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Re-thinking Skype’s business model

Skype is rumoured to be for sale by eBay. At least they’ll waive their own listing fees when it goes for auction. We do hope the buyer pays up and one golden-edged Skype share certificate duly arrives in a padded envelope. It doesn’t really matter if the rumour is true, because Skype has clearly failed to shine as brightly as it potentially could have under eBay’s stewardship. That’s because it’s got a business model that is tied into the past. And the greatest irony is that eBay itself is a closer model to what Skype needs to be than almost any other company.

We’re going to draw together some key messages from three of our recent and forthcoming reports to demonstrate what’s wrong and how to fix it:

  • In the Voice & Messaging 2.0 report, we examine how there are different kinds of communication, even within a single phone call, and they provide different opportunities to re-think the user experience. Skype bolted a VoIP and IM client together in uneasy alliance, rather than creating a truly new experience that solved a problem others couldn’t solve.
  • In our Broadband Business Models 2.0 report, we look at how different distribution systems for digital goods compete. In particular, you have to play to the special affordances and capabilities of the system, in Skype’s case the Internet. Skype didn’t go far enough.
  • In our report on The 2-Sided Telecoms Market Opportunity, we look at how you can create “platform” businesses. Skype hasn’t really become one, and should.

Skype’s one-sided business model

First, let’s examine Skype’s business model as is today. Skype primarily makes money by selling minutes to users. It’s suspiciously like a telco. They also make licensing revenue from brand partners, such as mobile operator 3 in the UK, or devices from Logitech, or a number of plug-in services they co-market. Furthermore, Skype has a premium service where you can call other Skype users (without using the PSTN or its billing and settlement systems).

So let’s recap: Skype is making money from the users themselves, by selling metered telephony, and using the free VoIP as bait. The Internet is being primarily used to avoid the PSTN. There’s no revenue attached to the other IP-enabled parts of the Skype client, such as IM, your presence status, and “mood message”. There’s no such thing as an enterprise or merchant version of Skype — all Skype IDs are born equal. (There are some products that let Skype act as a virtual call centre, but they don’t create a new class of functionality). They have a small sideline in making money from “upstream” partners.

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

First, find a problem to fix

So that takes up back to our opening thoughts. In what way is telephony broken that Skype could have fixed? Well, one think it does well is enables social chat between users. To the extent that cost was preventing social chat, Skype solved that problem. (Subject to buying a fast new PC and getting a broadband connection.) Unfortunately, only select international and mobile calling remains expensive, as most users find themselves offered unlimited cheap landline telephony. Skype doesn’t solve the mobile part yet. (And for vendors who want to write in and tell me about your mobile VoIP client, we’ve installed them all for the voice and messaging report, and we’re not too excited yet.)

However, that’s not the broken part of the experience. What’s really horrible today is having to interact with a call centre. It’s a frustrating and impersonal experience, from the opening “Se Habla EspaƱol — press one”, to the laborious maze of menus, via the tedious scripts read to you, and onwards past the erroneous data entry to finally reach the insecure dictation of credit card details to complete the transaction.

That’s the problem Skype needed to fix.

Next, fix the problem

The point of the Internet is to act as a “meta-medium” in which new media can be created without limit. Skype is too close to traditional telephony, and the other parts (IM, file transfer, video) aren’t quite integrated right. What they could have done, and should have done, is made the user interface more multi-modal. That means the Skype window is a place for shared content and experiences. If I drag a picture into it, we should both see the picture.

Now, the next stage is to make this a shared space between users and merchants. What if I simply dialled freephone numbers from within Skype? Well, Skype could start to do deals with major call centre technology suppliers and vendors so that the IVR menu would be visually pushed down to the client. You can immediately jump to the option you need. No need to ask if you want Spanish, as that’s obvious from your settings and preferences within Skype.

Use the Internet to create new signalling systems. Indeed, Skype could just as well done a quick call-back to your landline or mobile phone and not used the Internet at all as the bearer for the voice. That’s not the important bit.

You can probably see where this is going. Why stop at IVR menus? Any form of content could be pushed down to the user, as a shared space. A video, a Flash demo of a product, or a web form. “Are the details we have for you here correct, Sir?”. Then when it comes to transacting, there’s the Paypal-branded “enter your PIN to have us authorise payment to this merchant”. No need to tell someone in India the security code from the back of your card. (Did you know that call centres tend to be infiltrated by organised crime? Now imagine what the Skype adverts could have looked like… “Do you dare to tell anyone your name and address?”).

A 2-sided business model

One of the aspects that took a while for me personally to understand about two-sided business models was that you don’t need money from both sides, just value being exchanged. Google doesn’t charge you for search or email, but you are paying in kind with data and attention. In this case, users are creating value for the merchant by acquiring a rich communications tool that allows the merchant to circumvent the limitations of the public telephone system.

It’s the merchants who would be expected to pick up the tab here. Lower costs for the call centre, less fraud, higher customer satisfaction, and a UI that’s more amenable to pushing promotions and up-sell opportunities.

This is remarkably similar to eBay’s business model, where users and merchants come together via the eBay hub to trade. eBay is a transaction system for money, Paypal is a transaction system for money. Both are 2-sided platform business models. And that’s what Skype needs to be! It was bought by the right company, but they simply lost confidence and stuck to the easy dead-end of selling minutes. (We’ve some old ideas on how eBay could have bootstrapped this business.)

Now, we’re not claiming that you could re-invent Skype with this new business model. For a start, an awful lot of momentum has been lost, the brand has meanings and associations that can’t be undone, and we’re not in 2003 at the start of the broadband boom. But as an exercise in how to go about constructing business models, we think it’s one you’d like to hear. Preferably in wideband audio, and with a neat multi-modal, secure, transactional user interface.

Ed - we’ll be extensively discussing the future of voice and 2-sided business models at the April Telco 2.0 event.

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A few points I would like to add Martin. (1) Skype and PayPal should have been a killer app, so why wasn't it? from a transaction point of view the only time people wanted a voice interaction capability during a transaction was from a high value or/and complex product, or where their was uncertainty in the check out section of an online interaction. The first category was too small, and the second had superior technology alternatives (i.e. click to call); (2) The IVR opportunity as described above, is a kind of backdoor solution. Although I can see some benefit in a 1800 solution as described, the real benefit might have been "social" and "context" based. So you've called Bank of America, what more does Skype allow you to automatically communicate with BoA than a straight phone call? This is kind of a leading question when you consider that Google uses the fact that you suppress an email as spam, and this suppression is updated to all spam filters on all users of goggle, i.e. the network effects on spam identification and removal are worth the price of admission. (3) eBay had/ has your reputation system, and your credit history, and your social relationships through skype, could this have been used to qualify, conduct and follow up on interactions? I think so. The problem is that they tried to coral the users into proprietary systems. Had they opened up, eBay users with Google Talk, yahoo IM, or MSN might have ported some important data to their Skype solution. Finally, what would the real "pain the ass problem" to be solved be? I think it might be "meta contact", and "meta interaction". Make of that as you will, but having read your other updates, I am sure you understand!

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