How does Skype make money?

Ever since WhatsApp was scooped up by Facebook for $19 billion last week, there’s been a lot of attention paid to the messaging space, and how other companies have monetized. That’s pretty understandable. You spend that much money on a company, the first question is going to be how you can make it back.

There are numerous ways for WhatsApp to make money, including in-app sales. Another way the company could make money is by replicating the business model made popular by Skype: offering some free services, while charging users for certain features, like calling or texting to non-Skype users.

Skype offers voice calls, video calls and group calls for free as long as they are Skype-to-Skype, even on mobile.  If a person on a computer calls out using Skype to another person’s mobile phone who has Skype on that mobile phone, then that Skype call will be free.  It also gives away free instant messaging, sharing screens and file sending.  

The way the company makes money is by charging small fees for other services. Making calls from Skype to a mobile phone that does not have Skype, or to a landline phone, will cost users. They either pay one cent per minute, or they can pay a flat monthly rate that changes depending on the country.

For example, a monthly rate in the United States is $2.99, while it is $1.19 a month in China and the United Kingdom. The same fees apply for sending text messages and for using WiFi hotspots. 

The company also offers a Premium version of the service, which comes with group video calls and unlimited calls to a country/region of the users’ choice for $9.99 a month. 

Skype has 299 million connected users. In the full year of 2013, which ended in June of last year, Skype users made more than 162 billion minutes of calls. It’s unclear, however, how many of those were paid calls that would generate revenue.

Skype is apparently a revenue-generating juggernaut, which is why it was acquired by Microsoft for $8.5 billion in cash in May of 2011. 

Since then it is unknown how much money the company is actually making since Microsoft basically isn’t saying. Any money being made by Skype is now rolled into the Entertainment & Devices unit, which also contains revenue from Xbox and Windows Phone. No individual numbers have been broken out for the company since it was purchased.

The Entertainment & Devices division brought in over $10 billion in 2013, with an operating income of $848 million. In the fourth quarter of 2013, the Microsoft saw an increase in revenue from the division “due to higher Windows Phone and Skype revenue, offset in part by lower Xbox 360 platform revenue.” 

As of a year ago, though, a report out from Bloomberg said that the Skype division was close to generating $2 billion in annual sales. In all, Microsoft saw over $77 billion in fiscal year 2013, with an income of $26.8 billion.

I bet Facebook would love to say the same thing about WhatsApp three years from now.

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