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Skype vs. at;T Essay

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Competitive Intelligence Project Paper Guided by Prof. John E. Prescott Submitted on 30th March 2011 2011 the Fate of Firms and Industries Page 1 of 25 Page 2 of 25 Table of Contents Abstract……………………………………………………………………………………………. Abstract By Anil Pal Anupam Banerjee J. Venkatesan Karan Chatrath Shrawan Kharkia Page 3 of 25 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.

Page 4 of 25 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. nto 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.

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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 Page 5 of 25 and analysis we have taken AT&T as the pronounced incumbent in telecom industry. Page 6 of 25 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. Page 7 of 25 • 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 Page 8 of 25

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 ased 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 Page 9 of 25 capital. Good news is also important to counter the company’s wellpublicized 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 h Strong ? Proprietary VOIP Skype protocol ? Skype filed with SEC for IPO to raise $100 million ? Page 10 of 25 Leading Lagging ? Videotelephony introduced ? No. of users reached 100 million Weak eBay purchased Skype ? Tony Bates appointed as CEO ? Acquisition of Qik, a mobile video sharing platform, by Skype ? Beta version of the Skype domains released ? Skype versions for different OS (Mac, Windows) ? Skype for Apple 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 Page 11 of 25 roup 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 Page 12 of 25 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 Page 13 of 25 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 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 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

Funding Hiring Page 14 of 25 Strategy Making 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 revenue earned from its paid services is enough to 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. Page 15 of 25 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 Page 16 of 25 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 Page 17 of 25 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. Page 18 of 25 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) Page 19 of 25 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, Page 20 of 25 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. Page 21 of 25

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 Page 22 of 25 • 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. Page 23 of 25 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

Page 24 of 25 References • • http://en. wikipedia. org/ http://www. att. com Annual Statement AT ; T 2010 http://voiceontheweb. biz/2009/03/skype-business-model-revealed-atebay-analyst-event/ • •