(everything) and @SkypeJournal (just the posts). Visit our Skype Journal private technologist roundtable, one of the longest running public Skype chats, where we’re talking about this right now.

Following the Mood Messages of a Skype employee in my Skype Conversations window I came across this last Friday: “brand new version of Skype To Go available. Dead simple to use, nothing to download, call directly from your contact list !” Curious, I went to my Skype To Go subscription where I found all six of my Skype To Go contacts had suddenly, and spontaneously, sprouted individual 647 numbers (647 being the overlay area code for Toronto’s legacy 416 area code).

Previously I had a single Toronto-based Skype To Go number which I would call to access one of my six contacts by selecting a number between “1” and “6” when I called the number. This process, using a Bluetooth connection between my BlackBerry and car audio system,  meant my “hands free” calling to this number in my car required that I actually use the keypad on my car’s “phone” panel. The new Skype To Go resolves this issue and more.

Here’s what’s new:

• Up to nine Skype To Go contacts can be designated; each with an individual Skype To Go number
• Up to five of your mobile or landline phones can be registered as valid phones to use these numbers
• When calling from a registered phone to one of the nine contacts, there is no need to wait for any voice prompts; the connection is now immediately made.
• Validated with a PIN and entering one of the registered phones’ numbers, one can call these numbers from any other phone.
• You register also the Country and Area Code you are calling from. When you move to another Country you can change the registered Country and get new local phones numbers for each of your Skype To Go contacts. But when you return to your “home” country you will get back your original Skype To Go numbers.
• The listing also shows what your charges are to these numbers below the destination number.
• You can select which of the registered numbers you want to display as your callerID when making these calls.
• What’s not changed? Your old Skype To Go number which you can still use for calling numbers not included in your Skype To Go contact list.

Skype To Go numbers can be obtained in 23 countries (note that Canada was added earlier this year):

So what’s the cost?

• If the number called is on one of your Skype subscription plans, there is no charge to landlines and mobiles in the eight countries with totally unlimited calling; for the 33 countries with unlimited calling to landlines only you pay the going Skype calling rate for calls to mobile phones (for instance, $0.317 per minute to mobile numbers in Spain). Note that Skype’s fair usage policy applies.
  
• If not on a subscription you pay, via Skype credits, the normal SkypeOut charges plus a connection fee.

Bottom line: I can now make totally hands free calls to these nine “most frequent” contacts using Skype To Go from my car via my BlackBerry or iPhone simply by pressing the “Enter” button on my steering wheel and saying “Call [Name] Other”. To simplify this process I have recorded these Skype To Go numbers under “Other” in my smartphone and Outlook address books. Back to total compliance with Ontario law regarding use of mobile phones while driving.

The bonus: I added my wife’s BlackBerry as a registered phone and she gets to call three relatives in another Canadian city at no cost when calling from Toronto’s rather large local calling area, encompassing four area codes. (With 90% of  its population spread out across a belt 100 miles wide and 4,000 miles long, Canada still has long distance charges, although they are gradually evaporating into carrier calling plans at low or no cost.)

When I interviewed Skype CEO Josh Silverman at CES 2010 in January, I had asked about the timing for a Skype IPO. Josh’s response:

“We’ll see. We don’t have a timeline for it. Our focus is to build a really great company. When we’re ready and the markets are ready, we’ll consider an IPO. At some point investors will want an exit, of course, but they’ re really taking  a long term point-of-view. This is not a quick flip; this is about building one of the great companies of technology.”

Today “long term” was defined as something between nine and fourteen months. Nine months after being taken private by an investment group lead by Silver Lake, Skype announced, through a blog post by Josh Silverman, they had filed a preliminary prospectus for an IPO. With a road show and other pre-IPO activities we’re probably three to five months from seeing the final transaction happen.

The prospectus makes for interesting read about both Skype’s business model and the communications infrastructure transition wrought by new technologies. Key Skype performance data includes:

• 2010 Jan-Jun revenues of $406.2MM vs same period 2009 of $324.8MM, an increase of 25.1%
• “Adjusted” EBITDA increase by 59.3% from $75.2MM to 115.8MM over the same periods
• $37MM in capital expenditures budgeted for 2010 vs $13.5MM spent in 2009

and some interesting user data:

One should really think of “Registered Users” as “Registered Accounts”. Especially with Skype for Business becoming more active, there will be a rise in accounts but lots of reasons for stagnant or dead accounts. (Personally I manage, via Skype Manager, over 25 accounts with about 15 users but really only use two of them for my own ongoing activities. The other users were created for one or more business activities and )

Most interesting are the “connected users” numbers, defined as “average monthly number for the three months ended [on] the date [shown on the x-axis]”. While Skype is showing a current number of 124 million“connected users” for the quarter ended Jun30, 2010  Hudson Barton’s “real users” number – which is more an indication of daily users on line is currently running at about 60 million.

The increase in paying users is the most significant number of interest. The prospectus confirms that SkypeOut represents Skype’s number one source of revenue and this number is the best indicator of how quickly these revenues can grow.

One other interesting metric relates to calling minutes, broken down as”

• Communications services billing minutes (SkypeOut minutes): from 5.0B in H1 2009 to 6.4B in H1 2010, a 28% increase somewhat consistent with the revenue increase, and
• Skype-to-Skype minutes: from 49.1 billion in H1 2009 to 88.4 billion in H1 2010, a 80% increase confirming that “free” really is the key marketing strategy for increasing Skype users and Skype usage.

Bottom line: Skype continues to grow at double digit rates but they are about to enter a phase where marketing activities and business communications services will become vital to sustaining its growth. Yet, regulatory and competitive issues will also become a significant factor and a real test of how willing governments are able to adapt to technological change as opposed to sustaining cost-inefficient legacy telecommunications operations whose fundamental business models are threatened. For the first time, we’ll be able to view quarterly the business success of Skype as an independent business operation.

There’s lots of other interesting marketing information and financial data in the prospectus but that leaves room for additional posts. And the statements re regulatory issues have the makings of several discussions.

Note that while $100MM has been put out as the amount to be raised, it was apparently only used as a metric to assist with determining SEC filing fees. The actual amount to be raised has yet to be announced.

Other posts:

• Dan York, Disruptive Communications: Skype, less than a year after eBay sale, files for $100 million IPO
• Business Insider SAI: Skype Spent $343.8 Million To Acquire Its P2P Software From Founders
• Andy Abramson, VoIP Watch: Skype To Go Public makes a couple of interesing points:

Now, going public brings with it a whole new set of responsibilities, not only SEC quarterly reporting.

For Skype’s lead investors, Silver Lake Partners, this is their opportunity to cash out. For many of the employees at Skype this is their chance for a nice reward for all the hard work they’ve put in over the past year.

• GigaOm: Skype Files for IPO

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• Skype Files For $100 Million IPO (techcrunch.com) (This one includes a block diagram of the various companies involved)
• Internet calling service Skype files for IPO (sfgate.com)
• GIPS, Google and All That Co-opetition Jazz! (voiceontheweb.biz)
• SkypeKit: “Naked” Skype Support Arrives for Hardware-Embedded Skype and PC Applications (voiceontheweb.biz)

Yesterday Skype introduced new subscription or calling plan options that provide more flexibility in terms of matching a subscription option to an individual user’s specific needs. In summary:

Ongoing Plans

The previous local country, regional and worldwide calling plans remain in place with three two changes that I have encountered:

• some price increases: for instance, while “Unlimited US and Canada” remains unchanged, “Unlimited North America” and “Unlimited World” have gone up by $1.00/€1.00 per month
• acknowledgment that the Canadian dollar is now close to or at par with the U.S. dollar
  • effectively a cost reduction for C$-denominated purchases
  • in the example below C$=US$ when changing currency
• continuation of the 15% discount for a 12-month subscription
  • not changed; discount applied during the purchase process
  • also 5% discount for a 3-month subscription

New Plans

The new plans offer three new options that have the potential to reduce calling costs for specific user segments:

• select an individual (termination) country from over 170 countries (would be useful for Canadians with family ties back to one specific country outside North America, such as India, Italy or Argentina)
• time caps (for example calling to Spain offers 60, 120, 400 minutes or unlimited per month) that provide reductions from the ad hoc pay-per-minute rates using Skype credits
• addition of time-capped mobile phone subscriptions for individual “caller pays”countries (again with a reduction from the pay-per-minute rates)

Bottom line:

• There are $1.00 or €1.00 increases for some of the previous calling plans
• Choices to be made by the individual:
  • What country(ies) or regions do I want to call?
  • Do I want a “time cap” or unlimited calling?
  • Do I want to call landlines only  or “landlines and mobile”
• When my Unlimited World is renewed later this month:
  • $12 per year increase in basic 12-month cost
  • $23 increase with loss of 15% discount (no change discount applied during purchase process)
    
  • $20 saving due to exchange rate fluctuations
  • it’s still a bargain relative to legacy PSTN long distance charges for calls outside North America

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So it’s finally resolved. The Skype spinout from eBay will involve Skype’s founders as investors and board members while contributing a cash investment. Skype finally owns the core intellectual property required for Skype to operate at its current cost levels. eBay gets the cash they were looking for but 5% less of the new Skype. Canadians still get to invest $16.75 each through the government operated Canada Pension Plan. Marc Andreesen gets involved with another major Internet play. Mike Volpi and Index Ventures are out of the picture. Lawyers and consultants are probably heftily rewarded for all the litigation activity leading to the final resolution. Incessant speculation on Skype Journal’s Skype 5.x Public Chat about how to get around JoltID’s Global Index software will finally cease (well, maybe).

While I have put links to several posts leading up to the resolution below it has been most interesting to read various bloggers comments on the resolution and the future direction for Skype:

Phil Wolff at Skype Journal sums up the numbers in his post, Sold! The Bullets and values the JoltID intellectual property at $275 million. (Phil gets credit for the graphic above, by the way.)

Om picks the winners and losers on My Thoughts on the Skype Settlement: Winners & Losers Scorecard. He points out the “great spin quote” from Silver Lake as a leftover from the “PR spin” days prior to the transparency that comes with social networking. Come on, guys. We’ve all seen the depositions and emails. As for the future, Om comments:

No Silver Lining?: One person who I totally feel for is Silverman, the current CEO of Skype. He gets to run a company which will have the looming presence of its founders.

Whatever the press spin might say, the new investor group is like a poisoned well. It will be a polarized group, always looking over their shoulders. Silverman is going to need to keep a lot of people happy, and those board meetings with nearly two-dozen people aren’t going to be fun, either. But as Biggie Small once said:

“It’s like the more money we come across, the more problems we see.”

Both Kara Swisher at All Things Digital, in All Is Forgiven: “It’s a Clean Slate,” Says Andreessen About Lawsuit-Mad Skype Co-Founders, and Dan Primack at PEHub, in 5 Skype Questions for Marc Andreessen, interviewed Marc Andreeson of Andreeson Horowitz. The common statement about his relationship with Niklas and Janus:

We have not been in business with them before, so we don’t have any baggage at all. Our view is that they’re two super-creative founders. We’ve known lots of legendary founders, and they are all different and have things that make them unique. We include ourselves in that from past experiences. We view ourselves as a pro-founder firm, so we like the idea of founders being involved. It’s a net positive.

Martin Varsavsky. CEO of FON, a company partially financed by many of the same players in the Skype sale, restricts his comments to his thoughts on the future of Skype – where is Skype vulnerable?, where are its strengths? – in Why it may make sense to buy Skype back. His overriding statement:

Skype is simple. Michael Arrington and all of Silicon Valley may find Google Voice amazing but is the average global citizen ready to use it? Massively use it? You download Skype, you find your friends on Skype, you talk. And, if you don’t find them, you Skype out. And when you talk you can also do video. I LOVE video calls on Skype. I used to use them for people I really cared about, relatives, close friends. Now I even do business calls on video with Skype. It just gives you more of a sense of what is going through the other person´s mind. And Skype is the leader on video quality. So simplicity plus video may be a good way to beat flat plans from telcos and avoid being Tivoed. If the video services can migrate to mobile phones Skype is on to something.

Andy Abramson, in The Skype Suit Is Settled-Now Business Can Get On, comments:

I’m just glad the suit is settled between eBay and Skype. Now a lot of things that have been held back can finally move forward. In many ways the settlement is a good thing. The return of the original founders means disruption will continue, and new ideas will flourish. It also means Skype as a business or brand will now have a chance to prove its worth.

Alec Saunders, in eBay’s big mistake; Why the JoltID license was inevitable, concludes:

The lesson in all this? Deals involving technology licenses and acquisitions are common in business. When acquiring a technology asset, buyers must acquire the necessary control needed in order to protect the business.  Either buy, or license in perpetuity, what you need to prosper. Unless your intent is to immediately begin work on a substitute technology, a license for core technology that needs renewal is a sure way to find yourself caught by the short-hairs in a future negotiation.

The bottom line is that Skype is now in a position to focus on building future communications software and services without the distraction of depositions, legal wrangling and media curiosity. Provided he can navigate through a 23-member board with diverse interests and experiences, Josh Silverman can build the real communications software business of providing infrastructure for conversations while having a wealth of technology and business connections available in an advisory role.

Previous Posts:

Om’s trail:

• Skype, Founders Settlement in the Works (Nov. 1)
• Further Details Emerge As Skype & Its Founders Close to Settlement (Nov. 3)
• Skype Founders Fight Their Way Into the New Skype (Nov. 5)
• My Thoughts on the Skype Settlement: Winners & Losers Scorecard (Nov. 6)

Kara Swisher (All Things Digital):

• Volpi and Index Ventures Out of Skype Deal, the Lawsuit-Happy Founder Twins In (Nov. 3 with lots of links to related stories)
• I Love the Smell of Settlement in the Morning: Skype Founders Set to Get 10 Percent, Option to Buy Three Percent More and Two Board Seats (Nov. 3)
• All Is Forgiven: “It’s a Clean Slate,” Says Andreessen About Lawsuit-Mad Skype Co-Founders (Nov. 6)

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Skype launches a Canadian Skype store customized to the Canadian market.

When Skype began working with hardware vendor partners a few years ago, it also realized there was an opportunity for revenue generation by hosting a store where a Skype user could purchase Skype Certified headsets, phones and webcams. However, it also quickly became apparent that operating a multi-national retail web-based store came with the logistics challenges of delivering atoms (as opposed to bits), collecting revenue in multiple currencies and as well as inventory management, warehousing, shipping and “local” customs agencies and their rules. Not to mention that every political jurisdiction likes to collect its taxes.

Over the past year Skype has been quietly overhauling its Skype Stores on a country-by-country basis. Skype came up with a strategy that involved working with country-based shopping comparison sites who would, in turn, introduce shoppers to products as well as with In Store Solutions who have been developing their own “In Store Solutions” stores that now supports 40 currencies across 67 countries. The Skype Store for 21 countries (U.S., U.K., Australia, several western European countries and several Latin American countries) comprises both a shopping comparison site shop and an In Store Solutions shop whereas In Store Solutions is the sole Skype Store shop in 47 additional countries including Japan.

The shopping comparison sites facilitate purchase of products from vendors such as Logitech, Plantronics, Netgear, Belkin and Polycom while In Store Solutions sells their FREETALK line of headsets (FREETALK Everyman and FREETALK Wireless Stereo Headset) and the FREETALK Buddy Cam.

Prior to April this year, if, from a Canadian IP address, a Canadian visited the Skype Store at shop.skype.com, s/he would simply get a web page with a message to the effect that there was no Skype store for Canada. Since April but until last week the same situation would lead the visitor to a Skype store but with a U.S.-based shopping comparison vendor in addition to In Store Solutions. And pricing was in U.S. dollars. Neither a terribly relevant nor successful store in terms of sales generated.

As of last Thursday this situation changed completely. Canadians will now find a “Real Canadian Skype Store”¹ involving a Canadian shopping comparison site as well as In Store Solutions. And all pricing is in Canadian dollars.

Bottom line: Canadians can now order Skype Certified Hardware, including the FREETALK Everyman Headset and other FREETALK hardware, knowing what their final C$ price will be at the time of purchase. If, for some reason, you do not find C$ pricing check that you are in the Canadian store by looking for the “Canada (English)” selection in the footer of the store page. A “Canada (French)” version is under development.

Full transparency: A real Canadian Skype store has been under development long before it was announced last week that Canadians will have a “shareholder” interest in Skype.

Full disclosure: In Store Solutions has become a client of Denali InterConneXions, publisher of Voice On The Web, building on the author’s previous business development experience with establishing partnerships that can assist with the promotion of a primary vendor’s offerings. A more complete statement will follow shortly.

¹“Real Canadian Skype Store” is a parody on a Canadian grocery and housewares retailer who had a chain of stores called “Real Canadian Superstore”.

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Note: Denali InterConneXions, publisher of Voice On The Web, has taken on In Store Solutions as a business development client; see the more complete disclosure at the end of this post.

Over my three years of following Skype as a blogger there have been many ups and downs in the availability of Skype Certified hardware. In my October 2007 Skype Primer series, published at the time Skype had announced a search for a new President, I had stated in Skype Hardware – If and When Available:

Having been involved for several years in the hardware distribution channel, the formula is not that difficult:

• Skype, as the real time conversations service provider and royalty recipient from the hardware vendors, not only needs to set the engineering standards for these phones, in particular via the firmware (and they do this quite well), but also needs to execute a significant “Skype Sanctioned” marketing campaign to generate awareness and “pull” (à la “Intel Inside” for PC’s).
• At the same time hardware vendors, many of whom already have distributor relationships, need to incorporate standard distribution marketing practices, such as market development funds and appropriate promotional packaging, into their cost models as the hardware vendor is ultimately responsible for the “push”.

These criteria apply even in these days of electronic purchasing via e-commerce sites.

With the recent launch of the FREETALK^® Everyman Headset, Skype has partnered with long-time hardware distribution partner In Store Solutions to provide the first in a new line of hardware specifically designed to address issues with improving the Skype calling experience.

Two years ago at CeBit I was introduced to In Store Solutions as a distributor of Skype Certified hardware. Having had over 20 years experience working with PC distribution channels I was impressed with how COO Craig Smith approached the retailing of hardware, especially in terms of packaging and building distribution networks. In the interim I have had some dealings with In Store Solutions where customer service and ensuring that customers were satisfied with their purchases was definitely a priority. For the past twenty months my primary headset for Skype calls has been the FREETALK^® Wireless Stereo Headset for which a second generation version was recently released.

My previous experience with PC hardware distribution within North America was relatively “simple”. I dealt with two countries (Canada and U.S.) and two currencies (US$ and C$) along with any associated federal and provincial/state taxes; systems were set up to provide rapid delivery while dealing with (sales and value-added) taxes in different jurisdictions. And customs clearance along with warehousing logistics were also distribution issues.

However, to be successful across Skype’s worldwide market geography, Skype Certified hardware needs to be distributed to over 180 countries, to deal with a maze of local tax issues, to execute transactions in at least 40 currencies and, at the same time, to be marketed in at least the 28 languages supported by Skype. Add to this the issue of increasing sales of hardware via e-commerce platforms while getting stocked with inventory at various retail operations.

At this point, In Store Solutions has developed:

• Key product supply relationships with Skype Certified hardware manufacturers
• A strategic partnership relationship with Skype involving not only the design and distribution of Skype Certified hardware but also its marketing
• An e-commerce engine that is currently operating, via the Skype Store, in 67 countries covering 40 currencies and multiple languages
• A forthcoming line of hardware that will address leading edge requirements for headsets, Skype phones, webcams and business products.
• A worldwide network of distribution warehouses to minimize delivery times and customs clearance issues within specific countries
• Retail distribution via WalMart, Sears and Synnex in the U.S., Staples and Maplin in the U.K. as well as retailers in Europe and Australia
• Customer support that includes a “no questions asked” return policy to ensure user satisfaction

Over the next few months In Store Solutions will be not only launching additional FREETALK^® products but also distributing Skype Certified products from other hardware manufacturers. It’s not simply about the e-commerce platform but rather the inclusion of logistics infrastructure and back office transaction-related issues such as payments handling, currency, order tracking and fulfillment along with customer support that are required to build a worldwide online commercial operation.

PayPal operates as an “uber-bank” supporting payments in 18 currencies across 190 markets linking back to banks and credit card services worldwide. Skype operates as an “uber-communications” infrastructure supporting conversations worldwide, independent of underlying carriers or service providers. In a similar vein Store Solutions is developing a “uber-store” capability that ensures Skype hardware products can be purchased worldwide at low cost while addressing country-specific issues such as currency and delivery times.

Full disclosure: In Store Solutions has become a client of Denali InterConneXions, publisher of Voice On The Web, building on the author’s previous business development experience with establishing partnerships that can assist with the promotion of a primary vendor’s offerings. A more complete statement will follow shortly.

Consider this a “Retweet for video”; in Renee’s dialogue/interview with/between Skype’s Chief Blogging Office Peter Parkes and Robert Scoble we learn a lot about the evolution of Skype’s approach to using social media.  Skype sees social media as a key channel for engaging customers in conversations as a complement to both their marketing and support activities.

Just to reinforce, Peter can be found on Twitter as @peteratskype listening for and responding to questions, comments and support issues.

And thanks to Renee for making this interview available.

Update: Dan York highlights a key statement made by Peter: Social media: Where brevity is appreciated, where clarity and simplicity win:

One phrase of Peter’s, though, stuck out in my mind as being so accurate about Twitter and really the whole current state of social media:

It’s actully quite refreshing to be able to work in an environment where brevity is appreciated, where clarity and simplicity win.

Indeed. A nice concise summary.

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Yesterday eBay held an analyst event at its San Jose headquarters location with a keynote by eBay CEO John Donahoe followed by presentations by various eBay executives and Skype President Josh Silverman.

Josh’s presentation broke a lot of new ground for Skype addressing issues such as:

• How does Skype generate revenue?
• What drives Skype’s cost model?
• How will a software company change real time communications in ways that legacy telcos cannot?
• How is Skype structured to address its various market opportunities?

In a long-term financial outlook issued by eBay in conjunction with this event, they state:

Skype is expected to more than double its revenue to over $1.0 billion in 2011. With more than 400 million registered users currently, Skype’s metrics continue to accelerate as the company further establishes leadership in free and paid Internet-based voice and video communications, with growth opportunities in core consumer, mobile, businesses and platform. Skype’s leadership position has strengthened over the past year, driven by a new management team and the launch of many innovative products.

The overriding aspect of Josh’s presentation was repeated emphasis that, fundamentally, Skype is a software company. As verified by many of the presentations at eComm 2009 last week, Josh stated that there is a communications paradigm shift going on where hardwired networks and devices are gradually being replaced by software-based networks and flexible devices. Skype’s “opportunity is to become the world’s leading communications software company.” Josh’s analogy: It was not the railways that invented air travel; in a similar manner, software will drive the future of real time communications innovation and efficiencies going forward, not the existing telcos. To reinforce his point, Skype will not simply be on familiar telephony devices, it will show up in intelligent TV sets, car dashboards and intelligent public access terminals such as bank ATM’s all tied to a common network.

Josh continued: Communications is no longer just about voice; it’s now multi-modal: mood messages, chat, voice calling, multi-party calling, video calling (did I also hear him mention multi-party video calling?) and online screen sharing. Where and how we communicate is expanding: laptop, mobile phone, flat panel TV’s – “any connected computing device with the addition of software becomes a communication device”.

He went on: With hardware and network access becoming a commodity, the opportunity for margin is to capture it at the application layer. Software companies will drive the innovation in the industry, drive the demand for new hardware and better access. (Did he effectively read from the Voice 2.0 Manifesto?) Solutions must be device and network agnostic.

How big is the market? The $300B EBITDA of the $1.4T communication industry revenue is almost equal to the total revenue of global ecommerce and Search.

How did Skype build its business last year? Inherent reliability; it “just works”. While so much of Skype’s operating environment stands outside Skype’s control, yet Skype must try to provide the ability, through its software, to readily adapt to these conditions, especially at the user end point.

How does Skype make money?

• From user services:
  • What’s free (at no cost to Skype)? Skype-to-Skype calling, video calling, Chat/IM, Multi-Party calling, File Transfer
  • 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 example discussed below, 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 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 (Have you ever noticed there’s no “phone bill” sent for payment once a month? – Skype has no 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).

Additional data provided:

• Skype continues to add over 350,000 new account registrations per day
• account registrations are distributed geographically as shown on the map to the right; he labelled North America as a “developing” market with rapid growth
• A year ago Skype celebrated support of over 100B cumulative calling minutes since its launch; in 2009 Skype expects to do this same number within the year
• Over 8% of the world’s international calling minutes are on Skype
• from December 2007 to December 2008, video calls increased from 27% to 34% of calls
• due to its peer-to-peer architecture only Skype can deliver a video experience for free, and at performance levels unequalled elsewhere.
• while active users rose 39% in Q4 2008, engagement, defined as ‘calling minutes per active user’, rose by 72%
• while calls under 2 minutes duration dropped from 41% to 33% comparing October 2007 to October 2008, calls in excess of 10 minutes rose from 37% of calls to 47%. Josh attributed this to higher reliability and call quality.
• small changes make a huge difference:
  • increasing penetration of paid products by 1% brings in $60MM of additional revenue
  • to be a billion dollar business, Skype needs its existing paying users to make just one more call per day
• Skype’s marketing approach was to drive awareness through embedding Skype into the “popular culture”, where it has been used on Oprah, Who Wants to Be a Millionaire?, CNN and other news reports.

Going forward Josh talked about three markets where Skype has barely scratched the surface: core consumer (size: $240B), mobile (size: $603B), and business (size: $203B).

For the consumer market, Skype has four approaches:

• continue driving new users (by building “communities” or leveraging social networks)
• better promote its paid products (make it obvious, upon registration, where paid products can be found – not buried three levels deep in the “My Account” tab)
• increase revenue per paying user (encourage adoption of revenue services based on calling patterns; continued focus )
• monetize free users via advertising (but be smart about it, do it tastefully and carefully all the while protecting the core business)

[Author’s note: Execution on the last will be interesting, given some experience with “free” voice services that have attempted to “blatantly” introduce advertising into calls themselves.]

Josh went on to discuss mobile, but that’s the subject of a separate post. However, take a look at the Skypephone on 3 success story:

• Over 500,000 units have been sold; this generates a monthly revenue stream to Skype
• 3’s margin on Skypephone is 20% higher than their average margin across all handsets
• 79% of Skypephone customers are new 3 customers

As for Skype’s business offering:

• 35% of users use Skype primarily, or often, for business
• adoption into business often grows out of individual employees using  Skype to call friends and family when on the road, start using Skype for multi-party calls, do video calls with customers and vendors
• leads to a call to Skype from IT managers who are getting pressure from their colleagues’ experiences (and, by the way, you can charge for it)
• needs to expand from being a product to being a solution that fits with other PBX and software solutions they are already working with
• create the infrastructure required to provide service and support services (revenue opportunity)
• build out a channel that reaches out to businesses that are familiar with dealing with VAR’s

Going forward:

• Act 1: (completed) one platform (PC’s), one revenue stream (SkypeOut), one market segment (long distance calling), one primary service (voice), one primary market (mature Internet markets – Europe and Asia) and one target user (consumers)
• Act 2: (now to 2011) is about “Many” – many platforms (PC, mobile, TV, web), diversified revenue streams (subscriptions, licensing, advertising), including business subscriptions; many conversation modes (voice, video, chat, collaboration tools), many regions and many target markets
• Act3: (2012 and beyond) “Any” – any mode, any platform, anywhere, multiple market segments, established products, regional ubiquity and mature target markets.

Josh’s forecast for 2011:

• More than double revenue in excess of $1B annually
• Maintain segment margins of 18% to 20%
• More diversified revenue streams: telecom, service and licensing fees, advertising)

His summary:

• Accelerating growth, outstanding fundamentals
• Attacking an enormous opportunity and positioned to win
• Business is getting stronger

Bottom line: For the first time a CxO level Skype executive has put out an extended set of benchmarks and guidelines against which their activities can be measured by all; the challenge now lies in the execution. And analysts finally get a more detailed view into this “mysterious” and oft-questioned Skype acquisition by eBay in 2005.

The audio recording and complete sides can be found for 30 days: click here and then select “Analyst Coverage” in the left sidebar. (viewer registration and Windows Media Player or Real Audio Player required). Or go directly to this link. Josh’s portion starts at 2:37:15 into the recording.

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