WHAT HAPPENED TO SKYPE: In May of 2011, Microsoft
announced that they would be buying Skype for $8.5 billion in cash. From the very beginning,
it seemed like Microsoft had overpaid for the video conferencing platform. Just two years
before this, Skype had been sold for a third of this price coming in at $2.75 billion. There was
no way Skype’s value had tripled within these 24 months, especially given the 2008 financial
recession. And Microsoft very much knew this, but if they wanted to get Skype, this was the
price they had to pay because two other giants, Google and Facebook, were also interested in
acquiring Skype. It appears that Microsoft had won the bidding wars, but now, it was time for
the actual hard stuff. They needed to ensure that this overpriced purchase would actually be
worth it over the long term. Unfortunately, by all accounts, they would miserably fail at doing this.
Public distaste for Skype simply grew year after year and people were simply waiting for a viable
alternative to pop up. For gamers, this turned out to be Discord. For businesses and institutions,
this turned out to be Zoom. Things actually got so bad that Microsoft themselves shutdown
Skype for business in the middle of 2021. Hearing all this, you would think that Skype
was a massive failure, and technically Skype itself was indeed a failure. But,
what if I told you that Skype as an investment was actually a massive win for Microsoft. You see,
just as Skype started hitting its breaking point in the late 2010s, Microsoft went out and iterated
on Skype themselves and created a new solution: Microsoft Teams. If you’re a tech worker, you’re
probably extremely familiar with Microsoft Teams, and this sound probably gives you nightmares. If
you’re not familiar with Teams, this is basically the business equivalent of this sound. Anyway,
according to Microsoft themselves, Teams is their fastest growing business app of all
time. And let’s not forget, Microsoft was also the creators of Office and Outlook,
so this is truly an achievement. Between March and June of 2020, Teams actually grew faster than Zoom
growing a whopping 894%. And today, Teams has a total of 270 million users, which is not that
far behind Zoom’s 300 million active users. Not to mention, Teams users are way more profitable
given that they're more likely to be business users. In 2020 for example, Zoom pulled in just
over $4 billion while Teams actually pulled in nearly $7 billion. Yet, all the media ever talks
about is Zoom. So, heres’ the rise and fall of Skype and its insane resurrection as Teams.
THE RISE OF SKYPE:
Taking a look back, the story of Skype dates back to 2003 to two Scandinavian men named
Niklas Zennstrom and Janus Friis. The idea behind Skype wasn't to crack into the business world or
dominate video conferencing. The idea was actually much simpler. The idea was to substantially reduce
the cost of long distance phone calls. If you have family in other countries, you’re probably well
aware of just how expensive this is, and this is still the case to this day. But, nowadays,
you’re first instinct wouldn’t be to hope on Skype. It would probably be to use Facetime or
WhatsApp. Back in the early 2000s though, these options didn’t even exist. So, you either had
to pay AT&T an arm and a leg or you had to put up with MSN messenger. Skype’s founders were acutely
aware of this situation and they felt that the industry was just asking for disruption. So,
like any good entrepreneurs, they got to work. They would partner with some Estonian developers
and they would create a minimal viable product by the end of the year. And they would call it Skype
which stood for “Sky peer to peer”. Skype was a massive hit almost instantaneously.
There was clearly a bunch of cooped up demand that was just waiting for a better solution, and
Skype was exactly that. The founders built on this success by expanding into traditional phone calls
as well with the launch of SkypeOut. SkypeOut allowed users to directly call a landline or
mobile phone from their computers. This probably doesn’t sound like a big deal today, but back in
2005, this was insane because not everyone even had computers. This meant that you could leverage
Skype even if only one person had access to a computer, and the best part was that it costed
a mere 2 cents per minute. For perspective, if you don’t have an international plan, AT&T will
shamelessly charge you $2.71 per minute and that’s in 2022. Who knows how much AT&T charged in 2005.
Anyway, the cost and convenience of Skype made it a no brainer. Within 18 months of launching, Skype
would cross 23 million registered users and within 2 years, they would cross 100 million downloads.
Skype was still very much just a startup, but bigger corporations were already interested in
acquiring the business. And we weren’t talking about tens of millions or even hundreds of
millions, we were talking about billions, $2.6 billion from eBay to be exact. Skype had gone
from 0 to $2.6 billion in matter of 2.5 years. Not a bad days work, but Skype was still just getting
started. At the end of 2005, Skype would launch video calling and in mid 2006, they would launch
support for massive calls with up to 100 people. By the end of 2007, Skype would reach 220 million
registered users and by all accounts, they were crushing it. But, despite all this growth, eBay
was finding it more and more difficult to keep up with Skype. There was virtually no synergy between
the two companies, so it was basically like running two different businesses. Soon enough,
eBay just wanted out, so they would sell Skype to the first buyer they could find for a terrible
valuation of $2.75 billion. These buyers would simply turn around and flip Skype to Microsoft
a few years later for $8.6 billion in cold hard cash, and that brings us into the Microsoft era.
THE DEATH OF SKYPE:
Microsoft bought the top. That’s simply the truth and there’s no way around it. To make things
worse, not only did they buy the top, but they overpaid at the top due to the bidding war. But,
wait a minute, hold up what happened? Wasn’t Skype growing at an insane pace with no end in sight?
Well, unfortunately, the reality was that there was an end in sight and reasoning was no obvious.
The number one selling factor of Skype was its functionality. People didn’t use it because it had
a cool UI or great integration and synergy or any of that. People used it simply because it solved a
problem. But, as we moved into the 2010s, there were several services that could solve the same
problem, but these other services also came with a bunch of extra bells and whistles. WhatsApp,
for example, actually offered an enjoyable mobile experience unlike Skype. Meanwhile,
Google Hangouts and Apple Facetime were able to tap into the massive networks of Gmail and iPhone
users. And for most people, switching to these services was a no brainer. Why settle for just
functionality when you could opt for functionality and a great user experience. This isn’t to say
that Skype stopped growing per se. In fact, in terms of pure numbers, they continued their
exponential growth into the billions of users. The problem though was that these weren’t happy users.
These were users that were becoming increasingly frustrated, and the only reason they used Skype
was because everyone around them was using it. It was the classic case of, it was popular
because it was already popular. Likely the two biggest complaints about skype were that
the UI sucked and the service itself was not as reliable as competitors. The first point is not
that surprising. I mean, we’re talking about Microsoft here. Despite their enormous size,
they’ve never been able to get mobile right. I mean just think about the Windows Phone
which lost them $8 billion. The problem was that Microsoft was always trying to import
a computer basd experience onto mobile devices which simply didn’t translate well. Meanwhile,
their competitors were reimagining how every task could be done on a phone from scratch,
and the competitors destroyed Microsoft everytime. As for the reliability problem,
this wasn’t exactly Microsoft’s fault, but they weren’t able to fix it either. The reason that
Skype was so unreliable was because it was a peer to peer service. The reliability of a peer
to peer connection was simply uncomparable to a server based connection backed by a $13 billion
data center. Microsoft tried to address this by moving Skype to the cloud, but this move was kind
of always botched. Not to mention, this move also kind of backfired as it made people think
that Microsoft was trying to track their data. And if you were gonna let Microsoft collect your data,
you might as well let Google and Facebook collect your data. At least, you’ll have a good
UI there. And if you want some quantitative data regarding just how much people hated Skype, well,
in June of 2017, the average app store rating for Skype drop from 3.5 stars to 1.5 stars. Yeah,
it was that bad, but at the same time, no one cared enough to switch either until the pandemic.
People figured that if they were gonna use video conferencing on a regular basis, they had to
find a better solution and the answer was Zoom. And this pretty much sealed the fate of Skype.
RESURRECTION AS TEAMS:
During all of this, Microsoft was by no means oblivious to what was happening. They
were literally waiting to get destroyed in the consumer market. But, at the same time, Microsoft
oddly didn’t mind. You see, the entire company was moving away from consumer products. I mean,
they’ve literally made Windows and Office free for consumers. The reason for this is that Microsoft
is no longer a consumer business. The majority of their revenue actually comes from b2b revenue for
things like cloud infrastructure and licensing. With that being said, Skype no longer fit inside
their wheelhouse. Something that did fit though was business video conferencing. Microsoft already
had strong relationships with virtually every company in the world given that basically every
company has to licenses Windows, Office, and Outlook. So, why not sell them another solution
that seamlessly integrated with these products. And this led to the launch of Skype for Business
in 2015. Microsoft quickly realized though that the Skype branding wasn’t doing them any favors,
so they would embark on a complete rebranding which led to the launch of Microsoft Teams in
2017. It wasn’t all sunshines and rainbows though as most businesses already had established video
conferencing systems from Cisco. Cisco Webex was nothing to brag about, but it got the job done
and companies didn’t see a reason to switch. As a result, adoption of Teams was lackluster to say
the least. By the end of 2017, Teams only had 2 million users, and even by the end of 2018,
Teams only had 8 million users. 2019 was a much better year for Teams as they finally got into the
tens of millions of users, but the breakthrough obviously didn’t come till 2020. As we all know,
2020 forced everyone to reevaluate their video conferencing solutions, and the choice was pretty
clear. WebEx was an obvious no. If you’re not familiar with WebEx, it’s basically the business
equivalent of Skype. This left companies with two options: Zoom or Teams. Both products offered
leading conferencing solutions, but Teams had a slight leg up on Zoom which was integration with
Microsoft’s other products. For companies that already relied on Microsoft products,
this synergy was simply too good to pass on, and I think you can guess what happened next.
THE DOMINATION OF TEAMS:
Today, Teams doesn’t receive all that much attention just like Microsoft themselves. But,
don’t let this fool you, Teams is the real king of video conferencing. For most people,
using Zoom was an unfortunate temporary reality, and they ditched Zoom as soon as they could. This
is very much reflected in Zoom’s stock graph. For most companies, however, using Teams is a
permanent solution. And given that companies are pretty hesitant on switching services, they’re
probably locked in for several years if not decades. So, Microsoft’s $8.5 billion acquisition
has turned into $6.8 billion in revenue every single year. And that was as of 2020 when Teams
had 75 million users. Since then, their user count has grown nearly 4 fold to 270 million. So Teams
revenue today is definitely above $10 billion and probably closer $20 billion. And if you’re still
not convinced about Team’s success, just listen to this. Last quarter, Microsoft made $5.3 billion
from Windows, their most well known product. If we annualize this, we get about $21.2 billion per
year. In other words, Team’s revenue is literally comparable to that of Windows, and it’s probably
just a matter of time until Teams overtakes Windows altogether. Also, the sector that Teams
is part of is already at $11.5 billion per quarter which is twice of Windows, so who knows, maybe
Teams has already overtaken Windows. And that’s why Skype was likely Microsoft’s best acquisition
of all time. Skype itself didn’t work out all that well, but it gave rise to the behemoth that
is Teams. Did you hate Skype? Comment that down below. Also, drop a like if you would like to
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