Skype’s present is secure, its future is not

It has been over six months since Microsoft (s MSFT) officially became an owner of Skype, one of the biggest communication services in the world. The company has been growing quietly, thanks to its “Skype everywhere” strategy. In April 2012, Skype reached over 40 million concurrent users online, a remarkable achievement for a company that didn’t exist a decade ago. Today, the New York Times published an article that reveals some more data about Skype and outlines where its new owner, Microsoft is planning to take the company.

“In seven months, the number of people using the service each month has jumped 26 percent to nearly a quarter of a billion, affirming Skype’s status as one of the crown jewels of consumer Internet services.”

“In the last several months, Skype has cranked out versions of its calling software for Google Android smartphones, a Sony portable game console, Comcast set-top boxes and Apple mobile devices. Skype is the fourth most-downloaded free app of all time for both the iPhone and iPad.

Skype’s use has continued to grow briskly, jumping 40 percent to 100 billion minutes of calls in the first three months of this year from the same period last year.

Microsoft, has essentially taken a hands-off philosophy with Skype though it does plan to integrate the service into some of its upcoming products.

Microsoft plans to integrate Skype into Lync, a Microsoft communications product aimed at businesses.

Another priority is making Skype video conferencing work on Microsoft’s Xbox 360 console, though that product is not likely to be released this year. In a sign of the investment Microsoft is making in its new acquisition, Skype has about 400 job openings, Mr. Bates said.

So by all counts, Skype is doing fine under Microsoft ownership. The software giant has kept its paws off the baby. However, the current level of success isn’t enough to mask the fact that the company is facing increased competition from upstarts, who are using social networks and mobile to grow at breakneck speeds and are likely to strike at Skype within a few years. They are all trying to siphon attention away from the classical telephony services – phone calls, SMS and even Skype.
Future’s Not So Bright
Skype has become such a part of our daily lives that we continue to use it despite its obvious shortcomings. It is victory of utility over user experience — the Skype app’s user experience is a lot worse than it was during the early days. The app has been crammed with so many features and has lost its intuitive simplicity.

The icons in the app often remind me of those unfinished hulks of buildings one sees when traveling down a freeway in fast growing cities. The garishness of the Skype app becomes even more obvious when you start comparing it to the new, more well-designed upstarts that have entered the market to take on the big kahuna. And mobile is its Achilles heel.
Sure, if you go by the numbers, Skype looks unbeatable — much like Facebook, another company that is struggling to come to terms with mobile platforms and the need for simpler offerings. Sure it bought GroupMe, a mobile messaging app. However, its position at the top isn’t cemented. There are dozens of upstarts who want to eat into Skype’s future growth.  To understand, let’s go back to the time when Skype started.
In those early days, Skype’s initial burst of growth came because it offered two things – free calling to other Skype users and instant messaging. Instant messaging worked well on both slow and fast networks. It was something people were used to. Free calls were just the icing on the cake. The instant messaging was one feature that brought people back to the app every day. It was what kept everyone logged in. It was what gave Skype app the attention, something I have written about a number of times.
The App Crisis
Today, that same daily and constant messaging behavior is going mobile. Whether it is SMS or IM, today’s smartphone users have dozens of options to communicate. Facebook Messenger, Viber, WhatsApp – the list is endless and it keeps growing. And all these apps are vying for our attention and time. Internet users, as many companies have learned the hard way, are quite fickle, shifting loyalties very easily.  If all my friends are using WhatsApp, then I am always using WhatsApp. Or Viber for that matter.
WhatsApp saw the number of messages on its platform grow from a billion messages in October 2011 to 2 billion messages in February 2012.  In the two years it has existed, Viber has signed up about 70 million users. More than 150 million calls (that last about a billion minutes) are being made on the app every month and a billion text messages are being sent every month.
Sandvine, which monitors traffic on telecom networks, in a recent report noted that in North America alone,  an average of 7.6 million WhatsApp messages were sent per day. In Asia-Pacific, WhatsApp was the tenth-ranked most used app (by bytes). Skype was at the ninth spot. Here is what they write in their report:

communications applications benefit from tipping points – once your friends are using the app, you use it too – and WhatsApp, like Skype, has emerged as the standard cross-platform communications tool on many networks (on the Asia-Pacific networks we studied, WhatsApp is used by 7-8% of active subscribers in any one hour period)

Informa, a telecom and mobile research firm, in a recent research report noted that SMS’s share of global mobile messaging traffic will fall from 64.1 percent in 2011, to 42.1 percent in 2016. At the same time, the global mobile instant messaging traffic will increase from 1.6 trillion messages in 2011 to 7.7 trillion messages in 2016, doubling its share of global messaging traffic from 17.1 percent in 2011 to 34.6 percent in 2016. Guess where all those messages are going? Yup, to apps like Viber and Whatsapp.

This is causing telecom head honchos a lot of headaches. In a speech to his shareholders, Deutsche Telekom CEO Rene Obermann made this observation:

This is due among other things to harsh competition and new Internet services which are replacing previous methods of communication. Social networks like Facebook and Twitter, communication services like Skype, WhatsApp, and many more – all have one thing in common: They are offered over the Internet and can be used via the fixed network, mobile network, or wi-fi. What is more, they appear to be free of charge.

What has that to do with Skype, you might be wondering. A lot.
It’s all about attention
Skype was a pioneer of what is now commonly known as the network effect. It was also smart to piggy back on Kazaa, a P2P file sharing network and get distributed across the web.
In order for Skype to work for you, the software depended on you to convince your friends and family to sign-up for the service, download the software and then sign-on. In other words, it used you as its sales tool. More people signed up for the network, the faster the network grew and today it has hit a point of maturity where many people already are on Skype.
And Skype came during a time before the iPhone. It had to grow at a much slower pace. Today, apps like Viber are focused entirely on smartphones and thus have access to a much bigger market. Thanks to social networks, these apps have been able to accelerate their growth and get a much larger network effect.
As these apps develop bigger networks, they start to siphon attention away from the incumbents and that includes the phone companies and Skype. I think many people might take issue with me calling Skype an incumbent, but the company is really an incumbent. Sure it doesn’t have the legacy networks but it is making money the old fashioned way – selling minutes and premium video-calling services.
Skype’s growth is also going to be impeded by one more group of competitors — the phone companies  themselves. The phone companies are so worried about the likes of Whatsapp and Viber and Skype that they are launching their own set of apps. Take Voice or VoIP apps as an example: there is Bobsled from T-Mobile. There is TeliaSonera charging about €6/month for VoIP apps. There is IP messaging app, Huddle from AT&T. And this is only the start.
So despite what you might have read this morning in the paper, let me just say – Skype’s future isn’t as secure as it seems to be. What it can do to fight this death by a thousand cuts? That’s an $8.5 billion dollar question.