Skype’s So-Called Free Business Model Drives Revenue

When you hear the name Skype, what do you think?  Probably: free phone calls.

Some thought Meg Whitman, former CEO of eBay, was nuts when eBay bought Skype back in 2005 for $2.6 Billion.  Analysts questioned what relevance Skype had to eBay’s business.  Many also questioned the business model of a service that was about making free voice calls.

It looks like Skype is getting its act together from a business perspective. They’ve figured out the “free plus paid services” model — and are making money at it.  Here is a chart from a recent press briefing  on March 31, 2009 showing their combination of free and paid services model:

Skype free plus paid business model

Free by itself is not a business model.  But free coupled with a compelling upgrade path to paid services, is.  How much of a business model?  Try $551 Million for 2008. This chart shows the Skype revenue growth since 2005:

Granted, it’s taken Skype awhile to get it together with a focused strategy.

They had some early mis-starts and distractions with goofy free services like Personal Skypecasts. The last time I tried that service, it seemed to be overrun with spammers and broadcasts consisting of nothing but complete silence except for the occasional word or grunt here and there.  Skypecasts was quietly shut down last September.

Then there was some experimentation with a feature that let you send money via Skype.  However, when your corporate parent also owns PayPal, such a product is a distraction from your core competency. The send money service has been shut down, too.

Instead, Skype is now focusing on their core competency: telecommunications. Their new enhanced interface (version 4.0) has a larger window and better audio/visual quality.  It’s designed for improved video calls, which Skype sees as a big part of their future. They are also investing in linkage between mobile phones and Skype, with new capabilities to use Skype on the iPhone and the BlackBerry (coming soon).  And they are investing in partnerships for services that business users value, such as partnering with a virtual PBX provider.

Most importantly, they are focusing on the kinds of features that people and businesses are likely to pay for.

By keeping the basic service free, they continue to grow their user base by 350,000 customers a day. That provides a good base that can be upsold to these new fee-based services.

Not everyone agrees that a free user base will help them grow revenues, however.   Om Malik of GigaOm suggests that this free user base is their achilles heel, noting:

“Skype grows because of its viral nature. Most people try and get their friends to download Skype so they can make free calls, a behavior unlikely to change. And once you have all your pals on the network, you don’t really need to use SkypeOut as much.”

While I respect Om’s opinion as it relates to early adopters like him, I view things much differently.  I think it all depends on how compelling a value proposition Skype makes it for users to upgrade.

Let me give you an example:  I use Skype daily, but almost never make Skype-to-Skype calls. Almost always I have to call a land line or mobile phone, because the other person is not on Skype or is out of the office, etc.  Plus, when I am making business calls (as most of my Skype calls are) I can’t ask people to download Skype just for my convenience so I can make a call to them for free.  Hence, the SkypeOut service — where I can dial out to regular phones — is the single most compelling feature for me.  I have to pay to get that service.

If Skype is smart, they will make their fee-based services more and more attractive over time.  Then it becomes a no-brainer for a certain percentage of new users to choose paid services.

About 35% of Skype’s users are businesses (probably small businesses). This is also important because business users are more likely to pay for advanced features, rather than sucking up the free version only.

The cost for Skype of adding new free users virally, and getting XX percent to upgrade, has to be much lower than the cost of other telecom providers to acquire new customers. I see nothing but upside in this business model.

The reason I spent so much time writing about Skype today is that I think there are 2 important lessons here for your own business:

(1) Focus on a clear strategy that sticks to your core competency — don’t get distracted and off track.

(2) Make sure that if you are offering free services, you also have a paid-services business model to go along with it and a compelling value proposition to entice free users to convert to paying users.


Anita Campbell Anita Campbell is the Founder, CEO and Publisher of Small Business Trends and has been following trends in small businesses since 2003. She is the owner of BizSugar, a social media site for small businesses.

28 Reactions
  1. Very thoughtful post. I have had mixed opinion about Skype. One thing was that Niklas Zennstrom, CEO of Skype, was the founder of the now-defunct file sharing program called Kazaa. Another thing was that it was hard to use when you had a Linux OS. I wrote a post (Tech Tuesday: Voice Over Internet Protocol) on this in 2005. It also had quality problems with it is software and as you mentioned in your post, it used a proprietary Internet telephony (VoIP) network, so the other party had to have Skype too.

    You could reach me on Skypke at Lyceum1776. 😉

  2. Anita,

    I tried to buy some credits for Skype Outgoing calls, but I got a bit turned off when my credits disappeared after some time, without I have used it. I know it was a time limit for the credits, so I can’t really say anything about that. But still, I was not a happy camper and I don’t know when I will try their service again.

    Have you seen the mobile phone with Skype installed? Available or coming to the following countries: Australia, Austria, Denmark, Hong Kong, Italy, UK, and Sweden.

  3. Anita
    As you know, I’m also a heavy Skype user and I use it like you. I love the voicemail part, too, and wish it used a vmail format that allowed me to forward a .wav file to my email, but other than that, I like all the features. I use the SkypeOut component nearly every day. I use the chat part all the time as well and it works well for me because I only use it with a small circle of clients and partners.

    I heard of a Spanish-language school that set up Skype so they could use it to conduct tele-classes and turn off their high cost landline service to do the same. I think I read they saved $2,000+ a month.
    Please note my attempt to be especially clear as Tim Berry’s post inspired via the comments:

    An add-on service that I like for Skype is Pamela for Skype, which allows you to record calls and conferences. There is a free and a paid version.

  4. @Martin — I have considered a Skype mobile phone for use in wifi areas (which are nearly ubiquitous in my part of the world – Seattle) and decreasing my paid cell service. But, I have not tried it yet. Has anyone else given a wifi phone a try here?

  5. TJ: I have a Qtek / HTC smartphone and I used it for VoIP phone calls on our WLAN. We had our our internal VoIP phone system with a computerized switchboard.

    I wrote on Pamela Systems in 2005 in my post, Skype Enhancers.

  6. I had not realised Skype had grown so much.

    Anita, I think one reason why some businesses stray from their core competency is that they get bored and what the excitement from launching something new.

  7. Hi Susan,

    And I guess if you REALLY get bored, like Meg Whitman, you eventually retire and run for governor of California. 🙂


  8. Hi Anita,
    That is a pretty good example of how to add a tad bit of excitement to your life.

  9. Inspiring how Skype turned to be as successful as this. I am an avid Skype user. I also have paid to buy credits for outgoing calls. I found it really useful and cheaper in calling overseas.

  10. Skype is also a bootstrapper’s dream program. One that the majority of my companies use or have used. It’ll be interesting to see how the pbx systems develop as that will take it to the next level for small business. RingCentral better watch out at that point! I’m also stoked for the Blackberry app as I’m addicted…

  11. I think a business offering a base service for free gives consumers the feeling of value. They are more likely to upgrade services when the basics are given free. Skype is making great strides and slowly becoming a household name, especially now. Everyone is looking for ways to save money here and there.

  12. For more information about profitability and the Freemium Business Model read


  13. Koren Motekaitis

    I have mixed feelings about Skype. I started with the free version and upgraded to a paid subscription and phone number. Great feature. However my skypeout line has been down for over a month. At this point thinking of swithcing to Vonage or some other VOIP.

  14. Hi Martin, It’s too bad you lost some of your credits. That would leave a bad taste in anyone’s mouth. 🙁

    Early on I too had a problem with credits. But when I wrote to Skype Support they went out of their way to resolve things.

    Now I am on an annual SkypeOut subscription for $30 a year (unlimited U.S. and Canada). I have not had any problems with the payments for a long time now.

    I will say that Skype has gotten much better now — when compared with 2 or 3 years ago. It’s much easier to sign up and use the service today, especially as a business.

    – Anita

  15. Anders Sundelin,

    It was interested to read your post on the “freemium” business model. Have you discussed this topic at Chalmers University of Technology and University of Gothenburg? I will follow you on Twitter.

  16. Anita,

    It is good to hear that Skype has improved its customer service. I will check out their new services later on. But I will also look out for new alternatives in the future. It was interested to see how Google acquired Marratech in 2007 and then used its technology in order to get Gmail video chat get going. We tested Marratech’s project tool during my studies in international project management (coordinator), 2003 – 2005.

  17. Wow. $30 a year for unlimited skypeout calls in US and Canada.

    @Amanda, you’re absolutely right on that.

  18. I have been using skype for a while now and am not very impressed. I cannot make Skype to phone calls in Canada-this I found out after they accepted my $30.00. I quickly asked for that back and they complied just as quickly. I’m still waiting for the service to be complete.

  19. @Martin
    Thanks for VOIP info. Helpful.
    Saw your comment about Freemium and Chris Anderson recently did a piece about this in the New York Times.

  20. Mary Grace,

    Yes, it’s quite inexpensive for SkypeOut.

    However, keep in mind, that Skype is just one of several telecom services I use. I have a mobile phone, a PBX service, land lines and a fax line. I use it to return phone calls and make outbound calls — it keeps my mobile minutes and long distance charges under control.

    But I don’t think most businesses could get by with Skype alone. I consider it an additional service — but a very important one.

    – Anita

  21. After 5 years Skype is still creating a buzz – especially recently with the iPhone! So, yes, get them with a free service, then start the “fremium” up-sell.

    Anybody doubting the buzz should check the Skype “tweets” on Twitter:


  22. I started using Skype since 2004. My biggest spending on internet is SkypeOut. I had spent not less than USD 6000 on Skype Out..averages $100 per month…and it is increasing.
    No complaints, as I am satisfied with their service. There was a period of 3 months i do not have internet connection…I spend USD 1500 for the 3 months for mobile bill..averages $500 pm.
    Skypeout suit me well, and I think I will stick to it for a LONG LONG TIME.

  23. Wonder if Skype could start with only paid services at the beginning and then move on to free services and grow their user base.

    The revenue graph nature would be the same but with higher figures for sure. What do the others have to say?

    Skype could have followed/opted the same root as most of the telecom companies and earned better revenue.

    Infact most social networking websites are suffering today because of this. May be they could initially opt the root of paid services get esteem customers earn money and use that money to deliver free services to common customers/internet users. What do the others have to say on this?