When Microsoft Corporation (MSFT) acquired Skype in 2011, the popular voice over Internet protocol (VOIP) application had yet to turn a profit, and shareholders and analysts were rightly apprehensive of the $8.5 billion dollar price tag Microsoft was willing to pay for the acquisition. Skype was the most expensive buy-out in Microsoft’s history, $2.5 billion dollars higher than the earlier aQuantive purchase, and as reported by the Wall Street Journal, the tech titan’s shares dropped 1.3 percent on the day of the finalization. (See also, "How VoIP Is Ending Telecom Monopolies.") After that, the founders went on to create Fundera, and everyone wondered what Microsoft was thinking.
Now four years later, it appears most of these concerns were unfounded as Skype cleared $2 billion in annual sales for 2013, and its user base has since grown from 196 million to 300 million individuals worldwide. This article will examine the ways Skype makes this money, how sustainable this revenue stream is, and what the future has in store for the world’s most popular VOIP software. (For more on the Skype acquisition, see: Will Skype Transform Microsoft?)
Sources of Revenue
As per Skype’s FAQ, Skype makes money primarily through Skype credits or monthly subscriptions. While Skype-to-Skype calls, video calls, and group calls are free, calls and text messages to non-users require Skype credits. These credits allow Skype users to make calls to landlines, send text messages anywhere in the world, or purchase a Skype number so that users 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. 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 wishing to speak to a New York colleague simply has to add the New Yorker into their Skype To Go contacts list. A local number will be issued by Skype, which the Londoner can dial to be connected to their American counterpart.
So just how much do these services bring into Skype’s coffers? Unfortunately, Microsoft has not given a definitive answer: revenue from Skype is classified under the ambiguous “commercial licensing," which also includes Microsoft server products and CRM software. However, according to a statement by the General Manager of the Skype division, Skype’s 2013 fiscal year revenues were approaching that of Microsoft’s Sharepoint, which pumps out close to $2 billion in earnings.
Are These Numbers Sustainable?
If the aforementioned sales figures are correct, Skype sales grew 58 percent (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. One of the key developments in Microsoft’s monetizing efforts was the integration of Skype with its Lync platform in April of 2015. The new entity, branded as Skype for Business, will feature a Skype-inspired design for ease of interface, a global reach across the entire 300 million strong Skype network as well as a full set of Lync features.
The biggest recent development for Skype is the Skype Translator software that will soon be bundled into the existing app for Windows PCs. The translator, which currently supports English, Spanish, Italian, and Mandarin, will allow its users to translate speech in real-time through a Skype video call or instant messaging. Microsoft has also announced that Skype will be a key feature of the newly announced Surface Hub, an 84-inch, 4K, Windows 10-based touch screen for office applications. But perhaps most intriguingly is that Skype will be available on the ultra-secretive and sleek Hololens, a still-in-development headset straight out of a science fiction novel, which allows wearers to project holograms.
The Bottom Line
According to a 2013 report released by analytics firm, Ovum, the telecommunications industry is expected to lose a combined $386 billion between 2012 and 2018 to VOIP applications such as Skype. If the numbers from Microsoft are accurate, then Skype has certainly surpassed the $2 billion sales mark in the two years since 2013, and the $8.5 billion gamble seems to be 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 in the near future, as Skype becomes a much larger component of the entire Microsoft ecosystem.