The rise and fall of Skype

In 2003, two European entrepreneurs launched an app that helped you make free phone calls across the internet. By 2011, the app Skype had 170 million users and Microsoft paid $8.5 billion to buy it, its largest acquisition ever at the time. By 2020, when the pandemic came and suddenly everybody needed voice calling over the internet, Skype fell flat on its face and Zoom took over the entire crowd. and in 2025 it was announced Skype was gonna be shut down forever. What explains the rise and fall of Skype? Oh, and by the way, thanks to Hostinger for sponsoring this video. More on them later. Niklas Zennström and Janus Friis were two guys who had met when working in 1997 at a telecom startup in Copenhagen. First venture together was a peer-to-peer file sharing network called Kazaa, and by 2003 it became the most downloaded app in the history of the internet. People were using apps like Kazaa to do basically illegal stuff like share music online, so the Music labels came after these guys relentlessly, and eventually Kazaa was shut down. Kazaa to download music, and the recording industry claims this cost them millions in lost revenue. But one thing these guys learned how to do was build peer-to-peer systems. And at this time in 2003, international phone calls still cost a fortune. Companies like AT&T would charge you by the minute to make calls somewhere else across the globe. So Zinsserman-Fries asked, well, what if we make calling just as simple and free as we did with file sharing. So they recruited a team of Estonian programmers, many of whom, whom have worked on Kazaa in the past, and they had a mission: go build something to do phone calls across the internet for free. August 29th, 2003, they launched Skype's public beta. Miraculously, 10,000 people downloaded it in the first day. In 2 months, they had a million users, and by August 2006, they had 100 million registered users. And Skype didn't just work, it just worked better than anything else. The genius was in the peer-to-peer architecture. By letting people connect directly with each other across the internet, you bypass central servers, which meant, well, the more people you got on the system, actually the better it seemed to work. And most critically, Skype was essentially free. You only paid if you wanted to do calls to actual numbers to and from. Traditional telecom companies were officially on notice, and this was the beginning of the end for companies like AT&T, Sprint, and others who'd made fortunes selling long-distance phone calls. In 2005, Skype was growing faster than any other startup in history. That year, they lodged 54 million registered users. The genius idea they'd hit on was a thing called virality, and this is where a product grows because people naturally tell their friends about it when they're using it. So if I was using Skype and I want to make a phone call with you, well, I'd say, hey, sign up for Skype and then we could talk. And that way they grew like wildfire. But there was a problem. Only 3.7% of users back then actually paid to use the service. This was why Skype didn't make much money. In a lot of years, it lost money. But one of the tricks that happens on the internet a lot, and especially in big tech, is people start with eyeballs and then figure out how to make money later. That was still the playbook back in these times. And so all of the big tech companies— Google, Yahoo, News Corp— they all came calling wanting to buy Skype. But a surprise bidder won the auction. eBay. You know, the guys who help you sell Beanie Babies on the internet? Yeah, they bought Skype. On September 12th, 2005, eBay CEO Meg Whitman announced they had won the auction for a value up to $4.1 billion. $2.6 billion of it was cash. They had won the auction for Skype and were the new owners, but most of the world, including Wall Street, was totally confused. In fact, eBay's stock fell 4% following the announcement. It just didn't make much sense. And at the surface, Meg Whitman's rationale for the whole thing sounded logical. Buyers could use Skype better than any other tool to coordinate and make bigger deals than they they had before across the eBay platform. Complex transactions like real estate, autos, the types of things that eBay wanted to get into at the time. It was thought, well, people could have voice conversations to close deals faster. But it turned out people using eBay already had communication systems that they liked. Nobody actually wanted this voice level of phone calls. That was part of the magic of the platform. You could just transact when it made sense to you, and asynchronous communication was the way to make it happen. Widman's proposed synergy, well, it only made sense really in PowerPoint presentations and boardrooms. In practice, it wasn't real. You see this a lot in businesses where the leaders don't truly understand the why or even the how of how their business works. In this case, Whitman and her team really hadn't spent enough time with customers to truly understand what they wanted out of eBay. And this transaction, well, that was a symptom of that. But wait, it gets worse. eBay was a mature kind of big corporate type environment. Skype was a European scrappy startup, an ocean apart in many ways. There was an inevitable culture clash coming. The founders left in 2007. Jokingly, I would call it they phoned in rich. And then Skype went under eBay's leadership and cycled through a series of basically different strategic initiatives and different leaders over the coming couple of years. Despite all these missteps, the business continued to grow, reaching 480 million registered users by 2009. There was just a lot of momentum to using voice over the internet, and Skype was riding that wave. Then in October 2007, basically eBay had to write down the whole purchase by $1.4 billion. Admitting they'd overpaid, but also acknowledging, like, the idea of the synergies they were looking for, they never materialized. But here's where it gets interesting. Turns out Zinserman-Fries had been pretty smart. When they sold the original business to eBay, they had retained the ownership of the technology themselves. So now when eBay went to market to try to sell Skype to find a new buyer for it and get out of the mess, well, the two founders stepped up and said, hey, wait a second, we're going to need to get paid before you're able to do this transaction. They sued, and eventually Ebay settled for a 14% stake to keep the guys happy and get them to drop their suit and allow the transaction to happen. And in September 2009, a consortium led by Silver Lake Partners, a private equity firm, put together $1.9 billion to buy 65% of Skype from Ebay. Ebay kept a 35% stake and was officially out of the hot seat. And new CEO John Donahue publicly admitted that Skype doesn't have the synergies with their core business. To make it worth keeping. Silver Lake's turnaround was aggressive. They replaced 29 out of 30 managers at Skype during their ownership. The app kept growing and it almost became profitable. Total user base went from 405 million to 660 million and revenue went up as well. It went from $551 million to $860 million during their ownership. They doubled the engineering team. They brought out releases every 4 to 6 weeks, much faster than under eBay. And basically they made it multiplatform. They went just from desktop, brought out releases all over the place, including smartphones, which were becoming much more prevalent at that time. Like most private equity owners, Silver Lake didn't want to be a permanent owner of the business. They wanted to be a temporary owner, and their goal was to make Skype appropriate for either an IPO or a sale. And they succeeded beyond anyone's wildest expectations. And under the hood, they understood technology while these buyers didn't. I mean, Steve Ballmer, he's a sales guy. He's not a tech guy. Meg Whitman, definitely not a tech person. They understood the underlying technology and they they were happy to be sellers at this point in time, especially for that amount of money. And in Microsoft, Ballmer's vision was ambitious. We were gonna integrate Skype into all these different platforms— Xbox, Microsoft Exchange, Outlook— it was going to be the voice hub for everything. And on May 10th, 2011, Microsoft CEO Steve Ballmer, himself a sales guy kind of like Meg Whitman, uh, announced that Microsoft was buying Skype for $8.5 billion, its largest acquisition in history at that time. Ballmer declared that Skype was a beloved product, loved by millions of users around the globe. Me personally, I found it too hard to use, and that would be a foretelling of the bad things to come in the future for Skype. And the funny thing about business is a lot of times the people outside of your company understand it much better than you do inside of your company. One analyst who followed Microsoft at the time warned that, man, Skype, that's a great acquisition for Microsoft, totally makes a ton of sense. It's too bad that the culture and the bureaucracy at Microsoft is going to kill it. Zinsterman and Friese, our original founders, they got paid an additional billion dollars each on top of what eBay had already paid them. Back by this vision, Ballmer and his team were paying 32 times profit for Skype. It was going to have to grow and become very strategic for them to make any kind of money off this acquisition. That was roughly 3 times what Silver Lake had paid for the business just 18 months earlier. It turned out that analyst was totally right. But before we get into that, I want to talk about today's video sponsor, Hostinger. Hostinger is the simplest way to get a real website online fast. If you want something affordable, powerful, and easy to use, this is the tool that to done. Their AI website builder creates the entire site for you in minutes. You type in what you want and it generates the layout, the copy, the structure, and the branding automatically. There are no technical skills required. I recommend the business plan. It gives you the AI website builder, e-commerce features, email marketing tools, and the performance you need if you're building something serious. Choose the 48-month option to lock in the lowest price, get a free domain, and get 3 extra months added. You can use the code Michael G for an additional 10% off. There is also a Black Friday discount, and the exact offer may vary depending upon when you're seeing this video. The AI creates a complete site from a single prompt. You refine it, publish it, and you are live. It is the cleanest end-to-end website setup you can get at the price point. Thanks to them for supporting this video. Go to hostinger.com/michaelg and use the code Michael G to sign up today. You see, Microsoft had had its own competitor to Skype at the time, I think called Windows Live Messenger. The first decision was to discontinue it entirely and move everybody over to Skype. On paper, this looked like huge growth for Skype. In practice, it was the beginning of an identity crisis. What was Skype going to be? Was it a text-based social network? Was it a peer-to-peer voice network? I mean, who was it for? Who was the buyer? Nobody was actually very sure. Underneath the hood, Skype's original genius, this peer-to-peer system, became its kind of current liability and Achilles heel. The architecture they'd put together to build it had imagined a world that was entirely about desktop computers and a world where people running multiple devices with kind of sketchy connectivity and all over different places. Well, Skype just wasn't ready to deal with that world. Microsoft essentially had to rebuild the entire airplane while flying it as hundreds of millions of users depended upon Skype. They had to try to make it ready to work in the new world. The transition was painful. It took immense amounts of changes. People would see all kinds of weird error messages, dropped calls, and all that kind of stuff. Something horrible when you're trying to build a brand and get people to depend upon your service like Microsoft was. Because while Microsoft was busy rebuilding and integrating, competition was building around them. The The first thing to come for Skype was that Apple launched FaceTime in 2010. It was a dead simple app. It was already integrated into every single phone out there. Well, if you were on Apple, that is, and it just, well, worked. Facebook went and bought WhatsApp in 2014 for whatever it is, $25 billion or whatever. And the first thing they added were voice calls. Google came at them as well. They offered Google Hangouts for, you know, for free basically, that would give people calls for up to 10 people. This was something that, well, Skype was making people pay for. Here was Google giving it away for free. Each of these competitors was mobile-first, user-friendly, easy to use, and reliable. And Skype was increasingly none of these things. Microsoft was forced to eventually start giving Skype away basically for free. In 2013, they did nearly $750 million that year in revenue for Skype. That number would go down by over 80%. Over the coming 8 years. Suddenly Skype was a declining business, losing money, facing formidable competitors, massive headwinds. If you're looking up and you're Microsoft, seeing the threat in June 2017, some brainiac at Microsoft decided that their whole vision and future was to compete for younger users. And to do that, they needed to copy Snapchat. Skype, thanks to a total redesign, looks a lot like Snapchat now. New design featured highlights, which were stories, basically different backgrounds and different notification type stuff. Basically, people wanted to make good phone calls across the internet and not have them drop, and Skype was giving them, well, fancy emojis. Users absolutely hated it. The UK App Store rating went from 3.5 stars down to 1 star, and basically the same thing happened in the US too. Nothing like a bunch of 1-star reviews to make you feel good about things, and, well, Skype deserved it. In 2018, basically Microsoft admitted defeat and rolled back all of these Snapchat-esque changes, trying to bring, uh, basically Skype back to where it was in its original days, making cool phone calls over the internet in a reliable way. But unfortunately, users weren't coming back. Then something happened that would change the world forever, and that was the COVID pandemic in early 2020. At that time, COVID-19 forced everyone indoors. I remember that time where everybody was scrambling to try to find a way to do online voice calls and meetings because we couldn't meet face to face at that point. And video calling was something that went from a nice to have to an essential piece of infrastructure basically overnight. And Skype well, they were— should have been perfectly positioned to take advantage of it. At that time, they had 32% of the video calling market over the internet, the most of any platform. Also had 17 years of brand recognition, the most of any platform ever. So into the pandemic, Microsoft reported a 70% surge in usage of Skype. Uh, daily active users surged to over 40 million people. But then something happened to them, and that thing was Zoom. December 2019, Zoom had 10 million participants. By the fourth month of the pandemic, they had nearly 300 million users, basically a 30 times increase over just a couple of years. Zoom's revenue went from about $650 million to over $2.5 billion during that period of time. Their market cap went to almost $160 billion. And how people had said that, you know, just Skype me was a thing to do. Well, suddenly it became, let's have a Zoom. There was a new king in town and it had replaced Skype. And it was Zoom. By early 2021, Zoom had over 50% of the voice calling market and Skype had gone from about a third to low single digits. Skype had a 17-year head start on Zoom, but just over the course of several months, Zoom totally ate their lunch. Why was that? Well, Zoom's founder was a guy named Eric Yuan, and he had worked at Cisco WebEx and he had left there in 2011. And the reason was he said he was embarrassed every time we talked to a customer just because WebEx at the time was a product that was so unusable. And Skype was basically the same thing. Yuan raised venture capital and built Zoom basically with one mindset, which was to deliver happiness with customers. Every decision they made was basically asking, is this going to make customers happier? And if the answer wasn't a resounding yes, they didn't do it. The result was that Zoom was just a delight to use compared to Skype. It was frictionless. One click and you were in a meeting. It even worked when the internet was kind of crappy, which frankly is a lot of America. And Eric was so determined about this stuff. I remember at the time this was peak Twitter back in 2020, and Eric, a guy who was a multibillionaire running this company, was there answering customer complaints directly on Twitter to help people use Zoom and improve it. Zoom went from 10 million daily users in April 2019 to in 2020 having over 300 million people a day use the platform. Meanwhile, Skype required you to create an account. The interface was cluttered. I mean, I have a computer science degree and it's one of the consumer apps that I personally still have no idea how to use. The other one is Snapchat. I don't know what kids are doing these days, but I ain't one of them. Zoom, unlike Skype, had a clear business model. You pay a subscription fee, $10, $12, $15 a month, you get certain level of limitations and you have meetings. Skype didn't have that at all. Still hadn't figured out what it wanted to be when it grew up. And here's something that'll drive you crazy about Skype if you loved it. Microsoft, by this point, pre-pandemic, had already decided to let Skype die. March 2017, Microsoft had decided they were going to compete with Slack by offering a clone called Teams, and that's where their video calling would live. So in those years leading up to the pandemic, when Skype could have been ready to be the next Zoom, well, it had been left to languish by Microsoft and set up to fail when the, basically the blizzard of demand happened during the COVID experience. By 2024, Microsoft Teams would have 320 million users, and CEO of Microsoft, Satya Nadella, He hasn't spoken about Skype on an earnings call since 2017. July 2021, they took the first step as Microsoft to shut down Skype for Business, officially directing all customers to Microsoft Teams. Post-pandemic, while companies like Zoom have continued to grow, Google Meet has grown as well. Skype continued to shrink. It went from 40 million down to 36 million daily users in 2023. Skype's annual profit went from $90 million in 2013 to just about $8 million in 2022. Basically a rounding error for Microsoft. And that's one of the funny things about these big corporations, whether it's Microsoft or Google. If you or I owned a business that was making $8 million a year, we'd be pretty stoked. To them, it's a nuisance. And you'll often see them do things like this, which is to shut them down. And that's the next thing that Microsoft did, which was to announce in February that on May 5th, 2025, they would officially shut down Skype for everyone for good. And that was 21 years after the very first beta launch. The video calling service will no longer be available to users from May. Today as the software giant shifts some of its services to Microsoft Teams. The platform was founded in 2003. And while Microsoft's $8.5 billion purchase back in the day, basically a decade earlier, had done two things. One, they had kept competitors from owning the business. Number two, it had taught them a lot about the video calling space. It's easy to recognize that most of that $8.5 billion had just been burnt up, uh, through their mismanagement of the Skype business. And today Skype, after being an app that had changed the internet, well, basically forever and disrupted tons of other industries. It's officially dead and gone and in the graveyard of internet stories. A lot of lessons in this story. To me, the most poignant one is the story of the transactions when there were people buying Skype who just really didn't understand the business very well. And the sellers, they understood the business really very, very well. And you saw what happened in all those situations. The people who were the sellers who understood it, they got the best out of the deal each and every time. And the people who didn't truly understand how the business worked, Meg Whitman, Bulmer, and those guys, well, there's the ones that got burned. All right, that's it for the story, Skype. Let me know what you think in the comments below. If you liked it, please say you liked it, because I'm doing this while we're here on vacation in Florida, and thankfully I didn't get hit by a golf ball. So catch you next time. Let me know what you think in the comments below. See ya.