Historical Background

Skype was founded in 2003 by Niklas Zennström and Janus Friis, who were also the creators of
the popular peer-to-peer file-sharing service KaZaA. Unlike traditional VoIP services, Skype
utilized a peer-to-peer architecture, meaning that rather than relying on a centralized server to
manage calls, it distributed this task among the users' computers (network peers). This innovative
approach allowed Skype to scale efficiently without incurring significant infrastructure costs.
The company launched its public beta in August 2003, quickly gaining traction due to its free
voice calls over the Internet. By 2005, Skype had amassed 54 million registered users. This rapid
growth attracted the attention of eBay, which acquired Skype in September 2005 for $2.6 billion,
viewing it as a strategic asset that could enhance communication between buyers and sellers on
its platform.
The integration into eBay did not return the expected synergies. EBay anticipated that Skype
would help reduce ecommerce friction, enable pay-per-call advertising, and provide cross-
marketing opportunities. Despite these hopes, the strategic fit between eBay's core business and
Skype remained unclear, leading to operational and strategic challenges. In 2007, eBay wrote
down Skype’s value by $900 million, reflecting these integration difficulties. Eventually, in
2009, eBay sold a 70% stake in Skype to a group of investors for $1.9 billion, indicating a
strategic pivot away from its initial vision for Skype.
2. Case Study Overview
This case provides a detailed examination of its business model, technological foundation, and
strategic challenges, especially surrounding its acquisition and subsequent divestment by eBay.
Business Model:
Skype's business model was innovative for its time. The service attracted users by offering free
basic features, such as computer-to-computer voice calls, voice conferences, and text messaging.
Skype monetized its platform through premium services, including:
SkypeOut: Allowed users to make calls from their computers to regular phone lines, which
incurred a cost.
SkypeIn: Enabled users to receive calls on their computers from regular phone lines, which also
required a subscription.
Skype's revenue model relied on a small percentage of its user base upgrading to these premium
services. By late 2005, about 5% of users were paying for premium features. This model allowed
Skype to maintain low variable costs, as users’ PCs and internet connections were used to route
calls, eliminating the need for extensive centralized servers.

Technological Framework:
Skype's use of peer-to-peer technology was central to its service. This architecture enabled the
service to scale efficiently and traverse firewalls and Network Address Translation (NAT)
without significant issues, which were common problems for other VoIP services. Skype's
signaling protocols were proprietary, enhancing its ability to bypass common network obstacles
but also limiting interoperability with other VoIP services based on the open standard SIP
protocol.
Strategic Challenges and Acquisition by eBay:
eBay's acquisition of Skype was driven by the belief that it could integrate Skype's
communication capabilities into its platform, thereby enhancing the user experience and enabling
new business models such as pay-per-call advertising. However, these anticipated synergies did
not materialize as smoothly as hoped. The misalignment between eBay's core ecommerce
operations and Skype's communication services became evident, leading to strategic and
operational challenges.
In 2007, eBay wrote down Skype’s value by $900 million, acknowledging the difficulties in
realizing its strategic vision for Skype. By 2009, eBay decided to sell a 70% stake in Skype to an
investor group for $1.9 billion, marking a significant shift in its strategy regarding Skype. This
move highlighted the challenges eBay faced in integrating and capitalizing on Skype's potential
within its business framework.
3. Problem Identification
Strategic Misalignment:
The primary issue was the strategic misalignment between Skype's services and eBay's core
business. eBay's ecommerce platform did not seamlessly integrate with Skype’s VoIP services,
and the expected synergies, such as reduced ecommerce friction and enhanced communication
between buyers and sellers, did not materialize as planned. This misalignment led to challenges
in justifying the acquisition and extracting value from Skype.
Technological and Regulatory Challenges:
Skype’s reliance on proprietary protocols, while advantageous in certain respects, also posed
significant challenges. Unlike SIP-based VoIP services, Skype’s closed protocols limited
interoperability with other services, which could have expanded its user base and integration
opportunities. Additionally, the use of supernodes created network load issues that led to bans in
some institutions.
Regulatory hurdles further complicated Skype’s operations. Different countries had varying
regulations regarding VoIP services, affecting Skype’s ability to operate freely and maintain
consistent service quality across regions.

Service Quality and Customer Complaints:

Despite generally high sound quality, Skype sometimes faced issues with service quality,
including time lags, dropouts, and poor connections due to remote routing and low bandwidth.
These issues were particularly pronounced for SkypeOut users, who experienced delays and
disruptions that hindered effective communication. Customer service also relied heavily on email
support and user forums, which was insufficient to address the growing volume of user
complaints.