How Netflix Shaped Skype’s Platform Strategy

Skype quietly announced SkypeKit, an SDK for CE manufacturers last week, to push Skype services beyond the PC. However, it wasn’t until the following day when Jonathan Christensen, the General Manager and Head of Platform at Skype, talked in depth about the company’s plans to mimic Netflix by following a platform-centric approach did the company’s broader intentions become clear.

As outlined by GigaOM Pro analyst Alfred Poor in a new research note on SkypeKit, Christensen talked in depth about how Skype learned from Netflix when putting together plans for SkypeKit, an SDK with an open API targeted at makers of consumer electronics devices such as TVs, tablets and other gadgets. The goal of this new effort is to encourage device makers to use the SkypeKit API to integrate Skype services into their devices. It’s this approach, along casting a wide net on different consumer electronics hardware partners, where Skype took inspiration from Reed Hastings’ company.

Given Netflix’s performance in recent years, we think the company isn’t a bad muse to have when it comes to strategy, but we still have to wonder if a similar strategy will work for Skype. After all, Skype is a low-cost or free, VoIP and video communication provider, while Netflix is a successful, paid entertainment subscriber service.

To answer the question of whether a Netflix strategy will work for Skype, let’s break down the reasons for Netflix’s success:

Reason 1: Timing

NETFLIX: Netflix has repeatedly created business models that are pitch-perfect fits for current market realities.  When Reed Hastings founded Netflix, he envisioned a future for online streaming, but knew the market wasn’t ready, so he created a physical media subscription service that bought Netflix time. When broadband  became pervasive and online video popular, he reinvented the company by pushing aggressively into streaming, and made Netflix a must-have partner for any self-respecting connected device maker.

SKYPE: No doubt, some of the same overarching trends that have benefitted online video streaming helps video and voice chat, including broad device connectivity and pervasive, low-cost broadband. Not only that, but visual communication will become much more common in coming years, as people use devices like the iPhone 4 to talk to each other.

Summary – Skype’s timing is actually pretty darn good.

Reason 2: Big Installed Base

NETFLIX: The main reason Netflix isn’t sitting alongside others in the online video graveyard is because it brought with it a big and loyal installed base of early adopters. Because they were early adopters, these subscribers proved the perfect fit for the transition to streaming.

SKYPE: With Skype, there’s no doubt the company brings with it a massive user-base, many of which are hardcore devotees to the company’s services.  Even getting a single-digit percentage of its user base to use Skype on connected devices would result in tens of millions of Skype-device users.

Summary – Skype’s installed base eats Netflix’s installed base for a mid-afternoon snack.

Reason 3: No Incremental Cost

NETFLIX: One of the reasons for the success of Netflix (and potential downfalls for Hulu Plus) is that Netflix didn’t require any additional fees from subscribers to its $8.99 (and above) service packages to access the Watch Instantly service. If you pay for Netflix by mail, you get Watch Instantly. Sure, the company garnered millions of new subs because of Watch Instantly, but the rapid adoption of the service was driven by its installed base of millions using the service from the outset.

SKYPE: Of course with Skype, a big chunk of the user-base is attracted to the service specifically because, well, they’re cheap. That doesn’t mean the company doesn’t get revenue from value-added services. Still, the reality is TV manufacturers will offer the basic Skype service for free, and Skype can look to create additional loyalty and potential for value added services down the road.

Summary – Skype to Skype calls will remain free on connected devices, and chances are those who pay for services like Skype-Out would also pay for additional video-chat services. So Skype’s lessons from Netflix should pay off.

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