Skype’s first decade reflects a trail of missed opportunities

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By Henry Mance

Thursday marks 10 years since the launch of Skype, the calling software that may rank as the most successful internet company to come out of Europe. One in three international voice calls is now made using Skype.

But the celebrations will be muted, even among those who made billions from the technology. Skype’s founders, Swede Niklas Zennström and Dane Janus Friis – who ended up suing the company twice – have moved on.* EBay, which bought the company for $3.1bn, was never able to generate synergies with its online marketplace, although it made a handy financial profit.

And some observers and former employees say Skype’s first decade is a tale of missed opportunities.

“In some ways Skype is a victim of its own success,” said Taavet Hinrikus, the company’s first employee. “It stopped innovating. The last meaningful thing to be launched by Skype was video calling in 2005.”

Skype aimed to put traditional telephone companies out of business by making all calls free, leading one analyst to liken it to “a giant meteor hurtling on a collision course toward earth”.

The software launched on August 29 2003 from a Soviet-era university block in Tallinn, Estonia. Its slogan was “Free internet telephone that just works”.

That soon became a double entendre when call quality turned out to be volatile, yet within a month it had been downloaded 500,000 times.

It continues to grow. Skype had “more than twice the volume growth achieved by all the phone companies in the world combined” last year, according to Telegeography, a research organisation. It has had a particular impact on international calls, traffic growth for which has slowed a lot since 2008.

Yet that success could have been much broader.

In 2005, a year before Twitter emerged, Skype started allowing users to enter a mood message alongside their name, but it did not expand the feature.

Skype never dominated instant messaging on mobile, despite promising as early as 2007 that it would do “much more than voice”. Instead a new crop of chat app start-ups, such as Viber and WhatsApp, have become the mobile messaging tool of choice, especially in Asia.

“Good video calling was the number one priority. Instant messaging was always seen as a secondary feature,” says Henn Ruukel, an engineer who has left Skype to set up a messaging service, Fleep.

While messaging apps have integrated with other services, Skype’s revenues continue to come entirely from calls.

Some observers say the lack of recent innovation could be traced to Skype becoming just one part of a much larger company. This could provide lessons for other start-ups that became high-profile acquisitions.

“I would suspect that [Skype] could have achieved more if it had been an independent company,” said Danny Rimer, a partner at Index Ventures, which invested in Skype in 2004.

Mr Ruukel said Skype “changed rather quickly after the eBay acquisition [in 2003]. It became about how to meet the next quarter’s goals.”

Meg Whitman, eBay’s chief executive, envisaged that video calling would enhance ecommerce – allowing dialogue between seller and customer, as in bricks-and-mortar retail.

“The synergies were not stupid,” says Michael Jackson, Skype’s one-time chief operating officer. But “a lot of people liked the anonymity of eBay”.

After eBay wrote down its investment by $1.4bn and sold most of its stake in the company, Skype’s backers tried to engineer an acquisition by Facebook.

Instead, Microsoft bought the company for five times more than Google had paid for YouTube three years earlier. “Steve Ballmer was in a bidding war with himself,” said one person close to the deal.

“We thought at the time, the primary reason for acquiring Skype was because it’s a verb,” said David Mitchell Smith, an analyst at Gartner. “I’d venture to guess that if you ask most people, they don’t even know that Skype is owned by Microsoft.”

Microsoft’s stewardship of Skype has been more productive than eBay’s. The company will pre-install Skype on Windows 8.1, its latest operating system, and has plans to integrate the software with the Xbox games console.

Microsoft does not break out the revenues it receives from Skype, but the number of monthly users of Skype has grown from 200m when Microsoft acquired it to 300m in February. 

The problem is that WhatsApp, the messaging app founded six years after Skype, reached the same number just six months later. Microsoft declined to comment on Skype.

Source: www.ft.com; published August 28, 2013