Skype

Blue Ocean Strategy Institute

Skype in the Voice-over-IP Industry: A Commercially Viable Blue Ocean?

02/2013-5949

This case was written by Katrina Ling, Executive Researcher, and Jee-Eun Lee, Institute Executive Fellow, both at the INSEAD Blue Ocean Strategy Institute, under the supervision of W. Chan Kim and Rene Mauborgne, Professors of Strategy at INSEAD. It is intended to be used as a basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation.

Copyright 2013 INSEAD

COPIES MAY NOT BE MADE WITHOUT PERMISSION. NO PART OF THIS PUBLICATION MAY BE COPIED, STORED, TRANSMITTED, REPRODUCED OR DISTRIBUTED IN ANY FORM OR MEDIUM WHATSOEVER WITHOUT THE PERMISSION OF THE COPYRIGHT OWNER.

ecch the case for learningDistributed by ecch, UK and USA North America Rest of the worldwww.ecch.com t +1 781 239 5884 t +44 (0)1234 750903All rights reserved f +1 781 239 5885 f +44 (0)1234 751125Printed in UK and USA e [email protected] e [email protected]

313-047-1


Copyright 2013 INSEAD 1 02/2013-5949

Meet Sarah C. Scott An Actively Connected Skype User in 2011

In 2010, after a 20-year career in the New York fashion industry, Sarah C. Scott went solo. Seeking a fresh start, she left her home town and moved to San Francisco with her husband and 2-year-old son. Professionally, the location change suited her well as her suppliers and consultants were equally distant in Hong Kong and Paris. Personally, it meant being away from her parents in New York.

In her previous job, Sarah had worked for an internationally renowned fashion house. As the creative process was highly visual and could not be done effectively by phone or email, Sarah would make monthly trips to collaborate with colleagues in Europe, or fly in the other direction to hand-pick textiles from suppliers in Asia.

This had changed in the late 1990s. Seeking to reduce travel costs, Sarah's company had installed a dedicated video-conferencing system to replace all but essential travel. However, although the system was extremely expensive, it was complex and difficult to use. For the few business partners who were equipped with video-conferencing, Sarah found it impossible to set up a call without the aid of the IT department. During her presentations she would cringe every time she advanced her slides on the remote control for fear of pressing the wrong button, which had stopped the presentation more than once.

Now that Sarah was the sole designer/decision-maker in her own firm, she found that the more she travelled, the less she got done. The time wasted going to and from the airport, and on security, transfers and jet lag, just didn't justify the cost. Yet a dedicated video-conference system was neither an affordable nor convenient option.

Shortly after arriving in San Francisco, a friend of hers suggested she try Skype, an internet voice and video service. Today, Sarah doesn't know how she ever lived without it. Now she starts her day sharing her latest design ideas with her associates in Paris via Skype's video-conferencing application. Making a Skype videoconference call is as simple as clicking on the Video call button. To make a voice call she simply clicks on the Call button:

On Skype, I can show my consultants my vision for the new line, point to areas where they need to pay special attention If I had to convey the same ideas by phone, fax or email, it would have taken a lot more time and effort on my part; and on the receiving end, it might leave more room for misinterpretation, errors and time wasted going back and forth.

Seeing is Believing

As Skype provides file- and screen-sharing capabilities, Sarah can easily send her design specifications to her colleagues on the same call while she is explaining the details in the document, or show the design on her screen to answer a spontaneous inquiry. Furthermore, if she needs to get a point across while her business partners are engaged in a conversation on a Skype call, she can simply send an instant Skype text message to one or more participants without the need to interrupt the conversation. Since Sarah has a subscription to call US and international numbers on Skype for a low monthly fee, she feels less pressure to end a

313-047-1



conversation prematurely, which while saving on long-distance phone charges, could end up costing her more in design errors.

Sarah has eliminated the use of a traditional wired phone at work. Instead she uses an online number from Skype that enables her to receive calls from people outside of the Skype network. This resembles any other phone number with a US country code, local area code and 7-digits. To the caller, it works the same as calling a number on any phone exchange. But to Sarah, she has more control over how she receives incoming calls. For example, she can pick up a call from her computer while she is working at her desk or from a mobile Skype application on her smartphone. If the call is not picked up with the Skype application, it can be forwarded to her landline or mobile phone.

Sarah's clients and colleagues find it easier to reach her as she has one number regardless of whether she is in her US office, passing through Hong Kong, or in the park playing with her son. To make outgoing calls on her mobile phone, it is just as easy for Sarah to make the call through her phone carrier directly as it is via Skype. By setting up her most frequently dialled international numbers with a Skype-generated local number, Sarah enjoys the same low rates offered by VoIP calling cards, but without the hassle of dialling long access codes.

The real-time interactivity that Skype video calling offers Sarah the entrepreneur is equally as valuable to Sarah the mom and daughter. Instead of waiting for annual holidays to take a cross-country trip, Sarah calls her parents on Skype video every week to see how they are really doing. With Skypes video teleconferencing capabilities, she can visually monitor their health status as well as engage them in everyday activities with her 2-year-old son, who is too young to hold a conversation over the telephone. Sarahs father, Paul, agrees:

When Sarah first told us she was moving to the West Coast, we were concerned since traveling has become difficult at our age. Knowing how busy Sarah is, we figured we would only see them once a year during the major holidays. We were surprised by how easy Skype was to use. Not only is Skype less expensive than long-distance calling, no other voice carrier offers video capabilities. Without Skype, it would have been impossible for us to interact with our grandson in a meaningful way and to stay in touch with Sarah on such a regular basis.

Sarahs experience is representative of millions of Skype users since the easy-to-use voice-over-IP application was launched in 2003. In just seven years, Skype grew to 663 million users, who in 2010 made 207 billion minutes of voice and video calls and sent 176 million text messages. TeleGeography, a telecommunications research firm, estimates that Skype accounted for about 20% of international long distance calling minutes that year.

By launching its video calling feature in 2005, Skype made available for the first time what had been cost-prohibitive to ordinary people. Anyone with an internet connection and a computing device with a camera and microphone now has the ability to see and speak with each other in real time without the cost and hassle of fixed video-teleconferencing or travel. By Skypes own estimate, the popularity of its video chat calling had grown to 42% of all Skype-to-Skype calls by end of 2010.

However, according to the companys IPO filing in 2010, only 1.3% of all registered Skype users pay for its services. So the key question is: Taking the perspective in 2011 prior to

313-047-1



Microsofts acquisition of Skype, what must Skype do to make its unprecedented offering more financially sustainable in the long term?

Questions for Interactive Class Discussion

1. Using the templates provided in Exhibit A-1 of this case, develop three buyer experience cycle/buyer utility maps for each of the following target user groups:

a. Long-distance calling services b. Room-based video conferencing c. Travel

For additional reference, sample purchase options for a traditional US wireless calling plan and a room-based video-conference facility are provided in Appendices A2 and A3.

2. What is the unprecedented utility Skype created for the target mass of travellers, users of traditional room-based video conferencing and long-distance calling services?

If you have no experience of Skypes offering, please download a copy of the Skype application from skype.com, install it on your computer, and make a few calls using Skype to familiarize yourself with its voice and video calling functions. Try to also send one or more instant text messages and send a file to your caller while on a call to experience the multi-media interactivity of the Skype offering.

3. Using the Price Corridor of the Mass for Voice-Calling Services shown in Exhibit B, what would be a strategic price for Skypes voice- and video-calling services for it to convert its new market space into a commercially viable blue ocean?

4. Based on your knowledge of strategy, is there anything else that Skype must address for its "breakthrough strategy" to have a strong and profitable growth trajectory?

313-047-1



Exhibit A-1 Template for Buyer Experience Cycle/Buyer Utility Map

313-047-1



Exhibit A-2 Sample Options for a Traditional Wireless Phone Subscription

Since the Nation 450 calling plan is for calling within the US only, both Long Distance and Roaming Charges are listed above as $0.00 in the basic subscription. To make international calls from a mobile phone in the US with this subscription will incur additional charges, as listed below for two sample countries (Canada and France).

Source: www.wireless.att.com

If the wireless phone with this plan is used to make or receive calls, send or receive data, text, picture or video messages while the subscriber is roaming outside of the US network, additional fees are charged. A sample list of voice and data usage fees while roaming in Canada or France is listed below:

313-047-1



Source: www.wireless.att.com

Depending on the expected level of use for voice and data features, the subscriber must choose from numerous options, as listed on the two pages that follow. This represents one subscription option among many others for one traditional wireless phone service provider. The number of options multiplies quickly by the number of wireless phone service providers, which are all different and cannot be easily compared on the same scale.

313-047-1



313-047-1



Exhibit A-3 Sample Options for a Traditional Room-Based Video-Conference Installation

313-047-1



Exhibit B Price Corridor of the Mass for Voice-Calling Services

313-047-1

Documents

Skype