You may find it hard to believe, but voice-over-internet-protocol (VOIP) has been around well before the new millennium. VOIP is a technology that allows users to make voice and video calls through the internet. The technology takes a voice signal and converts it into a digital one using traditional phone technology. This signal travels across the internet instead of a phone line. The seeds for the technology were planted in the 1970s when the first transmission was made using a voice packet. And in 1991, the first VOIP application was released—and the rest, as they say, is history.

A number of companies have capitalized on this technology including Skype—one of the most recognized communications platforms. Touted as a free service, the company caters to people who want to ditch traditional landlines but still want a convenient way to communicate with others. But how exactly does it make money? Read on to find out more about the company's revenue stream and its sustainability.

Key Takeaways

  • Founded in 2003, Skype was purchased by Microsoft in 2011.
  • Skype makes money by selling credits and subscription services to personal consumers and business clients.
  • Individual revenue figures aren't released for Skype, which is part of Microsoft's productivity and business processes unit.
  • Skype faces competition from rivals like WhatsApp and Zoom.

Skype: A Brief History

Skype is a telecommunications application that was founded in 2003. It was meant as a way for people to communicate with each other over the internet. The service provides a platform for video and voice calls on computers, tablets, smartphones, game consoles, and other mobile devices using an internet connection. The service also allows the use of video conferencing. People can communicate with others through Skype by using voice, video, and instant messaging options. The service is available in more than 100 languages. As of 2017, the service had an estimated 1.33 million users.

The company has changed hands over the course of its history. It was first acquired by eBay in 2005 for $2.6 billion. In 2011, Microsoft (MSFT) purchased the company for $8.5 billion—the most expensive buyout in Microsoft's history and $2.5 billion dollars higher than the earlier aQuantive purchase. At that point, shareholders and analysts were nervous about the deal since Skype wasn't turning a profit. According to the Wall Street Journal, the tech titan's shares dropped 1.3% when the deal was finalized. Years later, most of these concerns all but disappeared as Skype cleared $2 billion in annual sales for 2013, bringing in more worldwide users annually.

Innovation

One of the biggest developments for Skype was its Translator software, a speech-to-speech application. Launched in 2015, it began operating as part of Microsoft as of 2018. While the service is available to Microsoft users as part of the Skype app on Windows, users can also download it as a separate app. The translator supports a range of different languages and allows users to translate speech in real-time through a Skype video call or instant messaging.

Revenue

One of the biggest draws for most users is the fact that voice, video, and group calls between Skype users are free. So how does it make any money? Skype's primary source of revenue is through the sale of credits and monthly subscription services. Credits allow Skype users to make calls to others including to landlines, send text messages anywhere in the world, or purchase a Skype number so they can receive calls from anywhere in the world on their Skype account.

Skype also offers Skype To Go, a service that allows low-cost international calls from mobile phones and landlines. The service doesn't require an internet connection or a data plan. No matter the location, a Skype To Go subscriber can dial a local number that they purchase to dial out to international contacts. For instance, a Skype user in London who wants to speak to someone in New York simply has to add the New Yorker into their Skype To Go contacts list. Skype issues a local number, which the Londoner can dial to be connected to their American contact.

So just how much do these services bring into Skype’s coffers? Unfortunately, Microsoft doesn't give a definitive answer. According to a statement by the General Manager of the Skype division, Skype’s 2013 fiscal year revenues were close to Microsoft’s Sharepoint, which pumped out close to $2 billion in earnings. Skype is listed under the company's office consumer segment, which also includes other Microsoft products such as Outlook and OneDrive. The office consumer segment is part of the larger productivity and business processes unit. In the 2019 fiscal year, the unit earned revenue of $41.1 million, a 15% increase from the previous year.

Microsoft doesn't provide definitive revenue figures for Skype.

Are These Numbers Sustainable?

If the sales figures noted above are correct, Skype sales grew 58% (from $860 million) at a compound annual growth rate since the acquisition. Furthermore, Skype announced in 2013 that a whopping two billion minutes of conversation occurred daily over its network.

The company also developed a platform for business solutions in 2015 called Skype for Business, which it later branded as Microsoft Teams. The interface, part of the Microsft Office suite, is a cloud-based platform allowing users to collaborate. Just like business communication app, Slack, it allows users to message, conference through video, and store files. According to a Business Insider report, Microsoft's chief executive officer (CEO) announced in April 2020 that the Teams platform had 75 million daily users.

One of the key factors that may hinder Skype's growth for Microsoft is the competition it faces from other similar platforms. WhatsApp is a downloadable app that allows users to make free voice, video, and group calls, as well as text messages to other users around the world. Facebook (FB) purchased the app for $19 billion in 2014.

Another competitor is Zoom (ZM), which rivals Skype on the online chat and video conferencing front. This service is a popular option for many businesses. The cost to use Zoom ranges from a free basic account to $19.99 per month for an Enterprise account. The company earned $622 million in revenue for the 2019 fiscal year.

The Bottom Line

If the numbers from Microsoft are accurate, Skype has certainly surpassed the $2 billion sales mark since 2013, which means the $8.5 billion-gamble that it took purchasing Skype is paying off. Until further data is released, we can only assume that Skype makes its money through credits and other VOIP-related services. However, this may change, as Skype faces competition from other, related names in the industry.