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)

Following up on Tuesday’s announcement, where many questioned the valuation placed on Skype by Microsoft, Ben Horowitz of Andreeson Horowitz, one of Skype’s investors in the “Silver Lake round” a year ago November, provides some interesting insight into what Andreeson Horotwitz had seen when they made that initial investment 18 months ago. And these insights provides additional background as to why Microsoft saw an $8.5B acquisition as appropriate.

And, having been involved with or witnessed from behind the scenes a few acquisitions in the past, it provides insight into assessments of acquisitions that journalists simply don’t seem to appreciate. It’s too easy to write that story about how an investment will fail.

Key points:

• Prior to the Silver Lake Round, there were intellectual property issues that, on the surface, made it appear that the company was impossible to buy.
• There was scepticism that Skype could not migrate from solely having Skype clients to the mobile and web client world while maintaining its ease-of-use.
• But the investors recognized that both Skype’s founders and employees were a unique resource:
  

  With a company as complex as Skype, investors draw different conclusions about the same facts. In this case we had the same data as everybody else, but we had a radically higher opinion of Skype’s founders and employees than the doubters and naysayers. We believed that we could work with, rather than against, the founders. And we believed that Skype’s amazing engineering team, led by the original Eastern European software wizards who created the service, could compete and win against anybody.

  We specifically thought that Niklas and Janus, two of the preeminent technology entrepreneurs of our time, wanted Skype to be a huge success and would do everything in their power to make that happen. As a result, we did not think the doomsday scenario that greatly concerned other investors—that the founders would attempt to shut down the company through the courts—was an actual possibility. Based on the founders’ motivations, we felt that we’d quickly settle the IP litigation. Both sides wanted to get on with the business of making Skype more competitive and could not afford to waste time bickering about IP ownership.

  We couldn’t have been more right about that. After quickly settling the litigation, both founders immediately made major contributions to the business through their energy, insight, and intellectual prowess.  And boy did we need them to do that, because we soon faced full frontal assaults from the both Google and Apple.

• They recognized that Skype’s founders were approachable and basically wanted to see Skype succeed.
• Working out a settlement to the intellectual property litigation, they brought the founders into the investors as a resource that could make “major contributions to the business through their energy, insight, and intellectual prowess.”
• The result of the Silver Lake round was increasing growth of the Skype user base (going from about 300,000 new accounts per day to over 500,000), Skye usage (supporting almost 25% of international calling minutes) and, at peak times, over 30 million concurrent users.
• In his summary paragraph Ben sums up how the combination of passionate employees, innovation and Skype’s powerful network effect overcame any competitive attacks, even from a respected player such as Google.
  

  In retrospect, it was easy for people to underestimate the quality of the Skype engineering team and the power of Skype’s network effect. When we bought the company from eBay, many thought that Skype, like so many acquired technology companies, had lost its technical talent. Through our research, we found that Skype had a core group of engineers who were completely dedicated to the mission. They stayed through the eBay acquisition and were hugely determined to make Skype the communications company of the future. Over the past decade, this team consistently introduced ground-breaking technologies ranging from highly resilient and scalable peer-to-peer networking to radically higher sound quality through dramatically superior codecs. In doing so, Skype out-innovated the competition in the most important areas. When combined with its powerful network effect—how valuable is a video calling service if there is nobody to call?—Skype became a formidable competitor. [Editor’s bold]

Bottom line: My long time acquaintance Rick Segal used to talk about looking first at the people before even looking into the technology when considering investments. Over my many years of meeting Skype employees I have consistently found, in spite of an oft-times critical public,  an underlying enthusiasm and passion that says they are on a mission and want to complete that mission.

Now they get to play out that mission under the guidance of a technology business that established many of the business processes for combining marketing, product management, engineering and financial resources into successes. Microsoft has the opportunity to add proven real-time communications services into their existing product line. Skype, as an autonomous business unit within Microsoft, can finally overcome many of  its inhibitors to success and expand significantly on the founders’ initial vision.

Related articles

• The End of the “Skype as Bandit” Era (disruptivetelephony.com)
• Skype’s Real P2P Network (gigaom.com)
• More Skype Rumors: Big News Soon, Microsoft In The Mix (gigaom.com)

With today’s announcement of Microsoft’s intention to acquire Skype, subject to regulatory approvals, Skype has received the endorsement required to be considered a long term, viable and stable service addressing both consumer and enterprise markets.

From the press conference and press release:

• Skype will continue as a brand and an independent business unit within Microsoft. There is significant value when your brand name has become a verb in the English language (and one that translates readily to all other languages).
• Skype will continue to support “Skype Everywhere” on Mac’s, Linux, iPhones/iPads, Android phones, TV and other devices – a key requirement to maintaining and growing its current base of over 170 million active users. (This was one condition of closing the deal but execution is key; the first test will be the revamp of the Skype for Mac 5 user interface.)
• Skype has a strong basic revenue generating business; at this point it should be profitable but certainly has had good EBIDTA.
• Skype now has 170 million active users (in the past quarter), as many as 30 million online concurrently at its daily peak and growing the accounts at a rate of over 600,000 per day.
• Outlook is a key initial application for integration into current Microsoft products; Microsoft Lync will be taking advantage of Skype’s underlying technology where appropriate and feasible.

My initial thoughts:

• Keep in mind that Microsoft has bought a communications software company; one of the biggest challenges will be the integration of the software development activities across what has to be at least two different product management and software development cultures.
• Microsoft brings to the table a new level of business process and product management expertise from which Skype will benefit significantly.
• Only Microsoft has the resources – technical, product and business – that can be leveraged to justify an $8.5B buyout price (and give the current investors ~150% return on their investment over 18 months). With opportunities to enhance Office products, add technology to Microsoft Lync and complement other collaboration product such as the Sharepoint platform, they can readily get their investment back within a few years.
• Skype has found a permanent home.
• Skype can now focus totally on product and service development without the distraction of seeking financing (and the associated endorsement).

Some questions:

• How will the two companies’ instant messaging services be brought together? Skype chat offers a richer chat experience, especially given the ability to rapidly escalate to a superior voice and video conversation and to provide complements such as file transfer.
• What will happen to the Skype Store and associated hardware? While Skype has supported and sold products from several hardware vendors, Microsoft’s limited hardware offering (of mice and keyboards) is sold via traditional PC hardware retail distribution channels. Yet much of the hardware has been designed, with assistance from the Skype-certified program, to take full advantage of Skype’s inherent technology.
• Skype has been attempting  to address the large enterprise market with its Skype Connect program; yet we have heard of no successes. Microsoft Lync is a large enterprise product that can probably take advantage of Skype’s inherent technology while delivering an offering that meets the concerns of enterprise communications managers. However, what will Skype be doing to support the small to medium business market – where over 35% of its users say they are using Skype in business?
• What impact will the time required to deal with regulatory issues be on the development and launch of upgrades and new products ? We were told at the press conference no road map will become available until these regulatory issues have been addressed such that the acquisition can be completed. Yet innovation, business development and product releases must continue during this period.
• What direction will the developer program take? Will Skykit survive its rather long birthing process or can Microsoft bring in developer program expertise that would finally get Skype an active developer program from which we can see results? (and from which third party developers can benefit.)
• Can we still expect to see evolution of the Facebook relationship in some way that supports real time conversations via Facebook?
• Since Steve Ballmer showed up on stage at RIM’s BlackBerry World event last week and is now deeply associated with Skype, can we expect to see a carrier-agnostic Skype client on BlackBerry devices? Or would that be too much conflict with Windows Phone?

Bottom line: while there have been overlapping products (such as Live Messenger and Skype Chat) there is so much synergy here that it’s going to be interesting to see what product evolution occurs over the next year and how Microsoft integrates an acquisition with what has become a brand onto itself. Steve Ballmer can be thankful that there was no Yahoo acquisition and that the Skype opportunity has come about with so many more obvious benefits.

One other benefit for Canadians: the Canada Pension Plan Investment Board cleared about $500MM on the deal above their initial $300MM investment 18 months ago.

Other thoughts:

• Dan York: The End of the “Skype as Bandit” Era where Dan provides an interesting  commentary on the barriers Skype has overcome, the Skype experience and the people behind Skype. Dan has blogged more about Skype than any other topic; his employer, Voxeo, lives and dies by Skype, especially the Skype chat.
• Alec Saunders: Does Microsoft’s acquisition of Skype change anything? where he talks about the impact on carrier relationships, video calling and handset manufacturers.
• Alec Saunders: Why is Steve Ballmer excited about Skype? where he provides an excellent overview of today’s Microsoft-Skype press conference and his conclusions as to why this is an excellent deal. (Recall Alec worked for several years at Microsoft.)
• Tidbits, Apple News for the Rest of Us: Microsoft to Buy Skype for $8.5 Billion “… Microsoft says it will continue to invest in and support Skype clients for non-Microsoft platforms. If Microsoft really loves us, they’ll throw out the Skype 5 interface as an initial gesture of goodwill.”
• Phil Wolff, Skype Journal: What Skype’s partners can expect from the deal and Why did Microsoft buy Skype?
• GigaOm: Steve Ballmer & Tony Bates Talk About Skype-Microsoft …

Related articles

• Done Deal: Microsoft to Buy Skype for $8.5 Billion in Cash (kara.allthingsd.com)
• Microsoft to Acquire Skype (online.wsj.com)
• Microsoft targets video-calling with Skype (theglobeandmail.com)
• Microsoft’s Plans for an Office-Flavored Skype (blogs.wsj.com)
• It’s official: Microsoft to buy Skype for $8.5 billion (seattlepi.com)
• Why Microsoft Plus Skype Is An Enterprising Idea (informationweek.com)
• Microsoft Brings Skype from Living Room to Board Room (pcworld.com)

I first met iotum CEO Alec Saunders as a competitor in the Canadian PC software market back in 1994. I was Canadian Country Manager for Quarterdeck whose QEMM-386 memory manager had been the tops-selling utility for DOS-based PC’s; Alec was Microsoft’s Canada’s Product Manager for DOS where they were introducing some memory management techniques into DOS 5 and DOS 6. (All to deal with the violation of the Bill Gates’-attributed memory maximum statement “640K is more memory than anyone will ever need.”)

But Quarterdeck’s development team kept coming up with ingenious ways to move drivers and other small utility programs outside the “640K” limit. QEMM-386 allowed users to, say, connect to networks while running multiple programs in this memory constrained environment using Quarterdeck’s DESQview. With the introduction of DOS 5 in 1991 and DOS 6 in 1993, QEMM-386 sales actually increased as awareness of memory management as a resource issue increased. Of course the introduction of Window 95 in August 1995 killed the need for a memory management utility altogether. But the point here is that Alec and I participated in a competitive environment that was actually mutually beneficial to us both; thus defining “co-opetition”.

We both moved on – Alec to Microsoft headquarters to become the original Internet Explorer Product Manager, myself to Los Angeles to work with a restructuring team at Quarterdeck. We would meet at conventions (usually Comdex) and occasionally exchange emails and phone calls for whatever business reasons. Alec returned to Ottawa in 2001 to take up product management and marketing positions with a couple of startups.

In April, 2004 I received a phone call from Howard Thaw, another acquaintance from my days involved with distribution of PC hardware and software in Canada, asking me to have a coffee with him during one of my trips to Ottawa on another project. He presented me with documents supporting his and Alec’s proposal to start up a new venture involving “applications that take advantage of the opportunities opened up by the emerging IP-based communications space”. The philosophy behind this goal is summed up in Alec’s Voice 2.0 Manifesto, pointing out that the value-add going forward in the communications space will be the applications.

After several iterations and developing some unique software, as well as winning a DEMO God award in 2006 iotum launched in the fall 2o07, initially as a Facebook application, Free Conference Call, a multi-party conference calling service which evolved over time into supporting the complete conference call process; the outcome then relaunched as CalliFlower in June, 2008. Through all this time I have also been privy to many of the financing trials and tribulations Alec and Howard have encountered as a startup.

Fast forward to the fall of 2008. iotum had decided there was an business opportunity in making an iPhone application for participants in CalliFlower conference calls.

Update, April 22, 2009: The posts previously linked here related to an issue that has subsequently been resolved satisfactorily with the developer who was the subject of the posts; the posts have been removed. However, I leave the remaining content in this post as it does make a point about how any outsourced service or outside contractor needs to be viewed as a team member even though they don’t have full “employee” status.

However, Alec sums up the situation very succinctly in the third post:

The lesson to be learned here is pretty simple.  When you bring a contractor into your organization you’re adding that person, albeit temporarily, to your team.  You expect to be able to work with them, through good and bad. To do that demands a certain generosity of spirit from all members of the team.

All across America, businesses are waking up to the reality that in this economic environment, team work is the key to getting through this crisis.  Whether it’s GM and their unions, the banks and their mortgagees, or the tech start-ups in Silicon Valley, businesses are learning that accommodation, flexibility, and sacrifice, not egos, are the formula for success.

When [a contract developer] failed on his first deliverable as part of our team, we simply worked through it with him.  But when we asked him to return the favour, he refused.   That’s why, in my opinion, he [was] not [at the time] much of a team player.

And that’s the reason I couldn’t [at the time] recommend [developer name] to my friend.

We had a similar experience at Quarterdeck when developing a Voice Over IP application called WebTalk in 1995. We needed additional resources beyond our internal development team, including a developer company to develop the codecs. Part way through the project, they tried an “extortionist” play. They quickly learned that, if you take on a development contract, it’s not about just delivering code; it’s also about demonstrating that you have the business smarts to realize that, even when you’re not an employee, you – as a contracted developer – better be prepared to play as a member of the team contracting your development expertise. And, as a team member, you work through the problems, including the financial issues, with from the perspective of being a team member.

There are many opportunities arising for developers in today’s communications markets, not only in the smartphone app store space (Apple, BlackBerry,etc.) but also with other platforms such as Skype and WordPress. If you’re a contract developer with this expertise, ensure you are comfortable, not only with the thrill of technical development but also the ride of working with startups who may be otherwise resource challenged, including financially – especially in today’s economic environment. You never know when your co-operation may result in having been a participant in that breakthrough “brass ring” opportunity.

In my thirteen years of running a consulting business, my clients have occasionally been challenged financially. Yet, in all circumstances, they brought their issues to me, we worked out a payment or compensation plan and I eventually was paid. (Some careers died in the process where a management change was involved.) But without that flexibility, I would never have received in one case, about two years later, funds that I needed to help my oldest son complete his medical degree at Stanford.

In today’s environment, rife with both opportunities yet significant economic challenges and barriers, it’s about building relationships for the long term, not burning bridges for short term gain.

Sometimes communications services come along that demonstrate technical feasibility but then you have to ask “Why?”, “Who would use it?”, “What are the real user benefits?” Such a service is the voice-to-text SMS-based service announced by Skype and partner SpinVox last week.

Basically a Skype user can set up their account such that Skype voicemails can be converted to text via SpinVox’s speech recognition technology. The resulting text is then sent out as “segmented” SMS messages. But when one looks at both the limitations of the service and the alternatives to receiving the same information, one has to question whether any market research for a business case was done:

• Message segmentation: a single SMS message can only handle 160 characters and is usually reduced by “identifying” information. This means any text conversion needs to be sent out in 150-155 character segments as multiple SMS messages.
• Content limitation: the text version can be sent in up to three SMS messages which means the recipient will only see the first 465 or so characters of a voicemail message.
• Sender identification: there is none! Who is 233-33?
• Cost: there is a service charge of US$0.25 per voicemail plus Skype’s “per message” SMS charge of US$0.112 for each SMS. so a 450 character message costs US$0.59 per voicemail (assuming you have no additional SMS messaging charges from your mobile carrier).
• Timeliness: whereas one is immediately informed of a voicemail’s arrival on a landline or mobile phone (or even with Skype’s or Pamela’s voicemail), there is a ten to fifteen minute dead time waiting for the voice-to-text conversion to occur prior to sending out the SMS message(s).

Alternatives:

• Email notification of Skype voice mail: I can receive real time notification of a Skype voicemail including, at a minimum, the sender’s callerID via email on either my  PC or any mobile device that handles email, such as GMail for Mobile or BlackBerry email.
• Employing Pamela, which records voicemail as an MP3 file, these recordings are automatically forwarded via email to my BlackBerry or any GMail for Mobile configured mobile device (such as my iPhone). I can then listen to the voicemail as an MP3.

A major issue working against adoption is simply the difficulty of even activating this service. On following links from the press release to the Voicemail to text description page and hitting the “setup voicemail to text” button I ended up on “My Account” page with no indication anywhere about this new service. Only after enquiring via Skype PR did I learn that there was an obscure and non-obvious path to setting up this service. Apparently this relates to the fact that I already had set up use of my mobile number for other Skype services (such as my SkypeOut callerID). It is readily apparent that nobody at Skype had performed a quality assurance walk through.

Overall a poorly thought through offering that needs more professional product management, including market and user experience research. From the Skype perspective the only way to generate revenue from such as service would be to send the voicemail’s text as SMS messages which can be charged against Skype credits. Converting all the content of a voicemail to text and sending as an email has no inherent revenue generation model.

I also have to come to the conclusion that SpinVox was desperate for some form of Skype partnership, given that there are many alternatives available to readily handle the content of a voicemail message. One has to question the overall value of and market need for having a text version of what starts out as a voice communication. If messages need to arrive via text, start with a PC (using email or even Skype SMS, for instance), a BlackBerry or other email-enabled mobile phone where the entire process involves text only.

I usually am a fan of Skype services but this one has to be considered a FAIL. It’s a service that has neither the quality or value that one usually associates with Skype.

Another perspective….

Andrew Hansen: Skype makes a small ripple, but no Splash with new VM features.

Related articles by Zemanta

• SpinVox Will Transcribe Your Skype Voicemails & Send You a SMS (gigaom.com)
• Skype offers SMS voicemail notifications: good idea, poor execution (skypejournal.com)
• Skype and SpinVox team up on Voice to Text (saunderslog.com)
• Convert Voice Messages to SMS With Skype (mashable.com)

The most recent hotfix release of Skype for Windows 4 Beta 3 had one key new feature:

• feature: Super Wideband audio codec

The associated Skype Garage post went on to say:

… Starting from this version we’ve included the new Super Wideband Audio codec. This is our second in-house built audio codec especially designed for calls over the internet with superb quality. The Super Wideband Audio codec will help you most on lousy network conditions and when you have lower bandwidth available, although it also improves quality in normal conditions too.

Today Skype for Windows 4.0 Gold release will now allow the entire Skype for Windows user community to take advantage of the SILK codec’s features.

SILK is basically a significant improvement on Skype’s previously acclaimed HD Voice performance. I have now experienced a couple of calls where this SILK codec was available at both ends of the call; it certainly provides a clearer, crisper audio experience. (For those unfamiliar with the term “codec” they are algorithms engineered into the voice communications network for converting audio waveforms into digital streams for transmission over the communications network and then converting them back to an audio waveform at the receiving end.)

Last week I had the opportunity to interview Jonathan Christensen, Skype’s General Manager for Media Platform to learn more details about this “SILK” codec. This codec is the outcome of a three year development process with a focus on:

• improving the audio bandwidth out to 12,000 KHz
• providing bandwidth management to deal in real time with degraded  network conditions
• balancing the codec optimization between voice, music and background noise, each of which can have an impact on the overall user experience
• overall robustness to provide a more consistent user experience, regardless of network conditions and an individual caller’s voice signature.

While the human ear can hear sounds up to 22 KHz the actual sound produced by human vocal chords has a frequency range of 20 Hz to 14 KHz; however, sounds below 70Hz are not what you would call “pleasant” (as experienced with those “thump, thump” car speakers). Skype’s SILK codec is optimized for the transmission of audio between 70 Hz and 12 KHz. Compare this to the bandwidth of the PSTN’s standard G711 codec of 400 Hz to 3.4KHz; wider band codecs, such as AMR-WB and iSAC cover the range of 50 Hz to 7 or 8 KHz respectively. And, as indicated in both the AMR-WB and iSAC Wikipedia entries, there is a major licensing cost consideration:

AMR-WB has been standardized by a mobile phone manufacturer consortium for future usage in networks such as UMTS. Although its speech quality (similar to Skype, including glitches) makes it likely that older networks will have to gradually be transformed to support wide band, its high legal costs may limit its uptake.

However, in order to deliver on this audio bandwidth, Skype also had to consider getting the voice stream across the Internet. SILK interacts with Skype’s redeveloped (network) bandwidth manager that uses a feedback algorithm to provide “adaptive bandwidth management”. SILK is a “variable bitrate” codec that can scale the bitrate (amount of data being transmitted as voice packets) up and down as necessary. The key network parameters governing this adaptation are packet loss and jitter changes. Fundamentally, to the end user, this means incorporating a level of call robustness that results in improved consistency of call quality, especially for lower speed Internet connections (below 3Mbps) with no user intervention required.

Another factor to be considered are accommodations for differences in perception of audio quality depending on whether there is voice, music or random background noise involved in the audio signal. Suffice it to say that Skype’s engineers have been involved in a balancing act amongst these factors in the development of the SILK codec.

The bottom line is that Skype has set new barriers for voice call quality and and the associated user experience. Since there needs to be SILK at both ends of a call, the number of calls I have experienced with SILK has been limited but, as mentioned above, those I have made had a very crisp, clear audio quality. With Skype’s launch today of Skype for Windows 4 Gold release almost all my Skype-to-Skype calls will be able to achieve this performance level. Going forward expect to see SILK incorporated into ont only Skype for Mac. But the the SILK codec has been modularly designed for embedding into silicon; we can expect some future Skype-enabled hardware platforms to be able to take advantage of SILK’s performance.

And finally note that, in order to keep costs low while improving call quality, Skype has no licensing costs associated with their proprietary codec. Is there a potential for a new Skype revenue stream by licensing this codec to other communications service providers as well as hardware vendors?

Josh Silverman joined Skype as President early in the spring of 2008; since then he has been reviewing Skype’s opportunities and building a team of experienced executives who can bring to Skype the products, programs and team building expertise required to operate a business with a run rate of $600MM per year, 20% contribution margins to eBay and growing at 380,000 new account registrations per day (with “real user” growth also increasing significantly).

Summarizing the past executive appointment announcements we can clearly start to see the evolution of a business structure, along with each unit’s responsibilities:

• Operations: Product, Marketing, Customer Care, Support
• Technology: Engineering, Platform, Development Community
• Strategy: Partnerships, Strategic Alliances, Acquisitions
• Administration: Global Communications Human Resources. Finance, and Legal round out the top executive team.

During our interview at CES 2009 with Skype COO Scott Durchslag, he outlined details of his restructuring of Skype’s Operations team along two axes: product and geography under the mantra of providing “Skype Everywhere”.

Global product offerings will encompass three divisions: consumer, business and mobile, each responsible for developing products. Each of these groups will be interacting with members of CTO Daniel Berg’s technology teams to convert their technology developments into marketable global product offerings and to adapt the technology to meet product marketing needs.

• Consumer will involve the current Skype client desktop offerings along with hardware, such as Skype phones.
• Business starts with the current Skype Business Control Panel but intends to expand well beyond this starting point into a range of offerings, such as Skype for Asterisk and the recently announced IBM LotusLive developments, addressing the small-to-medium business market.
• Mobile involves current products such as Skype for Windows Mobile, Skypephone (in conjunction with iSkoot), the recently launched Skype Lite (including Skype for Android) as well as any upcoming offerings for the iPhone and BlackBerry

In addition each of these divisions will be responsible for developing appropriate customer care and support programs appropriate to market demands. For instance, the business unit will come up with ongoing support programs relevant to supporting sustainable business operations of its products’ users. Ideally these programs would follow the model of Red Hat for Linux or Digium for Asterisk and build up a network of resellers and VARS who would provide relevant and timely end user support. While Dan Berg’s technology team will be responsible for third party developer partner support, an additional challenge for the Business products group will be to assist with marketing of business applications offered by these developer partners.

While Skype veteran Stefan Oberg is heading up the Business unit, announcements re appointments to head up Consumer and Mobile are pending.

Along the geography axis is a recognition that, while the Products divisions have a global mandate, there are different market needs within different regions of the world. For instance, in many Asian market wireless carriers do not subsidize mobile phones as is the North American practice. This requires a differentiated approach to these markets with respect to how easily innovations, especially around reduced calling costs, can be introduced to these markets.

The geographical market responsibilities are:

• Americas: Don Albert becomes General Manager, Americas. Don has had North America responsibility for a couple of years and will now be responsible for both North and South America. With respect to the latter he is looking forward to building on all the Skype activity in Brazil, for instance. (And, yes, once again at CES Don was made aware we are awaiting SkypeIn and a Skype Store for Canada)
• Europe, Middle East, Africa (EMEA): appointment pending
• Asia/Pacific: Yesterday we saw an announcement of the appointment of Dan Neary as General Manager, Skype Asia Pacific. One of Dan’s initial responsibilities will be to build and monitor closer relationships with partners such as TOMSkype to avoid embarrassments such as that created by the TOM Skype privacy breach we have reported on last fall.

Outstanding executive appointments are expected shortly; at this point it’s becoming all about execution. The next six months will tell the story.

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This is the third in a series of posts resulting from an interview last Friday with Josh Silverman, Skype’s recently appointed President. In this post we talk about Skype’s value set, getting the business side right while benefiting from the experience and skills of the current employees and the role of product marketing.

In the last post we talked about the major issues Josh has identified for addressing along with a strategy for employee empowerment to reduce the complexity of decision processes while driving towards business success. But a critical requirement for employee empowerment is the need to establish and communicate a sense of core values that flow throughout the company and make employees more comfortable in making decisions, especially with decisions that may involve some risk. As a follow-on question to our discussion of employee empowerment I asked about the need to drive a value set through the company. Josh’s response:

Skype has a great set of values. Coming into the company I’m very humbled by what they’ve accomplished, what a great culture and values we have. I want to make sure we nourish and respect that. So some of the values I see are:

• thinking disruptively and differently about problems, not just incrementally innovating
• wanting to have an impact on the world
• caring a lot about what we do for people and doing that globally
• a big desire to win
• a big desire for excellence
• a passion for the customer

Those are qualities that I would hold dear and want to make sure we nourish as we grow.

We then went on to the “people” challenges of getting the business side right while building on the inherent passion of the current employees.

I think everyone at Skype would agree that we, in a very short time, in about a year, hired over 150 people into marketing, product management and [other] non-technical functions. [We] essentially evolved those functions from scratch in a year. Given the pace of change at Skype, we needed to bring a lot of that expertise into the company. Of course, the challenge is that, when you grow that fast, making sure everyone knows what their role is and how to do that well … training … getting a common culture … takes a little bit of time. So what I’m focused on now is clarifying the accountability of all those business roles.

By the way, to your point about ‘we have a lot of passionate technical people’, I couldn’t agree more. Often time the best ideas come from that team. It is my belief that what the product and marketing organizations need to do is understand what problems the customer needs solved, and then to work together with engineering to think of the most creative, best way to solve that problem, hopefully better than anyone’s ever thought of in the past. If you’re doing an “ok” job of that, you’re understanding the articulated needs of the customer – like I can’t pay easily enough … it takes too long to download … I can’t configure my devices . If you’re doing a great job, you’re understanding the unarticulated needs of the customer .. things like “I’d like to be able to call anyone in the world for free” …

We then got into a short discussion about the role of the product manager as the mediator managing a balancing act between the user market and the engineering and design teams:

… It is not the job of the product manager to come up with the solution; it’s the job of the product manager to quarterback the design team and the engineering team and the marketing group together to come up with the world’s best solution. I think engineering and design play huge roles in that process.

Next: The Skype Platform …

We reported earlier that Mike Bartlett, Skype for Windows Product Manager, would be the guest on Friday’s Squawk Box. With 15 fifteen participants, Mike answered questions ranging from features of the new Skype for Windows 4.0 Beta; plans and objectives for the beta program, the challenges of trying to launch concurrent (Windows, Mac, Linux) versions, interoperation with other services (such as iotum’s Free Conference Call service that hosted the call) and other issues related to the evolution of Skype.

Three key points:

• The Skype for Windows 4.0 beta program is unique in that they are seeking out user responses to the challenges of getting new users started readily while leaving the flexibility and scalability issues power users encounter. For instance, while the Beta 1 client takes up a full desktop — largely to get user reaction — there will probably end up being a way to “hide” the conversation content pane, leaving the left hand conversation management pane but they want feedback from all beta participants on the full desktop. As a result we will see several phases to this beta program with a final release date largely dependent on the beta program feedback (and they’re getting lots).
• New users are randomly being presented to with the beta to get the feedback from actual new users on how they adopt Skype. They want to improve on the adoption rate by new users; abandonment is an issue they are certainly conscious of. (Or does it help to answer the question as to, why, with over 300 million reported account registrations, are the ongoing usage rates in the range of 30 to 35 million “real users“?)
• Providing real time communications infrastructure is most efficiently handled when Skype can write in the native environment for each of the Windows, Mac and Linux platforms. As a result they do not want to compromise the performance through using a cross platform environment but rather want to provide user experiences that users of each environment are accustomed to. Yet this diversity approach to each platform allows the team for one platform to pick up features and experiences from other platforms. For instance the conversation management user interface of Skype for Window 4.0 beta was picked up from experience with the Skype for Mac user interface with its “slide-out” drawers.

There were many more issues discussed; go over to Saunderslog.com’s “Squawk Box June 20 – Skype 4.0″ and listen to the complete interview.

Once again, if you wish to participate in the Skype 4.0 for Windows beta program, read our earlier post for download information but also read the caveats.

Caution: Skype 4.0 for Wiindows Beta 1 is about improving the User Interface but it is not a replacement for your ongoing Skype conversations on your primary PC and should only be used on a secondary PC to provide user feedback.

While over the years, over 300 million have figured out how to download and install Skype, it’s become apparent that, in the end, it’s the user experience that will drive more massive Skype adoption. Finding those initial contacts, getting the speaker/mic working properly, ensuring you have a good Internet connection and determining what hardware is optimal for a good Skype experience is all part of Skype’s ongoing research and development. And perhaps the most important of these is having a user interface that “delights the user”. Certainly new Skype President Josh Silverman has indicated this as a primary goal for Skype.

In working towards this end Skype has made available an early beta version of Skype 4.0 for Windows with the primary goal of making Skype easier:

• for new users who are just starting up with Skype
• for ongoing users to manage, archive and recall their Skype conversations
• to improve the quality of certain aspects of conversations but especially with how video is displayed during video calls.

Check out the videos provided by Skype that Phil has posted to get a more dynamic overview. A key to understanding release 1 of the Skype 4.0 beta is that its development is at a stage where the Skype product team needs some outside user feedback. As a result they expect the Skype 4.0 beta activity to last through the summer prior to releasing for general use in, say, September, 2008 (a speculative release date, not an official one).

On the other hand at this stage it is an EARLY beta and is missing some features available in the current Skype 3.8 for Windows client. As a result I recommend that you only try it on a secondary PC while keeping Skype 3.8 on your primary PC used for Skype conversations, especially if Skype is mission critical to your conversations. From Product Manager Mike Bartlett’s post today:

We’re sharing this beta with you a little earlier than normal because we know it’s a big change, and sometimes change can take some getting used to. We’re going to spend the whole summer listening to your feedback and making changes so that when we do launch the final version, we’ll make sure it’s perfect. Because we’re releasing it early, a few little things aren’t available in today’s beta: full history and contact groups are two examples.

I can add Call Transfer and PayPal integration as two more 3.8 features missing from this Beta 1. Check out the full Release Notes, identifying the missing features. Via a “Contact Customer Support” Help menu item you can provide your feedback where they’re specifically requesting your “comment, feedback or frustration”.

If you’re into beta testing; if you have a secondary or back-up PC on which you can try this out, give it a try (download here). There is going to be a learning curve to get familiar with the new interface — keep in mind that, with Skype 4.0, it’s more about the user experience than the technology (although technology performance bugs should also be reported). As the beta releases progress we’ll advise you when it’s ready to try out as your primary Skype client. And, as we get more experience with it, we’ll be posting our comments.

Around the blogosphere:

Andy Abramson: VoIP Watch: Skype 4.0 Beta Comes To Life

As a basis for making new revenue, it shows me that Skype is looking beyond just selling cheap minutes. For now think of 4.0 as a canvas, that’s only been outlined. The real version is weeks away and likely will incorporate more feedback from users.

Om Malik: GigaOm: Video Makes Skype 4.0 Grow Bigger, Wider

The real reason for the redesign, however, is Skype Video, which desperately needed a new layout because it requires an ease-of-use that eludes the current client. As I pointed out a few weeks ago, video communication (which accounts for about 28 percent of total Skype calls) has been one of the fastest-growing features on Skype, thanks to the easy availability of built-in cameras, especially in devices used by mobile workers.

Dan York: Disruptive Telephony: Skype 4.0 seriously disrupts the Skype UI – is this a good thing? Dan hits on the core of this beta program:

I’ll also be curious to see how well Skype balances “simplifying” the user experience for new users while maintaining the functionality that “power users” have come to expect. It’s a tough balancing act and it will be interesting to see how Skype does.

New York Times: A Redesign at Skype (registration required)

Sten Tamkivi: siekatsu: Skype 4.0 beta 1 is out! (Full disclosure: Sten is Skype’s General Manager of its Estonia operations which includes the Skype development teams.)