How Microsoft ruined Skype

published on August 2, 2020

This video was brought to you by Slidebean A platform for startups and small businesses to create professional investor decks and sales presentations Get one free month by signing up at slidebeancom/youtube All of a sudden, videocalls have become a part of our daily lives From university classes and business meetings to birthdays and yoga Online is the new normal and will be for a while Fortunately, there are plenty of options, Zoom, Meet and Microsoft’s own Teams

But, there’s a name seems to have disappeared A name, mind you, that no so long ago was the go-to program for videocalls It’s safe to say that, if all of this happened, say, in 2010, we would’ve been Skyping But now, we’re doing anything but Skyping What happened? We’ll tell you, in this episode of Company Forensics The team behind Skype was talented, to say the least Janus Friis and Niklas Zennström

Founded the company in 2003 Estonian developers Ahti Heinla, Priit Kasesalu and Jaan Tallin created the software These guys also created Kazaa, which helped many of us “acquire” movies and games in the early 2000s In fact, the peer-to-peer foundation that made Kazaa successful would be essential for Skype Initially, because later, it would be a hinderance In fact, it was even in the name, originally conceived as Sky Peer to Peer, then it was

Reduced to Skyper, but trademark issues forced them to eliminate the r The idea? Free calls over the internet, using a Voice Over IP (VoIP for short) This software turns the user’s voice into data, then sends it as digital data packages over the internet But VoIP wasn’t new Actually, it existed for years so, what was new? Well, based off the software from Kazaa, Skype used peer-to-peer, which meant data didn’t have to be processed by a central server No central server meant less infrastructure, which was a cost-effective

Business model Skype’s seemed promising: lower call costs all around The team was so confident that Jaanus Friis was quoted as saying: We hope that one day, instead of saying 'I'll call you', people will say 'I'll skype you'” Spoiler alert: he was right One month after the launch, one million people had downloaded the software By mid-2006,

Skype had over 115 million Skype customers and was recognized as the fastest-growing internet community at the time Skype’s recipe was very attractive: calls within Skype were free, which was great! But also, Skype users could call land and mobile lines, known as SkypeOut Regular land and mobile phone users could call a Skype account, known as SkypeIn All for cheaper rates In fact, it was so efficient that some countries eventually banned

Skype altogether to protect their phone companies Videocalls boosted the software’s popularity even more, and the company was beginning to attract possible buyers Especially a certain online auction company called eBay, who dished out $26 billion for Skype in 2007 It seemed logical: Skype gave eBay better communications between buyers and sellers and helped reduce friction in eCommerce

A detail here is that both Friis and Zennstrom remained as part of the executive team But this massive purchase rapidly proved flawed The first criticism was its cost, as experts considered it aided in speculation Just wait and see what happens later Then Zennstrom and Friis constantly butted heads with eBay’s executives, so much so, that by early 2008, Skype had gone through at least 5 presidents and CEOs Underperforming numbers and diminishing customers due to competition forced eBay to write-down

Skype by $143 billion in value So, eBay pretty much admitted to having paid too much Such was the friction in fact, that Zennstrom and Friis left But they had an ace up their sleeve After rotating through CEOs, Josh Silverman ended up in charge, in February of 2008 Coming in from another section of eBay, his task was to douse the chaos inside the company, and he accomplished it Perhaps, too well

He shifted his efforts towards video calls, revamped the subscription program, and created premium accounts One key move was the creation of an iPhone app, which was a huge hit, with 1 million downloads in just two days, as well as moving forward with an Android version He also shed excess weight by removing plenty of features, including Skype’s own version of the Yellow Pages, the “Skype me” feature which allowed non-contacts to call you and removed the SkypeCast feature, a recording software that could record conversations

The efforts seemed to pay off as, in 2009, Skype grew at a rate of about 380 000 users a day and $740 million in revenue But not everything was going smoothly Some say that Silverman made Skype too stable and that much of the developments took too long Plus, call reliability was steadily plummeting Here’s where P2P comes into play again Yes, P2P meant less lag between calls but

Skype was prone to crashing as it relied heavily on individual PCs instead of central servers When Friis and Zennstrom sold Skype, they didn’t sell the peer-to-peer software In fact, what they did in the past was license the software to Skype and other companies like Joost, an internet video service, and Joltid, both of which were theirs But when eBay announced that it would sell Skype to a group of investors in an effort to free itself of the flawed company, the cofounders said: hold up! That’s our technology

You are selling Legally, if Friis and Zennstrom were right, any possible sale would go bust So, after much deliberation in the legal front, a deal was struck in which Friis and Zennstrom ended up with 14% of shares in Skype And the deal wasn’t small: around $27 BN and was finalized in 2009 In short: they sold it once, for a lot of money Then got money on the second sale

That's a pretty smart move Ebay retained 30% and Silver Lake, the new investors, ended up with 56% But once the legalities were over, both co-founders promised to invest heavily in the program, so excitement was high And, as a somewhat independent company, Skype had some very good years By 2010, 25% of the world’s voice calls were through Skype, in a market that grew just 5% to 6% a year

With such numbers backing it up, Skype looked to raise $100 million in an initial IPO, in hopes of eventually raising at least $1BN But there was also talk of another sale, which included possible buyers like Google, Facebook, and Microsoft Not bad, at all Yet, there’s another side to the story Yes, Skype seemed great But it actually lost about $7 million in 2010 and had a long-term debt of close to $700 million So, the buyer would have to act fast to turn those numbers around

If you take the good and the bad, it seems like Skype wasn’t that bad And, this is Forensics, after all So, what went wrong? Well, all roads lead to Microsoft On May 11, 2011, the giant announced that it would acquire Skype for $85 BN Microsoft’s offer represented a 300% increase in Skype’s value, in a little over three years Also, they were paying 32 times the operating costs and the other offers, Facebook

And Google, hovered about $3BN, which was closer to reality So, people were left scratching their heads Here’s a quote from Time magazine A few years down the line, Microsoft’s $85 billion purchase of Skype will either seem outrageous or it’ll look like a good idea You may recall that eBay bought Skype for $26 billion in 2006 and, up until this morning, that figure seemed outrageous Now eBay’s

Actually looking pretty smart, which is something that hasn’t been uttered for quite some time Microsoft had a good product to start with Skype was good in those years, as it now had 40% of the world’s calls and even the Oxford dictionary included the verb skype So, good one, Friis But, where did it go wrong?

Well, P2P again comes into play What had made Skype successful and what had determined the legal future of the company was its biggest hindrance P2P was great between computers but worked horribly with mobile phones In 2013, Microsoft made the right in migrating to cloud-based servers Sounds great, right? Well, yes

If you do it quickly and efficiently Instead, the transition lasted months which evolved into years And the bad thing was that Skype was all over new Microsoft products like Windows 81, the Xbox One console, and the Outlook package Users might remember when Skype calls came through in two devices instead of one Calls ended abruptly, notifications would come in on one device and not the other, group calls were hard to set up and then, there was one of its most annoying flaws: updates

Just as you were preparing for a big video presentation, minutes before starting, Skype decided to update itself, without warning And you were left cursing and frustrated Meanwhile, competition like WhatsApp was working hard at messaging and Zoom was working hard at videocalls And they weren’t alone, with other options like Meet and Houseparty rising up the ranks But what did Microsoft do? Well, not much

They included weird text-activated emojis, then launched and dismantled a video messaging app Their efforts to make Skype better lacked planning, so it wasn’t unusual to face updates on a monthly basis And each update changed the software almost entirely Around 2016, many Skype users stuck to Skype because well, others used it And, somehow, those were good numbers: an estimated 300 million users, in fact But as threats were popping up left and right, Skype’s biggest threat came from Microsoft

Itself In 2016, Microsoft launched Teams, a unified communication and collaboration platform directed towards business It was Microsoft’s way of evolving its Skype for Business software and, all in all, it was a solid proposal with messaging, videocalls, calendar organization, and virtual meetings All very businesslike

Plus, by the end of 2017, Skype was still the go-to software for calls to landlines, but user confidence was diminishing It just didn’t have much else The new redesign was universally hated as it was plagued with bugs and missed what made the past versions good So, the app ratings plummeted Meanwhile, take a direct competitor: Zoom It was easy to use, users didn’t have to be members and got 40 mins for free It’s as though it’s designed for non-techies

Well, it is designed for non-techies And that was the key Skype’s user experience wasn’t kind Just google Skype bugs and you’ll have plenty of search results to indulge in Then there was Microsoft’s interests themselves From 2016 to now, Teams had improved constantly, because Microsoft was investing heavily in it They took all the good from Skype and improved all the bad: data transfer, tasks, video, and calls

And life changes, constantly Take this moment, for instance As things become even more virtual, Skype’s use has increased, but so has Teams And Microsoft was been pretty honest about maintaining Skype as a “for-the-moment” tool as eventually, they would migrate everybody to Teams Microsoft even announced a Teams for Consumers version, which was widely celebrated And that’s how much people hated Skype Who celebrates the death of software? Well, those

Who worked with it for too long In the end, Microsoft learned a lot from Skype Teams seems the adequate evolution, taking the good, leaving the bad, improving altogether But the lessons learned were worth $85 BN Would you pay $85 BN for lessons? Instead of that, don't pay anything Just watch the rest of our Company Forensics videos Hit that subscribe button to do that and we'll see you next week

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