Episode 24 Skype



In episode 24 of Acquired, hosts Ben Gilbert and David Rosenthal, along with their community of listeners, explore the complex and tumultuous history of Skype. From its inception as a disruptive peer-to-peer voice communication platform by founders Niklas Zennström and Janus Friis, to its various acquisitions—first by eBay in 2005, then by a private equity consortium including Silver Lake and Andreessen Horowitz in 2009, and finally by Microsoft in 2011 for $8.5 billion. The episode delves into Skype's innovative technology, its significant organic user growth, and the strategic misalignments and legal battles that ensued with eBay's acquisition. The discussion further examines Skype's integration into Microsoft's suite of services and its positioning in the evolving landscape of enterprise and consumer communication. The episode also highlights the involvement of key figures and companies like Pilot, Sentieo, and Jeff Bezos, as well as the broader implications of such tech mergers and acquisitions.

Summary Notes

Introduction and Podcast Overview

  • David Rosenthal and Ben Gilbert are the hosts of Acquired, a podcast about technology acquisitions.
  • Episode 24 focuses on the history of Skype and its various acquisitions, including Microsoft's 2011 acquisition, eBay's 2005 acquisition, and the Silver Lake Partners private equity takeover with Andreessen Horowitz in 2009.
  • The hosts express enthusiasm for the complex and dramatic history of Skype's journey.

"Welcome back to episode 24 of Acquired, the podcast about technology acquisitions. I'm Ben Gilbert." "I'm David Rosenthal, and we are your hosts." "Today's episode is Microsoft's 2011 acquisition of Skype and the Wild, crazy journey that it took to get there." "Ben, you mean eBay's 2005 acquisition of Skype and the Wild, crazy journey it took to get there?" "Or perhaps the Silver Lake Partners private equity takeover with Andreessen Horowitz in 2009 acquisition of Skype and the crazy path it took to get there?" "All that and more as we dive into the show."

These quotes introduce the podcast's theme and episode focus, outlining the complex history of Skype, which involves multiple acquisitions by different entities over the years.

Community Spotlight and Sponsorship

  • Acquired spotlights Sentieo.com, a software platform for Wall Street analysts, which recently launched an Alexa skill.
  • Pilot, a partner of Acquired, is highlighted as a comprehensive accounting service for startups and growth companies.
  • Pilot's growth from a startup to a billion-dollar company is emphasized, with notable backers including Sequoia, Index, Stripe, and Jeff Bezos.
  • The philosophy of outsourcing non-core business activities, like accounting, to focus on product and customer experience is advocated.

"Before we get started today, we want to do a community spotlight user in Slack Swix SW Yx pointed us at his company... Sentieo.com." "Our next sponsor for this episode is one of our favorite companies and longtime acquired partner pilot for startups and growth companies of all kinds... now is the largest startup focused accounting firm in the US." "Which is wild because when we started working with them way back when, they were just a startup themselves, and now they're a billion dollar plus company backed by Sequoia, index, stripe, and even Jeff Bezos himself."

These quotes highlight the community engagement of the podcast and the success story of Pilot, a company that offers specialized accounting services to startups, illustrating the value of focusing on core competencies and outsourcing other functions.

The Origins of Skype

  • Skype's origin story begins in 1999 with Nicholas Zennström from Sweden and Janus Friis from Denmark, who were working at the Swedish telecom company Tele2.
  • They sought to create a web portal but lacked the software development capabilities, leading them to hire three Estonian developers.
  • The developers learned PHP in a weekend to create the web portal, demonstrating their talent and proficiency.
  • Zennström and Friis left Tele2 to start a Napster competitor called Kazaa, which became the most popular application on the internet.
  • Despite legal challenges with Kazaa, they retained the underlying peer-to-peer technology, which later became the foundation for Skype.

"This story has more drama than something with a lot of drama. A whole lot of drama." "Our drama filled story starts all the way back in 1999 when two guys, Nicholas Zenstrom, who lived in Sweden, and Janice Freese, who lived in Denmark, were both working at the swedish telecom company Teletu." "They end up hiring three developers... they build everyday.com or whatever it was that Teletu wanted it to be called. And it was awesome."

The quotes provide a narrative of the early days of Skype's founders and their initial forays into entrepreneurship, setting the stage for the development of Skype.

Development and Launch of Skype

  • Skype was initially conceived as "Sky peer-to-peer" but was shortened to Skype due to domain name availability.
  • The simplicity and user-friendliness of Skype's software were critical to its widespread adoption.
  • Skype's peer-to-peer technology allowed for clear, high-quality voice calls over the internet, bypassing traditional phone networks.
  • Skype's launch in August 2003 saw rapid user growth, with 10,000 downloads on the first day and 1 million users by the end of the first month.

"They decided they wanted to call it sky peer to peer... they couldn't get Skyper.com. So instead they decided to just drop the r at the end and thus Skype was born." "Right from the start, we set out to write a program simple enough to be installed and used by a soccer mom with no knowledge of firewalls, IP addresses or other technological terms." "On the very first day, they get 10,000 downloads of first day they launch, get 10,000 downloads of Skype. By the end of the first month, they have a million users."

These quotes describe the strategic decisions behind Skype's branding and user experience design, as well as the impressive growth metrics following its launch, emphasizing the importance of accessibility and ease of use in software adoption.

User Growth and Market Impact

  • Skype experienced rapid user growth in its initial years, reaching 19.8 million users in its first year without the presence of mobile phones or smartphones.
  • The peer-to-peer technology allowed Skype to support a large user base without significant infrastructure costs, which would typically require substantial venture capital investment.
  • Skype's growth attracted considerable venture capital post-launch, including $18 million from Index, Bessemer, and DFJ.

"19.8 million users that they get in their first year." "They could support 20 million users without those insane infrastructure costs."

These quotes highlight Skype's impressive user acquisition and its ability to scale without the heavy infrastructure costs that were common at the time, thanks to its peer-to-peer technology.

Venture Capital and Early Investments

  • Bill Draper and Howard Hartenbaum were the initial venture capitalists who invested in Skype, showing faith in the team due to their previous success with Kazaa.
  • Following its launch and user growth, Skype attracted further investment from prominent venture capital firms.

"They did raise a small amount of venture capital before they launched, interestingly, from Bill Draper, the legendary venture capitalist, and Howard Hartenbaum." "They raise $18 million from Index, Bessemer and DFJ."

The quotes indicate the early financial support from venture capitalists, which was based on the reputation of Skype's founders and the company's subsequent ability to secure significant funding post-launch.

Unique Company Culture

  • Skype's company culture included unusual initiation rituals for new employees, such as a shot containing tequila, sambuca, and Tabasco sauce.
  • The company installed a pool in the boardroom of their office in Estonia, reflecting a non-traditional work environment.

"Every new employee at Skype has to undergo an initiation." "They install a pool in the boardroom in the office in Estonia."

The quotes describe the unique and somewhat eccentric aspects of Skype's company culture, which included initiation rites and unconventional office installations.

Product Evolution and Features

  • Skype initially started with audio calling and later added video calling two years after its launch.
  • The company adapted to technological shifts by developing mobile versions of the app for iOS and Android platforms.

"In June of 2005, they add video calling." "They really push Skype for mobile, getting on iOS, getting on Android."

These quotes outline the evolution of Skype's product features, from audio to video calling, and its strategic move to embrace mobile platforms, which were becoming increasingly important.

Acquisition by eBay

  • eBay acquired Skype for $2.6 billion in 2005, which was a controversial move given the perceived lack of synergy between the two companies.
  • The acquisition raised questions about eBay's strategy, with some speculating it was an attempt to diversify into a high-growth technology business.

"They end up deciding to sell to eBay for $2.6 billion." "Why is eBay acquiring Skype?"

These quotes reflect the surprising acquisition of Skype by eBay and the subsequent debate regarding the strategic rationale behind the move.

Intellectual Property Issues

  • eBay's acquisition did not include Skype's core peer-to-peer networking technology, which remained with the founders' company, Joltid.
  • Joltid later sued eBay, leading to a settlement that gave Joltid a 10% equity stake in Skype and integrated the technology into the company.

"They kept the core peer to peer networking technology in that company and then licensed it to eBay." "They give Joltid 10% in Skype as part of the settlement."

The quotes highlight the complications arising from the separation of Skype's technology from its operational entity, leading to legal disputes and a settlement that finally resolved the ownership of the intellectual property.

Corporate Culture Clash

  • The integration of Skype into eBay's corporate structure led to a significant culture clash, exemplified by a party in Estonia that resulted in public controversy.
  • The event underscored the differences between Skype's startup culture and eBay's more corporate environment.

"EBay and Skype management basically trashing this hotel." "To say there was culture clash is an understatement."

These quotes illustrate the cultural tensions that emerged following the acquisition, with a particular incident in Estonia serving as a stark example of the mismatch.

Private Equity Spin-Out and Growth

  • A consortium of private equity firms and Andreessen Horowitz spun out Skype from eBay, valuing the company at around the same price eBay paid for it.
  • Under private equity, Skype focused on restructuring, integrating technology, and expanding mobile offerings, leading to substantial growth.

"A consortium of private equity firms and Andreessen Horowitz, are going to invest directly in Skype." "Skype has over half a billion users around the world at this point, and is quite profitable and making a lot of revenue."

The quotes discuss the spin-out of Skype from eBay and the subsequent focus on restructuring and growth under private equity, which significantly increased the company's value.

Microsoft's Acquisition

  • Microsoft acquired Skype for $8.5 billion in 2011, which was then Microsoft's largest acquisition.
  • The acquisition represented a substantial increase in value from the private equity spin-out and was a strategic move for Microsoft to bolster its communication offerings.

"Microsoft announces in May of 2011 that they're acquiring Skype." "Essentially $6 billion, almost $6 billion of value creation."

These quotes mark the culmination of Skype's journey from a startup to being a part of one of the largest technology companies in the world, highlighting the significant value creation throughout its history.

Microsoft's Acquisition of Skype

  • Microsoft acquired Skype to integrate it into their ecosystem.
  • Skype was a crossover product serving both business and consumer markets.
  • After the acquisition, Microsoft streamlined their communication tools, integrating Skype across their services.
  • Microsoft also acquired Yammer, further expanding their enterprise communication tools.

"It's probably worth talking a little bit about what's happened at Microsoft since the acquisition."

This quote sets the stage for discussing the changes and integrations at Microsoft following the Skype acquisition, highlighting the significance of the move within the company's strategy.

Evolution of Microsoft's Communication Tools

  • Microsoft had multiple communication platforms: MSN Messenger, Office Communicator (later Link), and Skype.
  • MSN Messenger and Link were phased out in favor of Skype for Business and consumer Skype.
  • Skype's integration reached across Microsoft's ecosystem, including outlook.com and Windows.

"There's obviously varying levels of that that would come with communicator, which I believe in 20, I'm going to get the date wrong, but at some point was rebranded as Link."

This quote refers to the evolution of Microsoft's internal communication tools and their rebranding efforts, emphasizing the company's attempts to streamline and improve their offerings.

Skype as a Crossover Product

  • Skype was one of the early products to serve both business and consumer needs.
  • It foreshadowed the emergence of products like Slack, which blend user-friendliness with enterprise utility.
  • Despite its success, Skype's various versions for different purposes led to some consumer confusion.

"Skype was really the first both business and consumer Internet product."

The quote captures the essence of Skype's dual-market appeal, noting its pioneering role in serving both consumer and business communication needs.

Future of Enterprise Communication

  • There's an ongoing debate over who will dominate enterprise communication.
  • Products like Slack and Skype might merge or adopt features from each other.
  • Microsoft's approach to Skype has not been unified, leading to a confusing product lineup.

"Are we going to see a Skype like product and a slack like product merge?"

This quote raises the possibility of future convergence in communication tools, suggesting that products may evolve to combine the strengths of both Skype and Slack.

Microsoft's Acquisition Strategy

  • The acquisition of Skype by Microsoft was categorized as a product acquisition.
  • Microsoft used the acquisition to strengthen its ecosystem, not just for the technology.
  • The deal was also influenced by Microsoft's need to utilize overseas capital effectively.

"This was an acquisition done where this product was being greatly sought after by both Google and Facebook."

The quote highlights the competitive environment surrounding the acquisition, with Microsoft aiming to bolster its product offerings in the face of potential bids from other tech giants.

Alternative Outcomes for Skype

  • Skype could have remained independent and pursued an IPO.
  • Other companies like Google and Facebook were potential acquirers.
  • The acquisition prevented Skype from becoming a standalone public company again.

"I think there was a path and a very viable path for Skype to go public and be a standalone public company again."

This quote reflects on the alternative future Skype could have had as an independent entity, suggesting that the acquisition by Microsoft was not the only possible outcome.

  • Companies often become acquisition targets when they are about to raise funds or IPO.
  • The "dual track" process of pursuing an IPO and acquisition talks can create leverage.
  • The trend of mega acquisitions is on the rise, with Skype's deal being a significant example.

"A lot of times, whether it's you're about to make acquisitions, you're about to IPO, or you're about to get bought, there's a little bit of like a leverage game going on."

This quote explains the strategic timing often employed by companies to maximize their value or create pressure for a desired outcome, such as an acquisition.

Skype's Growth and Market Fit

  • Skype experienced rapid growth despite the limited global Internet and smartphone penetration at its launch.
  • The company's success demonstrated strong product-market fit from an early stage.
  • Skype's corporate history is complex, but its impact on communication technology is undeniable.

"The growth of this company and the product market fit that happened is pretty incredible, especially when you go back to the context of when Skype was started in 2003."

The quote contextualizes Skype's remarkable growth and its ability to resonate with users despite technological limitations at the time of its launch.

All Revenue is Not Created Equal: The 10x Revenue Club

  • Bill Gurley's blog post discusses factors that make companies highly valued by Wall Street, specifically those valued at ten times revenues or higher.
  • High valuation is linked to organic growth rather than growth driven by heavy marketing spend.
  • Skype is highlighted as an example of a company with pure product-market fit, achieving growth without spending on customer acquisition.
  • Skype's customer acquisition cost (CAC) was significantly lower than its competitor Vonage due to its peer-to-peer model and lack of server and marketing costs.
  • Skype's business model allowed for limitless growth due to the absence of these typical costs.

"Bill Gurley wrote this great blog post called the I believe the title is all revenue is not created equal. The keys to the ten x revenue club."

This quote introduces the concept of the 10x Revenue Club and sets the stage for discussing the characteristics that lead to a company's high valuation.

"Skype never spent any money on customer acquisition. It was all organic. It was just pure product market fit."

The quote emphasizes Skype's organic growth and product-market fit as key reasons for its success without the need for substantial marketing expenditure.

Microsoft's Acquisition of Skype

  • Ben Gilbert grades the Microsoft acquisition of Skype as a B-minus, noting its gradual integration and strategic alignment with Microsoft's existing services.
  • Initially skeptical, Ben's perspective changed over time as Skype became more integrated with Microsoft's ecosystem.
  • The acquisition is seen as a good use of capital, especially in light of potential tax benefits and the strategic value of having a consumer offering.

"I'm grading the Microsoft acquisition."

Ben Gilbert is discussing his assessment of Microsoft's acquisition of Skype, which he grades as a B-minus.

"It's the right move. It was an amazing use of that capital considering other options that they could have done with it."

This quote justifies the acquisition's grade by acknowledging the strategic use of capital and the benefits of integrating Skype into Microsoft's suite of services.

The Impact of Leadership and Product Vision on Skype's Success

  • The discussion reflects on how the experience with Skype may have informed Microsoft's approach to other acquisitions, like Accompli.
  • The role of corporate leadership and product vision is considered crucial for the success of acquisitions.
  • The departure of Skype's corporate leaders and product visionaries is seen as detrimental to its integration and evolution within Microsoft.
  • The original founders of Skype are recognized as the "heroes" of the company, and their absence is felt in its current operations.

"The lack of any real corporate leaders within Skype that could come in and champion that and champion a product vision for Skype as part of Microsoft has really hurt them."

The quote highlights the importance of strong leadership and a clear product vision in the success of an acquired company within a larger corporation.

Google's Hardware and Business Model Shift with the Pixel

  • Google's launch of the Pixel phone represents a direct competition with Apple's iPhone.
  • The Pixel's exclusive features, like the Google Assistant, suggest a shift in Google's business model from software to hardware.
  • The discussion explores the implications of AI and voice interactions on Google's traditional ad-based revenue model.
  • The Pixel's success is attributed to its high-quality hardware and potential to redefine Google's approach to the market.

"Google Assistant right now appears to be only available on the Pixel and not on. It's actually not part of Android."

This quote highlights the strategic decision by Google to differentiate its hardware offering with exclusive features like the Google Assistant.

"This is a potential change in business model for Google, not only because they're selling hardware."

The quote discusses the significance of Google's move into hardware sales and its implications for the company's traditional business model.

AT&T and Time Warner Merger: Implications for Net Neutrality

  • The merger between AT&T and Time Warner is compared to historical trends of telecom consolidation.
  • Concerns are raised about the potential impact on net neutrality and the alignment of telecom and content providers.
  • The discussion draws parallels between the merger and political movements that resist progressive change.
  • The relevance of traditional media and content production is questioned in the context of modern digital consumption habits.

"The most relevant and terrifying aspect of this."

The quote expresses the concerns associated with the merger of AT&T and Time Warner, particularly regarding net neutrality.

"Every time we get closer to the telecom and the content and a gigantic content provider being aligned like this, it scares the crap out of me."

This quote underscores the speaker's apprehension about the implications of telecom companies merging with large content providers.

The Wire Cutter Acquisition by The New York Times

  • The acquisition of The Wire Cutter by The New York Times is praised for its potential to evolve digital journalism.
  • The Wire Cutter's approach to creating valuable, long-lasting content is highlighted.
  • The discussion anticipates how The Wire Cutter's content could be integrated with The New York Times' investigative journalism.
  • The acquisition is seen as part of The New York Times' broader strategy to adapt to the digital era.

"Rather than writing news, he's writing something that just helps people."

The quote reflects on The Wire Cutter's focus on creating content that provides ongoing value and assistance to its readers.

"We figured out when to refresh it, what to refresh it with, how to tell people that we've refreshed the guides."

This quote describes The Wire Cutter's meticulous approach to updating their guides and ensuring their content remains relevant and useful.

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