Verticals
Verticals

How Skype blew a 10-year lead to Zoom

On our first episode of Verticals, we’ll walk through how the video conferencing industry was formed, the early pioneers, and how Zoom capitalized on the mistakes of Skype.

Video calls have become an essential component of the workday. You can strike up a conversation with anyone in the world with just a few clicks. Sales pitches, webinars, team meetings… imagine if video calls didn’t exist and you had to communicate strictly through email…

Fortunately you don’t, and whether it’s WebEx, Google, or Microsoft I’m sure virtual communication is in your day-to-day. But one company seems to be more prevalent than the rest.

Zoom dominates nearly half of the videoconferencing market. In the past few years you’ve had a Zoom happy hour, watched a Zoom reunion, and definitely suffered from Zoom fatigue. So why does Zoom get the biggest piece of the pie?

At the beginning of 2020, Skype controlled 32.4% of the market compared to Zoom’s 26.4%. But, by the following year, Skype dropped to only 6.6%. At this point, I don’t want anyone Skyping benjaminskywalker94… but if you think your old username is better, let me know.

In such an opportune moment for this industry, where did Skype go wrong? And what did Zoom get so right? In this video we’ll walk through how the industry was formed, the early pioneers, and how Zoom capitalized on the mistakes of Skype. I’m Ben Hillman, and this is Verticals.

But first, if you like this kind of content and want to learn more, subscribe to get in the know when we release new episodes.

Lessons from the Top

Videoconferencing has forever changed the way we work and communicate across the globe, both professionally and personally. But, what this story teaches us is that just because a product or service already exists and even dominates an industry, it doesn't mean someone else can’t or won’t come in with the same idea and knock them off their throne.

Eric Yuan is the example of taking an existing product, making it better, and leaving the competition (even with a 10-year lead) in the dust. He did that because he recognized the value of videoconferencing and then listened intently to what customers actually wanted and needed to make their experience better. Skype’s downfall was that they lost sight of providing the best experience, instead focusing on the bells and whistles that no one was even asking for.

Never rest on your laurels
Don't let any recent success make you complacent in your future efforts, or take your focus away from continuing to improve your core functionality. Though you want to consistently add value to your product or service, you need to ensure the core functionality is always performing optimally. Otherwise, any added features are futile.

Get up close and personal with your customers

Actively listen to and communicate with your customers. Your product development and added features should be based your customer's feedback. If you're not adding value and improving their experience, they will go elsewhere.

Freemium works

Freemium is a business model in which a company offers basic or limited features at no cost and then charges a premium for supplemental or advanced features.

Remember that freemium is an acquisition strategy and provides the ability to reach more customers as anyone can access your service for free. As long as your core functionality is providing a strong and valuable experience, and your features further improve and facilitate your customers' lives, they will likely turn into paying users.

Background

In order to set the stage for Zoom’s dominance, it’s important to understand the problem Zoom solves. Face-to-face communication is crucial because it allows you to read body language and nonverbal cues. Effectively, it gives you a better understanding of what someone is trying to communicate by combining multiple senses: sight and sound.

Videoconferencing (or videotelephony) refers to connecting and communicating via video and audio in real time. Over a hundred years ago, a typical white-collar working day meant going into an office, sitting at a desk, and speaking and interacting with coworkers in the same building. To communicate with someone face-to-face you had to get yourself up and swing by their desk (it was tough work!). You could communicate in real time with a phone call, but this could be cost prohibitive and offered no visual component… In 1927 all of that was about to change.

Then Secretary of Commerce, Herbert Hoover, gave a brief speech to an audience in New York City on a Thursday afternoon. Only, Herbert Hoover wasn’t in New York city. He wasn’t even shouting from a megaphone across the river in New Jersey. No. Herbert Hoover had just conducted the first video call from over 200 miles away while he sat in Washington D.C. at a setup developed by the American Telephone and Telegraph Company (or AT&T-you may be familiar with them).

This demonstration proved that visually connecting with someone over a great distance was possible… but a lot still needed to be figured out. Not seen during Hoover’s speech was the room full of cables, the network installed in between, and the constant iterations required to make this possible. Over the next several decades the groundwork had to be laid to take video conferencing from the bureaucrat to the board room.

Infrastructure was built… the technology was honed in… In the 1990s, the internet arrived and personal computer ownership skyrocketed. As the internet grew, the world shrunk, but no one seemed to crack the code on face-to-face communication. It was possible, but cost was still proving to be an issue. Several startups capitalized on this opportunity but it wasn’t until the early 2000s that videoconferencing had a breakthrough.

Early Leaders

In the country of Estonia, Kazaa founders found themselves in a bit of trouble as their company had become one of the largest file-pirating sites in the world. Kazaa made it possible to send files from one computer to another without an intermediary. They had the idea to use this method to make voice calls cheaper. So they started a new company: Skype entered the market.

It was first released in 2003 as a voice-over IP service to make free computer-to-computer calls, or reduced-rate calls. Two years later they introduced videotelephony and in the same year were acquired by eBay, a sale valued at $2.5 billion. In 2011 it was again acquired, this time by Microsoft Corporation for $8.5 billion.

By 2012 they accounted for 167-billion minutes of cross-border voice and video calling in a year. It was the number one downloaded video app and the sixth most downloaded app of the entire 2010s beating out the likes of TikTok, YouTube, and Twitter. Skype had become a verb. Skype was how you connected with people all over the world. It revolutionized communication in business and for the world in general.

But on the tail of Skype’s success was a new competitor that was about to enter the arena…

In 2011, an engineer named Eric Yuan founded a company called SaaSbee. Eric began his career at WebEx and during his time there, he discovered something that would eventually lead him to leave. His discovery? Too many unhappy customers.

After talking to customers and asking for direct feedback he learned that customers needed one unified solution. They needed a cloud-based conference room solution with good voice-over IP and video quality. Knowing WebEx was not designed for that, Eric left.

He took that knowledge and built exactly what they demanded. By 2012 SaaSbee acquired its first customer and by 2013, it reached one-million participants worldwide. Today, you know that company as Zoom.

So, what was the key difference that made Zoom soar and Skype plunge?

Reasons for success

When it comes to Skype, Microsoft’s adamant intent to make Skype compete with everyday communication apps, completely backfired. Priority was given to Microsoft Teams which included video conferencing as a portion of the product. Skype succumbed to feature creep and consistent redesigns. Users spoke of long load times, ad-filled browser windows, and updates before a meeting.

Skype brought the world closer together but through multiple sales and leadership changes, no one was listening to what customers were saying. Where Skype failed is precisely where Zoom succeeded.

Zoom runs with the singular focus to make video calls as frictionless as possible. They have a unifying leader in Eric Yuan. He ensures that his product is evolving based on customer needs, even personally getting into Twitter replies to ensure users are satisfied. In order to bring people closer, you have to go to where people are.

Additionally, Zoom’s success can be credited to the way it monetized the product: freemium. Freemium is a business model in which a company offers basic or limited features at no cost and then charges a premium for supplemental or advanced features. This allows anyone to access the service.

Anyone can connect to a 40-minute meeting for free. Once users require longer meetings, they’re happy to pay the $15 a month per license.

Another element to Zoom’s success is the initial focus on telemedicine and education. Zoom entered into agreements with several universities like Kansas State, Northern Iowa, and Ottawa offering educational licenses. This allowed Zoom to focus on one or two markets and then expand into others when the time was right.

Talking to customers, simplified use, freemium, and landing and expanding are the ingredients that lead to Zoom’s success. After the IPO in April of 2019 Zoom was valued at $9.2 billion… By focusing on making it as easy as possible to communicate face-to-face, Zoom was well positioned to explode… as luck would have it, that opportunity was right around the corner…

In 2020, a global pandemic swept over, and life as we knew it, seemed to change overnight. Suspended travel, at-home schooling, and working from home all became standard. And most major video conferencing companies benefited. Well… some more than others. Zoom saw its market share go from 26.4% in 2020 to 48.7% in 2021, more than twice the market share of Skype and Microsoft Teams combined.

Skype fell victim to being the hot product. Microsoft effectively acquired it in hopes that users would transfer over to their native solutions. Focus shifted to redesign the look of the product as well as adding features no one was begging for like emojis. Because of this, the core functionality of reliable video calling suffered, which made Skype vulnerable and ultimately led to its downfall.

Summary

Business has benefited greatly from videoconferencing. As many as 76% of individuals use video calls to work remotely allowing for less commuting, less travel, and more time spent being productive. It has changed the way we work by bringing us closer. Face-to-face communication becomes easier and easier with every Zoom update.

But as with anything, just as there are benefits, there are downsides. There is still a disconnect between videotelephony and in-person communication. Excessive close-up eye contact, seeing yourself constantly, a reduction in mobility, and an increase in cognitive load contribute to what academics are calling “Zoom Fatigue.”

If Eric Yuan wants to avoid the same fate as Skype, he needs to ensure Zoom is prepared for these technological leaps.

Companies are starting to focus on bringing the experience closer to real life. In 2021, Google announced Project Starline. The tech is reminiscent of the video booths of yesteryear. Users can see each other via a screen utilizing 3D imagery on a 3D display without needing to wear a headset. It’s still a long way from becoming a daily reality, but it’s experiments like this that will bring video calling to the next level.

A company that wishes to compete with Zoom at the very least has to rise to the floor of what Zoom is capable of. The focus has to be on listening to customers and getting the closest to unencumbered face-to-face communication. What company do you think that will be? Let us know what you think in the comments down below. From Paddle Recur, I’m Ben Hillman, and I’ll see you next time.

If you like this kind of content and want to learn more, subscribe to get in the know when we release new episodes.

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Skype concerned.

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Everybody's gonna use Zoom!

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Video conferencing is the new normal.

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Video calls have become an essential component 

of the work day. You can strike up a conversation  

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00:00:10,140 --> 00:00:16,200

with anyone in the world with just a few clicks. 

Sales pitches, webinars, team meetings. Imagine  

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if video calls didn't exist and you had to 

communicate strictly through email. Oof.  

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00:00:22,080 --> 00:00:24,720

Fortunately, you don't. And whether it's Webex,  

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Google, or Microsoft, I'm sure virtual 

communication is in your day-to-day.

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But one company seems to be more prevalent 

than the rest. Zoom dominates nearly half  

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00:00:35,460 --> 00:00:39,180

of the video conferencing market. In 

the past few years, you've had a Zoom  

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happy hour, watched a Zoom reunion, and 

definitely suffered from Zoom fatigue.  

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00:00:43,740 --> 00:00:48,600

But why does Zoom get the biggest piece of the 

pie? While at beginning of 2020 Skype controlled  

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32.4% of the market compared to Zoom's 26.4. But 

by the following year, Skype dropped to only 6.6.  

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At this point, I don't want anyone Skyping 

BenjaminSkywalker94, but if you think your  

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old username is better than mine, let 

me know in the comments down below.

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In such an opportune moment for this industry, 

where did Skype go wrong? And what did Zoom get  

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so right? In this video, we'll walk through how 

the industry was formed, the early pioneers,  

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and how Zoom capitalized on the mistakes of 

Skype. I'm Ben Hillman, and this is Verticals.

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In order to set the stage for Zoom's dominance, 

it's important to understand the problem that Zoom  

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solves. Face-to-face communication is crucial 

because it allows you to read body language  

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and non-verbal cues. Effectively, it gives you a 

better understanding of what someone is trying to  

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communicate, by combining multiple senses, sight 

and sound. Video conferencing, or videotelephony,  

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00:01:46,440 --> 00:01:51,900

refers to connecting and communicating via video 

and audio in real-time. Over a hundred years ago,  

24

00:01:51,900 --> 00:01:56,040

a typical white-collar working day meant 

going into an office, sitting at a desk,  

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00:01:56,040 --> 00:02:00,180

and speaking and interacting with coworkers 

that were in the same building or nearby.  

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00:02:00,720 --> 00:02:02,880

To communicate with someone face-to-face you had  

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00:02:02,880 --> 00:02:07,380

to get yourself up and swing by their 

desk. I know, it was really tough work.

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00:02:07,380 --> 00:02:12,180

You could communicate in real-time with a phone 

call, but this could be cost-prohibitive and  

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00:02:12,180 --> 00:02:18,480

offered no visual component. In 1927, all of that 

was about to change. Then secretary of commerce,  

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00:02:18,480 --> 00:02:22,800

Herbert Hoover, gave a brief speech to an 

audience in New York City on a Thursday afternoon,  

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00:02:22,800 --> 00:02:28,680

only Herbert Hoover wasn't in New York City. 

He wasn't even shouting from a megaphone across  

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00:02:28,680 --> 00:02:34,020

the river in New Jersey. No, Herbert Hoover 

had just conducted the first video call from  

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over 200 miles away while he sat in Washington 

D.C. He sat at a setup developed by the American  

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Telephone and Telegraph Company, or AT&T. You 

may be familiar with them. This demonstration  

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00:02:45,600 --> 00:02:50,640

proved that visually connecting with someone 

over a great distance was possible, but a lot  

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00:02:50,640 --> 00:02:55,080

still needed to be figured out. Not seen during 

Hoover's speech was the room full of cables,  

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the network installed in between, and the 

constant iterations to make this possible.

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00:03:00,060 --> 00:03:04,560

Over the next several decades, the groundwork had 

to be laid to take video conferencing from the  

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bureaucrat to the boardroom. Infrastructure was 

built, the technology was honed. In the 1990s,  

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00:03:10,500 --> 00:03:13,800

the internet arrived and personal 

computer ownership skyrocketed.

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Can you explain what internet is?

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As the internet grew, the world shrunk. 

But no one seemed to crack the code on  

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face-to-face communication. It was possible, sure,  

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but cost was still proving to be an issue. 

Several startups capitalized on this opportunity,  

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but it wasn't until the early 2000s that 

video conferencing had a breakthrough.

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00:03:33,360 --> 00:03:37,020

In the country of Estonia, Kazaa founders 

found themselves in a bit of trouble,  

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as their company had become one of the 

largest file pirating sites in the world.

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900 million files are currently being-

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Whoa.

... on Kazaa.

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Kazaa made it possible to send files from one 

computer to another without an intermediary. They  

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00:03:51,360 --> 00:03:55,860

had the idea to use this method to make voice 

calls cheaper, so they started a new company.  

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00:03:56,700 --> 00:04:01,560

Skype entered the market. It was first released 

in 2003 as a voice over IP service to make free  

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00:04:01,560 --> 00:04:06,600

or reduced-rate computer-to-computer calls. Two 

years later, they introduced videotelephony,  

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and in the same year, they were acquired 

by eBay, a sale valued at $2.5 billion.  

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And then in 2011, they were acquired again by the 

Microsoft Corporation for another $8.5 billion.  

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00:04:19,440 --> 00:04:24,780

By 2012, Skype accounted for 167 billion 

minutes of cross-border voice and video  

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calling in one year. It was the number 

one downloaded video conferencing app,  

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and the sixth most downloaded app of the entire 

2010s, beating out the likes of TikTok, YouTube,  

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and Twitter. Skype had become a verb. Skype 

was how you connected with people all over  

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the world. It revolutionized communication 

in business and for the world in general.

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00:04:45,420 --> 00:04:50,460

But on the tail of Skype's success was a new 

competitor that was about to enter the arena.  

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00:04:51,120 --> 00:04:56,580

In 2011, an engineer named Eric Yuan founded a 

company called Saasbee. Eric began his career  

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at Webex, and during his time there he discovered 

something that would eventually lead him to leave.  

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00:05:00,900 --> 00:05:08,280

His discovery? Too many unhappy customers. They 

needed a cloud-based conference room solution with  

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good voice over IP and video quality. Knowing 

that Webex was not really designed for that,  

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Eric left. Eric took that knowledge and built 

exactly what customers demanded. By 2012,  

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Saasbee acquired its first customer. And by 2013,  

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it reached one million participants 

worldwide. Today, you know Saasbee as Zoom.

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So what was the key difference that 

made Zoom soar and Skype plunge?  

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When it comes to Skype, Microsoft's adamant intent 

to make Skype compete with everyday communication  

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apps completely backfired. Priority was given to 

Microsoft teams, which included video conferencing  

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00:05:44,220 --> 00:05:49,620

as a portion of the product, but Skype succumbed 

to feature creep and consistent redesigns.  

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00:05:50,160 --> 00:05:57,360

Users spoke of long load times, ad-filled browser 

windows, and updates right before a meeting. Skype  

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00:05:57,360 --> 00:06:02,100

brought the world closer together, but through 

multiple sales and leadership changes, no one was  

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00:06:02,100 --> 00:06:07,560

listening to what customers were saying. Where 

Skype failed is precisely where Zoom succeeded.

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00:06:07,560 --> 00:06:13,080

Zoom runs with a singular focus to make video 

calls as frictionless as possible. They have a  

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00:06:13,080 --> 00:06:17,880

unifying leader in Eric Yuan. Eric ensures that 

his product in evolving based on customer needs,  

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00:06:17,880 --> 00:06:21,240

even personally getting into Twitter 

replies to ensure that users are  

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00:06:21,240 --> 00:06:25,740

satisfied. In order to bring people closer 

to you, you have to go to where they are.  

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00:06:26,280 --> 00:06:30,720

Additionally, Zoom's success can be credited to 

the way that it monetized the product. Freemium is  

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00:06:30,720 --> 00:06:35,640

a business model in which a company offers basic 

or limited features at no cost, and then charges  

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00:06:35,640 --> 00:06:41,400

a premium for supplemental or advanced features. 

Anyone can connect to a 40-minute meeting for  

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00:06:41,400 --> 00:06:46,380

free. Once users required longer meetings, they 

were happy to pay the $15 per month license.

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00:06:47,100 --> 00:06:53,100

Another element to Zoom's success is the initial 

focus on telemedicine and education. Zoom entered  

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00:06:53,100 --> 00:06:57,000

into agreements with several universities, 

like Kansas State, Northern Iowa, and  

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Ottawa, offering educational licenses. This 

allowed Zoom to focus on one or two markets,  

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00:07:02,400 --> 00:07:07,860

and then expand into others when the time was 

right. So talking to customers, simplified use,  

88

00:07:07,860 --> 00:07:12,720

freemium, and landing and expanding are 

the ingredients that led to Zoom's success.

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00:07:12,720 --> 00:07:19,920

After the IPO in April of 2019, Zoom was valued 

at $9.2 billion. By focusing on making it as easy  

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00:07:19,920 --> 00:07:25,800

as possible to communicate face-to-face, Zoom was 

well-positioned to explode. And as luck would have  

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00:07:25,800 --> 00:07:30,960

it, that opportunity was right around the corner. 

In 2020, life as we knew it seemed to change  

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00:07:30,960 --> 00:07:36,180

overnight. Suspended travel, at-home schooling, 

and working from home all became standard.  

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00:07:36,840 --> 00:07:42,660

Most video conferencing companies benefited. Some, 

more than others, as you know. Zoom saw its market  

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00:07:42,660 --> 00:07:50,160

share go from 26.4% in 2020, to 48.7% in 2021. 

More than twice the market share of Skype and  

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00:07:50,160 --> 00:07:56,040

Microsoft Teams combined. Skype fell victim to 

being the hot product. Microsoft effectively  

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00:07:56,040 --> 00:08:00,960

acquired it in hopes that users would transfer 

over to their native solutions. Focus shifted  

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00:08:00,960 --> 00:08:05,400

to redesign the look of the product as well as 

adding features that no one was begging for,  

98

00:08:05,400 --> 00:08:10,680

like emojis. Because of this, the core 

functionality of reliable video calling  

99

00:08:10,680 --> 00:08:14,460

suffered, which made Skype vulnerable 

and ultimately led to its downfall.

100

00:08:14,460 --> 00:08:19,620

Businesses benefited greatly from video 

conferencing. As many as 76% of individuals  

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00:08:19,620 --> 00:08:24,900

use video calls to work remotely, allowing for 

less commuting, less travel, and more time spent  

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00:08:24,900 --> 00:08:29,280

being productive. It's changed the way that 

we work, by bringing us closer together. But  

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00:08:29,280 --> 00:08:33,600

as with anything, just as there are benefits, 

there are also downsides. There's still this  

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00:08:33,600 --> 00:08:38,760

disconnect between videotelephony and in-person 

communication. Excessive closeup eye contact,  

105

00:08:38,760 --> 00:08:43,860

seeing yourself constantly, a reduction in 

mobility, and an increase in cognitive load  

106

00:08:43,860 --> 00:08:48,600

contribute to what academics are calling 

Zoom fatigue. If Eric Yuan wants to avoid  

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00:08:48,600 --> 00:08:52,980

the same fate as Skype, he needs to ensure that 

Zoom's prepared for these technological leaps.

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00:08:52,980 --> 00:08:57,600

Companies are starting to focus on bringing 

the experience closer to real life. In 2021,  

109

00:08:57,600 --> 00:09:02,160

Google announced Project Starline. Users 

can see each other via a screen utilizing  

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00:09:02,160 --> 00:09:07,080

3D imagery on a 3D display, without needing to 

wear a headset. This demonstration seems almost  

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00:09:07,080 --> 00:09:11,340

as exciting as it was for folks to see Herbert 

Hoover hop on that video call a hundred years  

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ago. It's still a long way from becoming a daily 

reality, but it's experiments like these that  

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will bring video calling to the next level. 

Any company that wishes to compete with Zoom,  

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at the very least, has to rise to the floor of 

what Zoom is capable of. The focus has to be on  

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00:09:26,160 --> 00:09:30,240

listen to customers and getting the closest 

to unencumbered face-to-face communication.  

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00:09:31,080 --> 00:09:34,020

What company do you think that'll 

be? Let us know what you think  

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in the comments down below. I'm Ben 

Hillman, and I'll see you next time.