How Skype Makes Money

Investing News

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 1995, 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 voice translator service is available in 40 languages while the text translator is available in over 60 languages. In 2019, the service reported over 40 million daily users, over 300 million monthly users, and over four billion total users since Microsoft acquired the company.

The company has changed hands over the course of its history. It was first acquired by eBay in 2005 for $2.6 billion, who then sold a majority to a private equity firm while keeping 30%. In 2011, Microsoft (MSFT) purchased the company for $8.5 billion—the most expensive buyout in Microsoft’s history at the time 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.

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 2022 fiscal year, the office consumer unit earned revenue of $641 million, a 11% increase from the previous year.

Microsoft doesn’t provide definitive revenue figures for Skype.

Are These Numbers Sustainable?

Even though actual Skype revenue data is unavailable, the office consumer unit has seen consistent quarterly and fiscal year increases for the past two years. And the unit’s segment, Productivity and Business Processes, has seen steady growth since 2016.

In 2021, Skype for Business, a platform for business solutions launched in 2015, was retired and replaced by Microsoft Teams, the Microsoft 365 communication app. The interface, part of the Microsoft 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 the January 2022 earnings call, Microsoft’s chief executive officer (CEO) announced that the Teams platform had over 270 million monthly users for the quarter.

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 (META) 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 for one user up to $25.99 per month or $250 annual subscription for the Business Plus account, which offers up to 99 licenses as well as unlimited calls and whiteboards. The company earned $4.1 billion in revenue for the 2022 fiscal year, a 55% increase over the previous 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.

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