Right now, Skype is a go-to service for far-flung families and friends trying to stay in touch. It offers free or low-priced calls and the chance to converse face-to-face via a webcam. But the company, which is widely expected to launch an initial public offering in 2011, wants to move beyond helping travelers to stay in touch on the road or allowing a grandmother to “be there” for a grandchild’s birthday despite living thousands of miles away.

Skype also wants to become a place where deals are made by CEOs and rank-and-file employees alike. Once seen as a renegade company that would give entrenched telecommunications providers a run for their money, Skype is now hoping to prevail in the business arena. Founded in 2003 by the developers of peer-to-peer file sharing software Kazaa, Skype was purchased by eBay in 2005. Three years later, the online auction giant sold a majority stake in Skype to an investor group.

The move into the corporate communications sphere will take Skype into closer competition with companies such as Cisco Systems and other established business technology players. Indeed, since regaining its status as an independent company, Skype has continued to add new features and embed its service into devices such as televisions and smartphones. Last October, Tony Bates, who was most recently general manager of Cisco’s enterprise, commercial and small business unit, was tapped to become Skype’s CEO.

Skype’s efforts to become more business-focused hope to capitalize on the increasing influence that consumer tastes and preferences have in dictating what types of technology will be used by corporations, according to Andrea Matwyshyn, a legal studies and business ethics professor at Wharton. Consumers are using their personal iPhones at work and want the software they use at the office to resemble websites they frequent during leisure time, such as Google or Facebook. And they want to communicate at work with tools like Skype, just as they do at home.

“Skype has built a loyal user base for several years. For most consumers, Skype is associated with communication,” says Matwyshyn. “As a result, businesses will give Skype a chance.” Peter Fader, a Wharton marketing professor agrees. “Skype is an essential [tool] and has so much potential,” Fader notes. “The Skype name is already a verb [as in ‘skyping’ with someone] and can certainly go down the business-to-business path. That’s where the money is.”

Show Me the Money

Gravitating toward a sector with significant profit potential makes sense for Skype because, “unless you’re going to be a site that attracts advertising, you have to find other ways to make money,” says Wharton operations and information management professor Saikat Chaudhuri. “The key for Skype is to offer enough value so the business user will buy a premium version of Skype.”

Skype currently offers two tiers of service: Free services include instant messaging, audio-only calls and video chats between Skype users. Skype charges users who make or receive calls from landlines and mobile phones. There is also a fee to get voicemail and send text messages. Plans range from 9 cents a minute for calls to $5.99 a month for group video calling services.

This “freemium” business model is designed to attract users through the lure of a freebie and then convince them to pay for more advanced capabilities. As of June 30, 2010, Skype had 560 million registered users and 8.1 million paying customers. For the six months ended June 30, Skype reported earnings of $13.1 million on revenue of $406.2 million. “The freemium model hasn’t been a runaway blockbuster, but Skype is doing a nice job with it,” Chaudhuri notes.

Wharton management professor David Hsu has a slightly different view. Sure, Skype has a massive user base, but the percentage of paying customers could be much higher. “Consumers are getting a very good deal,” Hsu states. “The initial revenue model was to charge for minutes, but that’s not generating enough profit. They have to be bold and devise a real pricing scheme for all users. It doesn’t have to be that expensive.”

According to Hsu, Skype’s plan to target corporations is a good start toward developing a more profitable business model, but ultimately he thinks Skype should pursue an advertising model for free services, consider charging more casual users, or vary network quality based on premium versus free service. “The ‘economy’ passengers on Skype shouldn’t get the same quality as first class,” Hsu says. “I see very little alternative but to move away from mostly free service. You can’t subsidize everybody indefinitely.”

Breaking with Tradition

Skype laid out a strategy to expand its business offerings and target premium services to the sector in an August 2010 filing with the U.S. Securities and Exchange Commission that declared the company’s intent to do an IPO. The IPO was expected to come in the first half of 2011, but in January, The Wall Street Journal reported that the IPO had been pushed back to the second half of the year to give the company more time to increase its value.

In the August regulatory filing, the company noted that a survey of 40,000 Skype users revealed that 37% “use our product platform occasionally or often for business-related purposes.” That statistic underscores what the company described in the filing as “a significant opportunity to better serve the communications needs of the small and medium enterprise segment, as well as larger enterprise customers.”

Since its initial filing with the SEC, Skype has made a series of moves to bolster its position with business customers:

  • At the Consumer Electronics Show last month, Skype launched group video calling services for consumers and businesses. Video calling accounted for 40% of all Skype-to-Skype usage in the first half of 2010. Skype-to-Skype means that callers on both sides of the conversation were using the service.
  • Skype launched video calling for the iPhone and acquired Qik, a company that provides mobile video software.
  • Skype partnered with Avaya, a company that provides video and voice communication equipment to large companies. Avaya will integrate Skype’s technology into its systems.
  • Skype launched a program to certify systems integrators, or firms that would install Skype at businesses.
  • The company also launched a software program called Connect that allows businesses to integrate Skype into traditional phone networks. Employees can make calls via Skype through their landline phones at Skype’s calling rates, while customers are able to call in from their computers by clicking a Skype icon on a business’s website.

However, Skype’s plans to be a business player may not go so smoothly. Kendall Whitehouse, director of new media at Wharton, says that businesses may be more comfortable with larger rival Cisco for enterprise-wide deployments. While business executives may know Skype from personal use, “Cisco may have more brand awareness on the business side. Skype came up through the free consumer space, not unlike Facebook,” notes Whitehouse. “There’s a lot of habit and tradition in the workplace. Why do you use Facebook to connect with friends and still use e-mail for business correspondence?”

Skype’s efforts to build a bridge to corporate America are not uncommon — witness Apple’s business push for the iPhone and iPad. However, making the jump from a consumer product to a business tool is not easy. “The enterprise sector takes a different [type of] sales and support organization,” Whitehouse points out. “Skype is known for consumer software, but it has a long path ahead to become more enterprise-oriented.”

One key aspect of being business ready is reliability. On December 22, Skype suffered a setback in that area, in the form of a 24-hour outage when its messaging services became overloaded. In a blog post, Skype’s chief information officer, Lars Rabbe, explained how the outage happened, and reported on procedures the company is adopting to prevent another failure.

“We understand how important the reliability, security and quality of our software is to Skype users around the world, and we work hard to maintain high standards as well as develop new features and products,” Rabbe wrote. “We are truly grateful to all of our users and humbled by your continued support. We know how much you rely on Skype, and we know that we fell short in both fulfilling your expectations and communicating with you during this incident.”

According to Fader, the Skype outage is not likely to damage the company’s brand in the long run. “The outage is a minor blip. If anything, the outage showed that public expectations for Skype are high. The outage reminded us that Skype is a ubiquitous utility that we take for granted.”

A Powerhouse in the Making?

Where does Skype go from here? Today, Skype specializes in Internet phone calls, instant messaging and video conferencing. But Wharton professors do not expect the company to be content with those specialties. “No one today would ask, ‘What is Skype?'” Fader notes. “The risk is that Skype expands their set of services and becomes bloated.”

Chaudhuri predicts that Skype may eventually evolve into more of a so-called unified communications tool, offering customers the ability to message, call, video conference and collaborate using a single platform. “The question for Skype becomes about unified communications, and where do the two services meet. Today, there is a clear delineation between the two categories. If you want high-end telepresence, it’s Cisco. But if you don’t need that, Skype may be an answer.”

A next logical step for Skype would be to allow for document sharing to better compete with Cisco’s WebEx and Citrix Systems’ GoToMeeting software, Chaudhuri adds.

According to Whitehouse, the challenge for Skype is integrating these features together in a user-friendly way. “Despite some degree of overlap in features, most of the major vendors focus on different functions — such as group collaboration, online presentations, or video and voice calling. For Skype to move into the enterprise, they’ll need to add more business features and connect with existing corporate infrastructure.”

Meanwhile, mobile technology is another key area for Skype, which has already embedded its service on numerous smartphones. The acquisition of Qik is also expected to expand Skype’s mobile reach. “Mobile solidifies Skype on a new platform beyond just the desktop,” Matwyshyn says. “For many users, the potential to have a nice integration between the smartphone and PC will be appealing.”

As Skype expands into the business-to-business market and adds more features for consumers, the list of competitors only grows longer. Cisco’s WebEx and voiceover Internet services are likely to be the biggest threat to Skype on the corporate side. On the consumer side, Skype competes with instant messaging systems from Yahoo and AOL, Apple’s Facetime video conferencing software, and services from Google and others.

In Skype’s IPO filing, the company named Google as a significant competitor because the company could integrate business communication services into its e-mail service. Apple, Microsoft and Yahoo are also threats, Skype said, adding that telecommunications companies are competitors because they can block its services if they choose.

Matwyshyn, however, says that Skype has been able to fend off rivals because it has a strong following among business travelers and international customers. Skype is often used to save on international calls and allows users to pick up local numbers when traveling. Fader agrees that Skype is likely to endure. “Skype at its birth was a bit of a renegade, and plenty of people said, ‘These guys aren’t going to last long.’ Now Skype is becoming a big staid corporate thing. Skype is a powerhouse in the making, and many people never saw it coming.”