INSEAD Blue Ocean Strategy Institute

Skype in the Voice-Over-IP Industry: A Commercially Viable

Blue Ocean?

Interactive Lecture Presentation

INSEAD Blue Ocean Strategy Institute

Introduction to Skype

• When Niklas Zennström and Janus Friis launched Skype in 2003, they re-directed a competitively low cost peer-to-peer server architecture from supporting free music (on Kazaa) to free voice calls over the Internet.

• Skype introduced their first revenue stream in July 2004 by charging its users for making calls to phone numbers outside the Skype network. The rate was comparable to that of international calling cards, but without the hassles of entering long access codes.

• When Skype added video calling in December 2005, ordinary people – for the first time ever – was able to see and talk with each other in real-time without the cost and complexity of traditional room-based video-conferencing or the stress and fatigue of leisure travel.

• Despite this unprecedented value, Skype did not charge for its video calling until 3 years after video was launched and only charged for group video calling for 3 or more users.

• By 2010, Skype had grown to 663 million registered users worldwide who made 207 billion minutes of skype-to-skype calls (42% of which were video calls) and sent 176 million text messages in one year.

• The company was first acquired by eBay for $2.6 billion in 2005. Then eBay sold a 65% stake in Skype to investors for $1.9 billion in 2009. Finally, Skype was acquired by Microsoft in 2011 for $8.5 billion.

INSEAD Blue Ocean Strategy Institute

However, only 1-2% of Skype’s millions of registered users actually pay for its services.

Registered Users Paying Users

2007 2008 2009 20100

250

500

750

217

325

474

663

2007 2008 2009 20100

2.5

5

7.5

10

4.6

5.8

7.3

8.8

INSEAD Blue Ocean Strategy Institute

Key objectives

• Introduce the sequence of blue ocean strategy

• Use the case for Skype to understand the first 2 steps of the BOS sequence:• Test for exceptional utility using the Buyer Experience Cycle/

Buyer Utility Map• Apply the Price Corridor of the Mass tool to set a strategic

price

INSEAD Blue Ocean Strategy Institute

Introducing:The Sequence of Blue Ocean

Strategy

Yes

If not,rethink

Yes

If not,rethink

A Commercially Viable Blue Ocean Idea

Yes

Yes

If not,rethink

If not,rethink

INSEAD Blue Ocean Strategy Institute

Yes

If not,rethink

Yes

If not,rethink

A Commercially Viable Blue Ocean Idea

Yes

Yes

If not,rethink

If not,rethink

Step 1: Test for Exceptional

Buyer Utility using the Buyer Experience Cycle/ Buyer

Utility Map

INSEAD Blue Ocean Strategy Institute

Three primary ways people far apart interacted in real-time with each other prior to Skype

• Call each other long distance by telephone

• Travel to see each other

• Use room-based video conferencing

Leisure travel Video conferencingLong distance calling

INSEAD Blue Ocean Strategy Institute

What are the pain points associated with existing modes of communication?• Long distance calling was expensive and cannot see

the other person on the call

• Stress and fatigue from traveling

• Costly, complexity with video conferencing

INSEAD Blue Ocean Strategy Institute

Buyer Experience Cycle / Buyer Utility Map- Capture the pain points associated with using existing offerings

INSEAD Blue Ocean Strategy Institute

Sample pain points with existing offerings

Expensive and no visual on phone, complex calling codes

Set-up is too complex for video conf

High costs for video conference

Leisure travel is stressful and tiring

INSEAD Blue Ocean Strategy Institute

What makes Skype’s utility unprecedented?• Skype has become a verb. What explains this?

• Who were the customers and noncustomers drawn in by this exceptional offering?

• What were the key pain points in the existing offerings that Skype addressed?

INSEAD Blue Ocean Strategy Institute

How did Skype address the pain points of existing offerings to create exceptional value?

• Skype is easy to install and easy to use across different devices (e.g. PCs, iPads, smart phones, wired phones etc.)

• Video chats allow more spontaneous interactions without incurring the cost and stress of travel.

• Visual connectivity is enriching for adults and even enables toddlers to interact without speaking.

• Free skype-to-skype calls, low price to call any number out-of-network

• International calling card rates without the hassles of long access codes

INSEAD Blue Ocean Strategy Institute

Yes

Yes

If not,rethink

A Commercially Viable Blue Ocean Idea

Yes

Yes

If not,rethink

If not,rethink

Step 2: Use the Price Corridor of

the Mass tool to set a strategic price

INSEAD Blue Ocean Strategy Institute

What is strategic pricing?

• Once your offering passes the exceptional utility test, a company must set a price to ensure that buyers will not only want to buy it , but also will have a compelling ability to pay for it.

• A blue ocean strategic move captures the mass of target buyers not through low-cost pricing, but through strategic pricing.

• The key is not to pursue pricing against the competition within an industry, but to pursue pricing against substitutes and alternatives.

• The strategic price you set for your offering must not only attract buyers in large numbers, but also help you to retain them.

• Imitation by free riders is discouraged best when exceptional utility is combined with the right strategic price.

INSEAD Blue Ocean Strategy Institute

Use the Price Corridor of the Mass tool to:

• Look beyond the price of competing products within the same industry

• Establish two key price level references: substitutes (a product or service that performs the same function) and alternatives (those that take different forms and functions but bear the same core utility as the new offering).

• Visually capture the relative number of target buyers and the existing price level of key competitive, substitute and alternative offerings to the new blue ocean offering.

• Set a strategic price at the upper-level, mid-level or lower-level of pricing within the price corridor of the target mass according to the level of legal and resource protection to prevent early imitation of the new offering.

INSEAD Blue Ocean Strategy Institute

The Price Corridor of the Mass tool

INSEAD Blue Ocean Strategy Institute

In the case for Skype

• Same form

• Voice calling services offered by traditional carriers such as AT&T and Verizon through fixed line calling services for both residential and business users, mobile services

• Digital voice calling services over the Internet by new (internet-based phone service providers) and traditional carriers (AT&T, Verizon)

• Different form, same function (Substitute)

• Room-based video conferencing offered by companies like Polycom or Tandberg (part of Cisco since 2010)

• Use international calling cards to make calls on a telephone

• Different form and function, same objective (Alternative)

• Business or leisure travel

• Text-based communication such as SMS messages, emails, cards and letters, social media

INSEAD Blue Ocean Strategy Institute

Skype’s Price Corridor of the Target Mass

PRICE CORRIDOR OF THE MASS FOR VOICE-

CALLING SERVICES

INSEAD Blue Ocean Strategy Institute

What would you set as the right strategic price for Skype’s unprecedented offering?• Using Skype’s price corridor of the mass illustration, what strategic

price would you set for Skype’s unprecedented offering prior to Microsoft’s acquisition of Skype in early 2011? Which price level would you use (upper-, mid- or lower-level)?

• What traditional industry boundaries may cloud Skype’s perception of how to set a strategic price for its offering?

• What adoption hurdles do you see for Skype to start charging for voice and video calling which their users have grown accustomed to using for free? How could Skype overcome these adoption hurdles?

• Is Skype a commercially viable blue ocean? Why or why not?