profitwell paddle

BIG NEWS: Paddle acquires ProfitWell to "do it for you"

How Skype blew a 10-year lead to Zoom

Ben Hillman Sep 7 2022

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.

 

 


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.

VRT-S01-E01-Video_Conferencing-Background

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.

VRT-S01-E01-Video_Conferencing-Early_Leaders

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. 

VRT-S01-E01-Video_Conferencing-Reasons

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.

 

 


Who's up next week?

Next week, will DocuSign stay on top of the e-signature market?

Do us a favor?

Part of the way we measure success is by seeing if our content is shareable. If you got value from this episode and write up, we'd appreciate a share on Twitter or LinkedIn.

 

This is a Paddle production—the first media network dedicated entirely to the SaaS and subscription space.

 

 

 

By Ben Hillman

Senior Show Producer at Paddle. Ben is a YouTube fanatic, contributing videos to the platform for 15 years, and amassing 2,000 subscribers to his personal channel. Prior to Paddle, Ben headed up the video team at Boston-based sports firm, CoachUp.

Subscription market insights you won't find anywhere else.