Looking back, it is clear as day that the service succeeded in what it set out to do. Research from Telegeography projected that at the end of 2011, Microsoft-owned Skype accounted for 33 percent of all long-distance minutes – 145 billion of the total 438 billion minutes. According to Skype CEO Tony Bates, Skype has 254 million monthly active users and is “growing somewhere around 40% year on year.”

But that success comes bearing a harsh reality: What comes next for Skype, which admittedly has lost much of its sexiness? Skype has become a default setting in our lives and today the only time it generates any excitement is when the company manages to mess up the user experience of its applications. Skype’s future was on the mind of my fellow VoIPers - a small but still very active community of bloggers who love all things pertaining to Internet Voice.

Dan York, who is amazed by the success of Skype, is wondering what happens to Skype next, especially now that it is part of Microsoft. He believes that Skype hasn’t really had a challenger for a long time — or as he put it: “Instead of the little company taking on the Man, Skype has now become the Man.” Skype is being challenged not by other VoIP players but instead by other means of communication. It is and will always be in a battle for attention. Today’s social communication tools are the enemy of Skype.

Not everyone is worried. Skype Journal’s Phil Wolff (in a colorful presentation on SlideShare) is predicting Skype inside Windows, the web version of Skype and Skype for Kindle, amongst many things that will add up to glorious things for the service. But it is not going to be that easy for Skype, which has lost some of its early simplicity and needs to work hard to improve its user experience.

In a recent interview with USA Today, Skype CEO Bates said:

It needs to become more seamless, and, quite candidly, easier to use on mobile smartphones. The big No. 1 focus for us is we see this huge shift to more and more people on the go and bringing their own devices, and we need to have the best possible experience to do that.

But there is a lot to celebrate when it comes to Skype. Andy Abramson puts it best when he writes: “Skype may have been the single most disruptive service ever to hit the telecommunications world. For starters Skype really defined the idea of “free” calling.” Amen to that!

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“For us, the most important thing — our goal is a billion [users] and this will help us get there, ” Tony Bates, chief executive officer of Skype said at a press event earlier today. He is betting that Facebook will be able to get Skype’s paid products in front of more people. “I did allude to the fact that there’ll be a way to get Skype paid products,” he said.

“Today is the start of a long strategic partnership which will include exposure to free and PAID products for all Facebook users. Makes perfect sense for us,” said Skype spokesperson Brian O’Shaughnessy. He pointed out in an email that CEO Bates wants Skype to equal video calling, and this helps the company get to that point — and will help make ”video is fundamental to the new social construct.”

Skype had added support for Facebook in its Windows client recently, but it is still not clear how that integration has worked out, both in terms of generating revenues and more engagement between the two services. In the fourth quarter of 2010, Skype averaged more than 145 million connected users per month. Facebook has about 750 million members.

Same Skype, Just Thinner

Bates pointed out that Facebook’s video chat was using the same peer-to-peer technology that is used by Skype. “Same free Skype service, but trimmed down to fit within Facebook,” is how he described it. In order to use the service, you need to download a java plugin — if you don’t have it installed you are invited to a video call, and given the opportunity to download the plugin (you don’t need a Skype account to use the service).

Even if we buy into the argument that Facebook can get Skype a lot of new customers, I still think it is a highly risky strategy, and it runs the risk of the company losing a grip on its customers. Let’s remember that at one point even IBM thought Microsoft was only going to help them sell more computers and make more money.

Facebook could learn a lot more about Skype’s customers through this partnership, and then try and woo them into Facebook and obviate the need for Skype all together –theoretically speaking, Facebook could replace Skype with its own video-chat backend and no one would notice. In fact even today, if you don’t look hard enough you will miss that Skype logo when the chat window opens up. It is there, and yet it is not there.

Good for Facebook isn’t Great for Skype

Furthermore, even if Facebook plays clean and straight, how much does Skype get from this deal. My skepticism stems from the fact that Facebook is skewed almost entirely towards average folks, while Skype’s premium video services are largely used by professionals — whether they belong to a startup or work for a big company. More importantly, if Google’s Hangout becomes popular like I predicted, Facebook won’t have an option — it will need to roll out group video chatting. Guess what is Skype’s premium service? Group video chatting & conferencing. And let’s not forget, Skype has some challenges around monetization, without Facebook.

Some of my fellow Skype watchers feel that it is not such a bad deal. Alec Saunders, a veteran of internet telephony argued that since Skype is too quirky for his wife and too weird for his mother, Facebook’s version actually might be a good thing for Skype usage and will get them to a billion people.

The questions is to what end? Andy Abramson who blogs about internet telephony believes that in the end it will be about Facebook vs Google. To that extent I agree. Ironically Skype, which at one point wanted to turn carriers into dumb pipes is being turned into a dumb pipe itself.

Don’t get me wrong — I am glad Skype and Facebook friended each other. For the record, I had suggested last year and again earlier this year that Facebook buy Skype. Why?

In one swoop, Facebook would dominate what I’ve maintained is both the new age and classic social networking. They will have people’s credit cards; they have their real-world phone information; and in the end, they have a better, more useful, social graph than Facebook itself…..A simple search box inside the Skype client, and the two companies are starting to take attention away from arch-nemesis, Google.

Obviously that didn’t come to pass. Instead, the next best thing happened. Facebook’s rich grandpa – Microsoft decided to spend $8.5 billion on Skype. And somehow I feel that Zuckerberg just got a sweetheart of a deal.

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He told GigaOM that the actual job, which began about six months ago, involved a lot of slimming down of Skype’s native client and making it work in a browser, creating the back-end integration between Facebook and Skype and scaling up Skype’s network to handle the flood of traffic.

“We anticipate some really heavy usage, well in excess of what Skype sees today,” Rosenberg said.

Cut the client fat

The first big challenge was taking what is normally about a 20 megabyte native PC or Mac Skype client and stripping it down into a less-than-3-megabyte runtime, which works in conjunction with a JavaScript plug-in. Skype essentially ripped out much of the user interface and unneeded features of its Skype client to create a slim piece of software that could be quickly downloaded. The runtime provides some APIs, and the plug-in delivers those APIs through Javascript for access to Facebook.

Facebook’s team built the chat icons and video buttons, and it handles the download of the plug-in. Skype takes over during the actual call, logging into the plug-in and runtime and relying on its existing infrastructure to complete the call.

Where callers have no name

Rosenberg said 98 percent of Facebook video chats are identical to traditional Skype calls, save for some small rendering code for the video UI. In order to access Skype’s network, Skype actually has to create an anonymous Skype login for each Facebook video chat user, even if he has his own Skype login. A Facebook user’s identity must then be mapped to the Skype login to ensure that the call can go through.

That was something Skype spent time to get right, to make sure users were connecting to the people they intended to call and that their personal accounts were not able to be accessed by others, said Rosenberg. ”There were a lot of security things we needed to do to make sure it would just happen as users expected,” he said.

Many browsers = headaches

Getting Skype calls to work in a browser turned out to be more of a challenge, because Skype had to take into account how browsers operated. One of the biggest issues was dealing with the fact that users often can have several tabs open with Facebook. Skype had to be able to handle each instance of Facebook and ensure that the different tabbed versions were able to communicate correctly with the runtime.

“We knew this would be an issue, but it was more complicated than we thought,” Rosenberg said. “It turns out there is just a lot of concurrency use cases.”

Another issue was dealing with different browser and operating system combinations, making sure Facebook video chat would work on all configurations. That testing, along with performance tuning, took up much of the last month before Wednesday’s launch. Even now, Facebook video chat doesn’t work on Macs running the upcoming OS X Lion operating system, which was seeded last week to developers.

Scaling up behind the scenes

On the back end, Skype has bought more servers and bandwidth in its data centers to handle the extra traffic it expects. It still relies on its peer-to-peer network, the same video and audio codecs, for transport, but it needs more infrastructure to scale up reliablity for Facebook and handle the handshake between the two networks.

One key decision has been to rely completely on dedicated supernodes to facilitate Facebook video calls and to bring them all into Skype’s own data centers or into Amazon’s EC2 cloud. Supernodes select Skype clients that often sit on the public Internet, act as directories that help guide calls through the P2P network, and are usually used during recovery efforts after an outage. The fact that Skype is taking this step shows that it is serious about getting off to a good start on Facebook.

More features to come?

Skype’s integration opens up some interesting possibilites for future video chat services through Facebook. Rosenberg declined to say if Skype video chat will come to Facebook’s mobile apps or if group video chat will come to Facebook’s site. He said that Skype just rolled out its Android app and is still working on ramping that up.

But he said it’s technically possible, as is group chat for the browser. Bringing group chat to the desktop browser, however, would require an update to the runtime, which was slimmed down by pulling out features like group video calls and instant messaging. It might take a little time, but I don’t doubt that we’ll see both features come in the future. Skype CEO Tony Bates said on Wednesday that the integration was a chance to introduce Facebook users to Skype’s paid products, things like group video chat.

You can read more about the Skype-Facebook integration on Skype’s blog.

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Those who were let go included  David Gurlé, Christopher Dean, Russ Shaw, Don Albert, Doug Bewsher and Anne Gillespie. Later, Bloomberg News reported that Ramu Sunkara and Allyson Campa, who joined Skype via its Qik acquisition, were cut too.

The company, according to Brian O’Shaughnessy, Skype’s PR chief, is rationalizing its operations and is focusing its resources on engineering and product. Reports in other media outlets have indicated that it is the private equity investors who might be behind the cuts. “It is Tony’s decision,” said O’Shaughnessy.

Bloomberg report indicated that the firings would reduce the value of the payouts to those executives, though investors in Skype dismiss that talk. Skype investors say that most of these executives are getting about 75 percent of the payouts due to them.

That said, Skype as a company isn’t known to be generous with its employees when it comes to doling out options. That was true in both the pre- and post-eBay days. Nevertheless, I don’t think we have heard the last of this development, so stay tuned.

Our buddy Andy Abramson notes that Christopher Dean was unfairly treated.

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Nonetheless, I’m betting that Microsoft knows that it is skating on thin ice and will make this Skype deal work. This morning, I spoke with Steve Ballmer and Tony Bates about the deal and what comes next. Here are my quick notes:

Steve Ballmer

• We wanted to partner with them but in late March/early April decided that we wanted to buy them and brought in a bid.
• We loved Skype’s growing consumer customer base.
• Tony Bates will report directly to Ballmer, and Skype will operate as a division of Microsoft.
• We will support the non-Microsoft platforms, and it is in our best interest to do so. That is part of the strategy. Real diversity of devices is the key value proposition of Skype franchise.
• This is about putting users first and giving them technologies they need.
• This is about communication and will be part of our communication efforts.
• Windows Phone 7, Outlook, Messenger, Kinect, X-Box Live, Hotmail and Lync are all getting Skype support.
• We want to be a scale provider of communication technologies.

Tony Bates

• The acquisition speaks to the strength of the business and the team
• I realized that while we can do it alone, the opportunities are much larger between us.

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Bates is a well regarded executive who handles Cisco’s Enterprise division, and in the past, handled their carrier-focused operations. As part of my reporting duties, I’ve talked to Bates on many occasions and have found him to be a straight shooter. I first talked to him back in the day when he was working for InternetMCI. He’s a good candidate to replace Silverman, who has done a remarkable job of stabilizing what was an operation on the verge of tipping over.

Silverman restored morale, and more importantly, helped with the spinoff of Skype as a separate company. He had an impossible task of managing a massive board of directors, many of them with big egos and bigger wallets. It can’t be easy to do that job on a daily basis. From what I’ve heard, the Skype board has been very stingy about giving out options to their employees, including folks like Josh.

Bates’ hiring is indicative of three things:

• Skype is dead serious about an initial public offering (IPO).
• The company isn’t looking to sell out anytime soon.
• Skype is about to make a deeper push into carrier and enterprise markets.

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