Sunday, July 04, 2004

The Business Model for Skype?

Currently a lot of people, especially in incumbent telcos, are wondering, musing or joking over the business model of Skype, but looking around, there is nothing very new here.

Skype is using basically two marketing strategies already around for a long time:

1. Customer lock-in and
2. Let the customer do it on his own (DIY)

Regarding 1. Customer lock-in by giving away things for a shoestring or for free, Skype is quite conservative and in good company. Mobile operators do this for years by giving away mobile phones, free minutes and reduced subscriptions. Hutchinson now took this a step further in Austria by giving new customers in addition 50 Euro in cash.

Some may say now that people in telecommunication are know to be crazy, but similar things are going on in other sectors too: e.g. another example in Austria: the tourism association in Badgastein and a shop for sporting goods (Hervis) gave away a pair of free skis for anybody booking 3 nights and a two-day ski-pass in the region. One idea of this is that customers may not throw away the skis and maybe use it next year also.

Michael O'Leary, boss of Ryan-Air, believes that in some years tourists may get paid to board an air-plane, especially to destinations with lower frequency.

Compared with these "bargains" Skype and Niklas is really conservative, because what is really given away by him? To give away a mobile phone, you have development costs, production, transport, distribution and retail costs, because finally atoms have to be moved here. Skype has some development costs and nothing else, because they only move bits.

Regarding 2. DIY Skype is only betting on the trend for DIY in the last 100 years, and this is not a risky bet. Somebody said 100 years ago that not more than 10.000 cars will be manufactured because of lack of chauffeurs. Nobody could imagine before IKEA that many people will self-assemble their funiture and currently markets for hobby-workers are making a fortune. Some even construct their own houses.

People make their own pictures and movies, and with PC and the Internet the customers where on their own from the beginning. Nobody hires a company to get his PC or SW installed, eventually a good friend is used. People even start DIY networking with wireless LAN. BTW, this is similar how CATV started: the original abbreviation stood for Community antenna TV and was DIY by small private communities out of the reach of TV broadcast.

The last remaining item which is provided by somebody else is telecommunication and especially telephone "services".

With VoIP people finally can do this by themselves also and they will do it. VoIP is not a service, it is a product, like fax.

So the Skype business model is quite simple: get customers in by providing an easy to use tool, let the customer do everything by himself (buy a device, get BB access, download, install, find your communications partners), and if you have enough customers, start selling them something in addition. Guess how many people have pre-paid $10 just to try SkypeOut. Guess how many people will pay an additional $10 to get a number.

$10 is not very much, but from the point of Skype: "many a mickle makes a muckle"
(Kleinvieh macht auch Mist).

In the PSTN you get an integrated service, which includes access, volume, maintenance and so on. Skype is voice for free, but you have to bear the cost for access and for data volume. So I argue that Skype cannot be compared to integrated voice service on the PSTN. It is necessary to conceptualize the different model of the internet, where you do not have vertical stovepipes, but horizontal layers. Skype is a voice (and much more) application on the net. Skype is independent of access.

The point with the internet is: "you have to pay for access only once" instead of paying for the access per service.
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