s

2011
Predicting the Fate of Firms and Industries
Skype vs. AT&T
Competitive Intelligence Project Paper
Guided by Prof. John E. Prescott
Submitted on 30th March 2011

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Page 2 of 25
Table of Contents

Abstract.......................................................................................................... Abstract

By

Anil Pal
Anupam Banerjee
J. Venkatesan
Karan Chatrath
Shrawan Kharkia

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Abstract

Voice over internet is increasingly becoming the preferred mode of

communication with the advent of broadband internet and springing up of
Wireless LAN’s and Wi-Fi spaces, thus posing a threat to Telecom
companies.

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Introduction

Voice over Internet Protocol (Voice over IP, VoIP) is one of a family of internet
technologies, communication protocols, and transmission technologies for
delivery of voice communications and multimedia sessions over Internet
Protocol (IP) networks, such as the Internet.

With the advent of broadband internet, increased speed of data transfer and
superior quality of service, VOIP has become a cost-effective and reliable
source of communication. The technology is of particular use for the
corporates since they can unify all communications channels –email, phone,
fax etc. into one. As it aims to provide a delivery mechanism of all these
different forms of data – audio, video, text into one medium –the cellphone,
it can pose a challenge to the incumbent telecom companies such as AT&T
and Verizon.

VoIP devices have simple, intuitive user interfaces, so users can often make
simple system configuration changes. Dual-mode cell phones enable users to
continue their conversations as they move between an outside cellular
service and an internal Wi-Fi network, so that it is no longer necessary to
carry both a desktop phone and a cellphone. However with the technology
coming of age, it could be possible that the cellphone mode is concentrated
only with the internet provider and do away with the telecom. Maintenance
becomes simpler as there are fewer devices to oversee.

Skype, which originally marketed itself as a service among friends, has

begun to cater to businesses, providing free-of-charge connections between
any users on the Skype network and connecting to and from
ordinary PSTN telephones for a charge. Thus it is one of the firms with the
potential of a disruptor in the communication market. For our comparison
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and analysis we have taken AT&T as the pronounced incumbent in telecom
industry.

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Signals of Change
Field

Fields on which both the incumbent and disruptor were operating were
Telecommunication, teleconferencing, video-conferencing, music downloads,
gaming etc

Types of Signals

Below are discussed few of the signals that resulted from the various
initiatives and activities of Skype, which should be observable by the
incumbents (here AT&T).

• Skype obtained a proprietary Internet telephony (VoIP) network

called the Skype protocol.
• In April 2003, Skype.com and Skype.net domain names were
registered. In August 2003, the first public beta version was
released.
• In October of the same year, eBay purchased Skype and in fall of
2009 sold a majority stake to an investor group.
• In December 2005, video telephony was introduced by Skype.
• In April 2006, the number of registered users reached 100 million.
• In October 2006, Skype 2.0 for Mac was released, the first full
release of Skype with video for Macintosh.
• In December 2006, Skype announced a new pricing structure, with
connection fees for all SkypeOut calls. Skype 3.0 for Windows was
released.
• Skype released an updated client for the Apple iPhone which
allowed Skype calls to be made over a 3G network.

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 • On 9 August 2010, Skype filed with the SEC to raise up to $100
million in an initial public offering.
• In October 2010, Tony Bates, who had been a senior VP at Cisco and
responsible for its multi-billion-dollar enterprise, commercial and
small business division, was appointed by Skype as its CEO. Bates’
appointment assumes significance because he has served on the
boards of such IT majors as Youtube, TokBox, Bubblemoton etc.
thus bringing loads of experience (20 years). Another point to note
is that all these companies have been firmed up (almost literally) by
him. Lastly his knowledge of shepherding small IT firms with
management expertise is well known. Thus he presents a great
chance for Skype to leverage him. Incidentally one of the major
tasks he faced when taking on the reigns was to bring the Skype
network back up on its feet when it collapsed late in December,
2010.

Incidentally one of the major tasks he faced when taking on the

reigns was to bring the Skype network back up on its feet when it
collapsed late in December, 2010.

him.loads of experience (20 years). Another point to note is that all

these companies have been firmed up (almost literally) by him.
Lastly his knowledge of shepherding small IT firms with
management expertise is well known. Thus he presents a great
chance for Skype to leverage

tube, TokBox, Bubblemoton etc. thus bringing Bates’ appointment

assumes significance because he has served on the boards of such
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IT majors as Yound small business division, was appointed by Skype
as its CEO. and responsible for its multi-billion-dollar enterprise,
commercial aCiscobeen a senior VP at dhawho,In October 2010,
Tony Bates

On 14 January 2011, Skype announced the acquisition of Qik which

is a mobile video sharing platform. This too was significant in the
journey of Skype as Qik, with its technology o allowing two wayways
video chat on a range of smart phones gives Skype the necessary
edge as well as completeness with respect to its range of products.
In the words of Skype CEO Tony Bates, “Skype and Qik share a
common purpose of enriching communications with video, and the
acquisition of Qik will help to accelerate our leadership in video by
adding recording, sharing and storing capabilities to our product
portfolio,” Moreover Skype and Qik also have two board members in
common adding to the synergies. Lastly by snapping up the very hot
technology start-up, Skype demonstrates sound business acumen in
building its disruptive capabilities against AT&T.

The current Perspective on Skype has thus been Positive based on its
impressive growth in international voice market share, the percentage of
video conferencing traffic, and the company’s moves to enhance its video
capabilities and features. While overall international voice traffic has
declined, Skype has doubled its market share of voice calls and grown video
calls from 30% to 40% of its traffic in the process. Its addition of more video
features, integration with Verizon Wireless, and acquisition of Qik can help its
video conferencing business grow even faster.Also because the company has
filed for an IPO, showing growth is critical. By showing growth and
continuously improving success rates and adding new features, Skype is
better positioned to be financially successful as it seeks to raise investment
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capital. Good news is also important to counter the company’s well-
publicized network outage in late December 2010..

Skype has been good in the sense that by never positioning itself as a
substitute for full phone service, it is seeing success at capturing
international calls. The acquisition of Qik also has a high impact on the
consumer video conferencing business, because Skype has taken a lead role
on features by adding wireless integration and multi-party calling, all for
about half the price of a Cisco umi solution that does not have integrated
mobile calling or support beyond point-to-point video.

Timing

Strengt Leading Lagging

h
Strong ✔ Proprietary VOIP ✔ Videotelephony
Skype protocol introduced
✔ Skype filed with ✔ No. of users
SEC for IPO to reached 100
raise $100 million million
✔

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 Weak ✔ eBay purchased ✔ Beta version of the
Skype Skype domains
✔ Tony Bates released
appointed as CEO ✔ Skype versions for
✔ Acquisition of Qik, different OS (Mac,
a mobile video Windows)
sharing platform, ✔ Skype for Apple
by Skype iPhone

Early Warning Trade-off

The AT&T managers should look at the early signals. At this stage the
incumbent have flexibility along with information uncertainty and should
utilize the flexibility to strategize. One such initiative that AT&T took was that
in 2009, it restricted Skype from using its 3G network on Apple Phones.

Performance Attributes for Technology

Performance

Skype provides similar voice call facility at much cheaper rate. The
clarity of the call might be comparatively better in case of incumbent
service providers, but at a very competitively cheaper rate the voice
clarity of skype serves the purpose.

Features

Skype has full of features at a much economic rate.Many of the

features might not be in fact offered by the incumbents. With Skype,
one can do phone-to-phone, phone-to-pc, pc-to-pc calls. Individual and
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 group video calls, screen sharing, conference calls, instant messaging
and receiving facebook news feed are also possible.

Conformance

The call transactions, account balance and other related reports are
stored. The account related reports can be tracked in a better way. The
incumbents many-a-times provide the reports in a restricted way. All
these transaction histories, balance tracking reports are made
available free online by Skype.

Serviceability

• Using the voice over internet protocol technology, Skype is able to

service the customers at much cheaper rate. It makes a lot of
difference in terms of call tariff as compared to incumbent service
provider when it comes to international calls.

Perceived Quality

• As compared to incumbent, the services are wide in range and much

cheaper in tariff. The call quality is comparable at a much economic
rate. As per the cost-benefit analysis, customers have found the
disruptor much appealing. This is being reflected in growing customer
base.

Signals of Change from Customer Groups and Non-market

Contexts

Nonconsumers

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The video conferencing facility was a great value addition from Skype.
People could connect others from their laptops/computers through video
conferencing which was not available with AT&T services.

Overshot Consumers

The international telephone calls were being provided by Skype at a much

cheaper rate as compared to the incumbents. The teleconferencing and
video conferencing rates were also much reasonable. AT&T was claiming
that it did not concentrate on the international calls because of its
comparatively lower contribution towards revenue but it made a pathway for
Skype to enter into the market big way.

Strategic Choices

Choices which a disrupter makes play a great role in increasing the likelihood
of the success of the disrupter. These can basically be measured by
observing the three key strategic choices which a disrupter makes viz
Funding, Hiring and Strategy making process.

Funding should be provided by investors who are used to uncertain

situations and are patient for growth and also prove to be a good mentor for
the company itself due to their previous experiences in raising similar types
of businesses.

Hiring should be of type of people who are resourceful and have the ability to
innovate out of uncertain situations. They must also have good experience
in start ups to deal with the job

Strategy making process should be such that it encourages more towards

observing and adapting towards market signals and to exploit all new
technology and resources which comes up so as to differentiate itself from

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the RPV of incumbent. Being small and flexible helps disruptor to adapt
more quickly to new technologies than the incumbent.

Following are our observations on the basic three strategic choices made by
SKYPE

From 2005 till 2009 Skype was under the control of

eBay which was highly experienced in upbringing the
new technologies. In 2009 e-bay sold majority of its
holding (upto 70%) to a group of investors. E-bay had
been a veteran in making successful new internet
ventures like UpforSale.com, ibazar for online auction,
Paypal for payment, Shopping.com for shopping. -->
As quoted by Skype's CEO relationship with Ebay had
Funding
helped Skype in building a good network & relations
but still maintaining Skype as an independent entity
--> The growth has been mentored quite well during
the ownership of e-bay. Currently the majority lies in
the hands of a consortium of investors Silver Lake
Partners, CPPIB, Andreessen Howritz and original
founders. They are all good renowned Private equity s
who have the ability to mentor SKYPE.
Skype has increased its hiring process after IPO.
Though we were not able to find any document on the
hiring process of Skype but looking at the vacancies it
is offering most of the jobs appear to be for marketing
Hiring managers and software engineers with relevant
experience in the technology companies. This means
that Skype is basically hunting for the employees
which are groomed for dealing with the key strategic
problems which Skype will have to face

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 Staff strength of Skype was around 500 when
recruitments were done. Skype also very limited real
estate with 3 offices in London, Luxemburg and San
Francisco with small teams located in Tallinn, Prague
and Stockholm. With limited infrastructure Skype has
high flexibility and adaptability for innovation. Skype
is basically widespread for its free services but the
Strategy
revenue earned from its paid services is enough to
Making
cover the expenses. But due to this it has very low
profit margins. So Skype's success lies in being
widespread and hence it comes up with products like
special apps for iphones and Skype mobiles for
making itself easily available to the people as an
option for conversation. Skype also acquired Qik a
video sharing platform to enhance itself.

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Competitive Battles

This section evaluates the Skype and its competitor AT & T based on the
resources, values and processes (RPV) framework. It further extends the
analysis by examining asymmetries and competitor response profiles.

Industry Business Model

In order to understand processes and resources developed by both

companies we will start by comparing business model of AT & T and Skype
for Voice and data telephony industry.

AT & T is one of the leading worldwide providers of IP-based

communications services to businesses. The company is the nation's
fastest mobile broadband network and the largest international
coverage of any U.S. wireless carrier, offering the most phones that
work in the most countries; the largest Wi-Fi network in the United
States based on branded and operated hotspots; and the largest
number of total broadband connections in the United States.
Recently they are making huge advances in the entertainment and
communications industry.

With respect to the AT & T , the revenue contribution as at 2010 were 47%
from wireless data, 25% from wire line data and managed services , 22%
from wire line voice and 6% from the advertising / solutions and others. The
revenue contribution from Voce segment is going down over a period of time
and the revenue contribution from the data segment is increasing.

With respect to the voice data, its traditional source of revenue, the
company bills its customers on per minute basis. There are also particular

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schemes by which if you pay a certain amount, the local calls are free of
charge and you shall be charged for long distance call on per minute basis.

Communications is no longer just about voice; it’s now multi-modal: mood

messages, chat, voice calling, multi-party calling, video calling and online
screen sharing. These are possible in Skype.

Skype offers the voice service through VOIIP technology along with video
streaming. Skype makes money from user services:

✔ Skype-to-Skype calling, video calling, Chat/IM, Multi-Party calling, File

Transfer are free

✔ SkypeOut (pay-as-you-go), Online Numbers, Voicemail, SMS are the

paid services. But they are much cheaper when compared to the bond
rate. However they are much cheaper when compared to the cost
charged by the incumbent companies, whose charge are at per unit
basis.

✔ The other source of revenue generation comprises advertising

opportunities

The service offered by Skype has got good demand, especially in

international calling and long distance calls, which are being charged at
higher rates. In fact over 8% of the world’s international calling minutes are
on Skype

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Comparing RPVs of Skype and AT & T

The RPV of the AT & T is different when compared with Skype. With regard to
Resource, AT & T has more of the hard assets in the form of fibre optical line
and towers. It is more asset intensive. They require scaling up, maintenance
and additional investments for the sustainable development. For Skype the
hard assets are very much minimal. They concentrate more on the software
part, patents, tie up with mobile operators / manufacturesr and internet
service providers for providing the service to the public.

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AT & T sells the connections individually as well as bundled with the handset.
As the company is resource intensive , the process and value are also
different from the Skype. For skype all sales are through online. Skype
charges a cheaper rate and also video stream skype, they offer the voice
service through VOIIP technology along with video streaming ing is
plausible..

Skype has inherent fundamentals that have made it profitable for the past
six quarters:

negligible customer acquisition costs (mostly word-of-mouth)

negligible capital expenditures and network maintenance costs

Skype’s users who invest in capital items, such as PC’s, routers and Skype
hardware, and in network maintenance through their Internet subscriptions)

strongStrong free cash flow conversion ($1.00 of EBITDA for Skype is almost
$1.00 of free cash flow)

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The above clearly shows the asymmetry of RPVs of the incumbent AT & T
and for the and SkypeSkype are completely different.

AT &T’s reaction:

Till the time Skype was not visible, The AT &T companyCompany did not
sense the emergence of the Skype. Skype exploited this ignorance / not
being noticed , to its advantage. Skype entered to the contract with Nokia for
inclusion of the Apps in Skype, so that they can empower the customers to
use the Skype services by holding the passport.

When AT & T sensed the emergence of the Skype, AT &T adopted the
strategy of coopting ie, use of internal resources for fighting the new entrant
Skype. They stopped offering unlimited data services and restricted the VOIP
in their service. When Apple declined to include Skype in Apple Apps, there
was a insider market news that the deal did not go through because of AT &
T. In fact AT&T also started the VOIP service under the brand, call advantage.
The VOIP service was subsequently withdrawn and a new service U Verse
Voice was offered. However the incumbent have not given the full freedom,
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they have offered the U Verse voice requires wireless phone from AT&T with
data plan.

All these restriction are not there in Skype, and they also provide a video
streaming facility. They have also come up with the plan of providing the
broadband along with the Skype services.

However, they should not confront the AT&T in other segments. AT & T is a
big corporation with huge cash reserves.

The long distance call revenue charges are un remunerative part to the AT &
T and considering the asymmetry of the RPVs, the Skype can increase its
market share in the voice data. However they have to guard against its own
online competitors like, G Mail, etc.

For AT & T, any how their share of revenue contribution for non data is
decreasing.

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Non Market Factors

Skype versus AT&T assumed popular proportions when AT&T in connivance

with Apple barred the users from using Skype on its handsets. That the case
went to the trade watchdog, in itself speaks of the disruptor’s strength in
unraveling the incumbent. Thus regulator as the non market factors has
played an important role in assuming leadership for driving innovation for
the customers. It is interesting to note here that Skype has a Government
Relations team which was very active and vocal in the VOIP blocking issue
mentioned in different places above.

Secondly with the advent of new security measures by the governments

around the world, monitoring of data (voice or video). In China, Skype has
been accused of indulging in what is called as the internet eavesdropping by
the users on the behest of the Chinese government. Moreover even the
Obama administration considered bringing a bill to allow the scanning of
social media transactions including Skype.

Some of the other factors include

• Explosions in bandwidth availability – due to the advent of science and

technology and the ability of machines to process the data faster.

• High landline prices – due to the incumbent business’ monopoly and

higher fixed costs.

• Higher international roaming prices even within the European Union

• The rise of mobile broadband and smartphones – a natural

concomitant of technology

• Plummeting costs of PSTN termination

• No Internet companies prepared to fight for Skype’s market, and

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 • An increasingly long list of communities in Diaspora who need
international calling to connect families across borders.

It can be said that Skype entered the market at the most opportune moment
so as to achieve the maximum bang for its buck. The current perspective on
Skype has been positive based on its impressive growth in international
voice market share, the percentage of video conferencing traffic, and the
company’s moves to enhance its video capabilities and features. While
overall international voice traffic has declined, Skype has doubled its market
share of voice calls and grown video calls from 30% to 40% of its traffic in
the process. Its addition of more video features, integration with Verizon
Wireless, and acquisition of Qik can help its video conferencing business
grow even faster. Also because the company has filed for an IPO, showing
growth is critical. By showing growth and continuously improving success
rates and adding new features, Skype is better positioned to be financially
successful as it seeks to raise investment capital. Thus good news has also
been important to counter the company’s well-publicized network outage in
late December.
On an another realm Skype has been good in the sense that by never
positioning itself as a substitute for full phone service, it is seeing success at
capturing international calls. The acquisition of Qik also has a high impact on
the consumer video conferencing business, because Skype has taken a lead
role on features by adding wireless integration and multi-party calling, all for
about half the price of a Cisco umi solution that does not have integrated
mobile calling or support beyond point-to-point video.

Thus Skype has been able to integrate the various market and non-market
forces in its endeavor to innovate its product offering.

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Motivational Framework

In an motivation/ability framework Skype is moving from ‘looking for a

target’ to ‘the hotbed’ state. Starting as a segment zero service provider,
Skype is able to capture the market share earlier belonging to AT&T.

Motivation: large customer base of nonconsumers and overshot

customers, creating a blue ocean strategy out of the existing market

Ability: superior technology, developed networking, capturing users’

growing requirements

Facilitators to innovation: prospective customer base, blue ocean

strategy, new business model, overshooting customers’ requirement

Barrier to innovation: Non market factors like Government policies,

intervention by regulatory bodies, concern over data security issue,
uncertainty over successful capture of market

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References

• http://en.wikipedia.org/

• http://www.att.com

• Annual Statement AT & T 2010

• http://voiceontheweb.biz/2009/03/skype-business-model-revealed-at-
ebay-analyst-event/