The revolutionary service that ate itself: the complete story of Skype

At the beginning of the century, Skype did the impossible - it allowed you to call without money and borders and made telecoms operators nervously adjust their tariffs. But on 5 May 2025, Microsoft finally pressed the exit button. Skype is closing down. The company is switching users to Teams, a universal corporate monster for meetings, chats, and collaboration. How Skype became a symbol of a new world, how it survived many resales, why it was devoured not by competitors but by internal transformations, and what finally made it unprofitable. This is not an obituary for a software, but for an entire era of communication.

A quick transition

• From P2P file sharing to free global calls (2000-2003)
• Conquering the heights: Early growth and expansion (2003-2005)
• The eBay deal: A strategic mistake? (2005-2009)
• A New Breath: An interlude with private equity (2009-2011)
• Microsoft's $8.5 billion bet: Integration and transformation (2011-2017)
• Messenger competition and team growth (2017-2024)
• The curtain: the 2025 shutdown and Skype's lasting legacy
• The bottom line: from disruption to digital history

From P2P file sharing to free global calling (2000-2003)

The story of Skype begins where Swedish entrepreneur Niklas Zennström and Dane Janus Friis meet. In the late 1990s, they both worked for Tele2, a large telecommunications company based in Sweden. Friis didn't have a diploma at the time, but he had self-taught programming skills and a hacker's approach to life, so Sennström offered him a job in customer support. That's how it all started.

Niklas Zennström (left) and Janus Fries (right). Illustration: eu-startups.com

Together, they tried their hand at various online projects - the Get2Net provider, the Everyday.com portal - but it wasn't enough. They wanted something that would really change the game. And they did - in January 2000, they launched Kazaa from their apartment in Amsterdam. It was a file-sharing service used by millions to download a song, a film, or a little something not quite legal.

Kazaa was based on FastTrack, a protocol that the pair developed on their own in 2001.

And it became a real hit. And then, as it happens with hits, there were lawsuits, complaints, and music corporations filing lawsuits.

It all ended seriously: the case was sold to Sharman Networks, and the founders themselves got hit in the wallet - the amount of court settlements reached more than $100 million. But in return, they gained an understanding: P2P is power. And this power should be used wisely.

The code magic for Kazaa, and later Skype, was created by four Estonian engineers: Ahti Heinla, Priit Kasesalu, Jaan Tallinn, and Toivo Annus. The first three were school friends who had been developing games at Bluemoon Interactive since the 1980s. They had already been tested at Everyday.com, so it was only a matter of time before they were invited to a more serious project. Annus managed the first office in Tallinn and was involved in key parts of the network architecture.

Ahti Heinla, Tiivo Annus and Priit Kasesalu in 2007. Illustration: Wikipedia

The same "eureka moment!" happened in the summer of 2002. After all the battles with Kazaa, the team decided to rethink P2P.

Instead of files, it was voice. No tariffs, no traditional telephone infrastructure. Just the internet and calls.

The idea belongs to Fris and Annus, and it immediately became an engineering and business solution - without the risk of suing every music company.

The technological essence is VoIP, but not through a classic server-based scheme, but through their own decentralised P2P network based on FastTrack. The development was done in Delphi, C, and C++ - everything is serious, without scripts or backdoors.

Even the name breathes with this P2P spirit. Initially, we planned to call it Sky Peer-to-Peer, then shortened it to Skyper, but the domains we needed were taken. As a result, one letter was simply dropped from the name, and Skype was born. The Skype.com and Skype.net domains were registered in April 2003.

After alpha tests in the spring of 2003, the first public beta was released on 29 August. Skype Technologies SA was registered in Luxembourg, but the core development remained in Tallinn. And within a few weeks, everyone realised that something really big had been born.

The reliance on the Estonian team also highlighted the early globalisation of tech talent, proving that world-changing technologies can originate far from Silicon Valley and marking the beginning of what would become Estonia's thriving tech ecosystem, often referred to as the "Skype Mafia".

Conquering the Heights: Early growth and empowerment (2003-2005)

The launch of Skype was a rare case of a "first day success". On 29 August 2003, the app was downloaded more than 10,000 times. A few months later, the number exceeded one million.

People instantly picked up on the main advantage: free, high-quality voice calls via the Internet.

The geography was global, the requirements were minimal, and communication bills were suddenly optional. This was a tectonic shift. Janus Fries even said it prophetically: "One day people will say 'I'll Skype you' instead of 'I'll call you'.

The team quickly started adding new features: instant messaging, file transfer, and all of this was still in its early stages. By October 2004, Skype already had 1 million simultaneous users, and the total volume of calls exceeded 2 billion minutes. In June 2005, the number of Skype-to-Skype calls reached 10 million, and when eBay entered the game, there were already about 50 million users.

Investors did not stand aside either. Even before its release in 2002, the project received $250,000. In August 2003, it received a second wave of funding, and in March 2004, a fat $18.8 million round A from Draper Fisher Jurvetson and Index Ventures. Bessemer also joined in with $1-2 million. The total amount of the first phase was about $20 million, which was spent on global expansion.

Of course, we had to make money somehow. In 2004, we launched SkypeOut, a service that allowed people to call ordinary numbers for little money. You could pay by the minute or sign up for a subscription (for example, $2.95 a month for unlimited calls to the US). It was called "freemium" - partly free, partly paid. And it worked: in the first three years, the model brought 70 million users and $35 million in quarterly revenue.

The team actively expanded to all platforms. A Mac version was released in August 2004, and a Linux version in February 2005. And then came the bombshell: video calling. First, in the beta version of Skype 2.0 in 2005, and in January 2006, officially for Windows. In the autumn of the same year, it was released for Mac. The picture instantly became the main argument in favour of Skype.

For telecom operators, it was a cold shower. Skype was called a "nightmare for operators". Its decentralised architecture made it possible to bypass infrastructure, tariffs and other communication rudiments. By 2008, the service controlled 8% of the international call market, and later reached 40%. But the whole revolution was not just based on tariffs - it was also based on technology: The P2P architecture allowed the service to scale with users without spending millions on servers.

It was the bundle: peer-to-peer + free calls + paid goodies that became the formula for Skype's early success.

The eBay deal: A strategic mistake? (2005-2009)

In September 2005, just two years after its launch, Skype was taken over by eBay. The online auction giant paid $2.6 billion in cash and stock. And if Skype had also shown the "right results", the total amount could have exceeded $4 billion. Yes, that's right, four. For a VoIP app that had a lot of users at the time, but no direct connection to a profitable business.

Meg Whitman, the then CEO of eBay, dreamed of combining eBay, PayPal, and Skype into a kind of "super system": buyers and sellers would be able to talk via video, exchange voice messages like "WhatsApp at its best", and trust each other even more. Everything looked beautiful on the slides. Plus, it was said that Google and News Corp. were also knocking on Skype's door, so eBay decided to waste no time in paying for it like a rare dinosaur coin.

Meg Whitman, CEO of eBay. Illustration: NBC News

Back then, analysts were scratching their heads. They said that these were completely different worlds: a platform for selling used TVs and a service for internet calls. Unlike PayPal, which actually speeded up transactions, Skype on eBay was like making a video call in a grocery store - kind of cool, but why?

It quickly turned out that the doubts were justified.

There was no integration, users continued to send each other emails, and Skype remained a separate island in the eBay ocean. This was a classic case of the "synergy trap" - when you buy for expectations and get a headache.

Nevertheless, Skype continued to grow: 100 million users in 2006, half a billion downloads in 2007, video calls, SMS, Skypecasts, Skype To Go, and even a business version. But financially, things looked much less rosy. In 2007, eBay officially admitted that we had overpaid. And wrote off $1.4 billion, of which $530 million were bonuses that Skype never earned.

Even though the service brought in $195 million in 2006 and $551 million in 2008, the "synergy" remained in theory. The leadership changed regularly, and founders Zennström and Fries left the project by 2008, switching to a new dream - the video platform Joost (which, spoiler alert: did not take off).

In February 2008, Josh Silverman, Skype's fourth CEO in three years, took the helm. He cleaned things up a bit: he removed unnecessary stuff, focused on video, and managed to reach one billion downloads by the autumn of 2008. But even under him, Skype never became part of the eBay empire. Just a neighbour in the office who speaks a different language.

Josh Silverman, CEO of Skype in 2008. Illustration: ibtimes.co.uk

New breath: The private equity interlude (2009-2011)

In March 2008, eBay got a new CEO, John Donahoe, who quickly realised what analysts had been saying all along: Skype was in their way. In April 2009, he bluntly stated that the company planned to spin off Skype and prepare it for an IPO in 2010. Honestly and directly: "Skype is a good standalone business, but it doesn't fit our e-commerce and online payments business."

But instead of going public, another scenario emerged: private equity. In September 2009, eBay sold a controlling stake in Skype (initially 65%, later 70%) to a consortium led by Silver Lake Partners. The deal also included Andreessen Horowitz (then a young venture capital fund), Index Ventures and the Canadian pension fund CPPIB. The total valuation of the company is $2.75 billion. eBay received $1.9 billion in cash, another $125 million in liabilities, and retained 30-35% of the capital.

At this point, everything looked like a fresh start... until a skeleton came out of the closet. Joltid, a company owned by Skype founders Niklas Zennström and Janus Fries, owned the patents for the core P2P technology of Skype. And eBay only leased it. And as soon as the deal with investors was announced, Joltid filed a lawsuit demanding to terminate the licence. That is, the whole Skype risked being left without its core.

This "patent minimum" became a great trump card for the founders.

In November 2009, the parties reached an agreement: Skype bought all the rights to the P2P technology, and in return, Zennström, Fries and their partners received 14-15% of the company's shares and returned to the board of directors. The comeback was high-profile - and strategically important.

It helped Skype begin its recovery. It was a classic private equity scenario: take a troubled asset, resolve legal and structural knots, put in place a new team, and turn the business around. In October 2010, Tony Bates, a former Cisco executive, became CEO. He relied on mobile platforms - just two days after the release of the iPhone version, there were more than a million downloads - and video as the main "feature".

Tony Bates, CEO of Skype in 2010. Illustration: eastbaytimes.com

The number of users grew rapidly, with 380,000 new users added daily by the end of 2009. Revenues also grew: $740 million in 2009, $860 million in 2010. There were about 170 million active or connected users, although only 8-9 million of them were paying.

In August 2010, Skype officially filed for an IPO, planning to raise $100 million. In the first half of 2010, revenue was $406.2 million (+25% year-on-year), but net profit fell to $13 million due to interest on the debt after the buyout.

But all this is just a teaser. The IPO never happened. A new buyer appeared on the horizon. A big one. And very familiar.

Microsoft's $8.5 billion bid: Integration and transformation (2011-2017)

In May 2011, Microsoft broke the news: the company was buying Skype for $8.5 billion. No bidding. It was the largest deal in Microsoft's history at the time and a profitable exit for investors from Silver Lake and eBay, who had been thinking about an IPO a little earlier. The deal officially closed in October 2011 after regulatory approval.

John Donaghy and Steve Ballmer. Illustration: nbcdfw.com

Microsoft's CEO at the time, Steve Ballmer, described it as "creating the future of real-time communications". The idea was ambitious: Skype was to strengthen Microsoft's ecosystem - from enterprise Lync to Outlook, Xbox Live and even Windows Phone. The package included 170 million active users and a globally recognisable brand. And, of course, a chance to improve Microsoft's position in the mobile and VoIP segment.

It was also "if not us, then Google or Facebook".

Both competitors (as well as Yahoo! and Cisco) were also rumoured to be interested in Skype. Microsoft couldn't afford to let such an asset end up in the enemy camp, so it overpaid - and overpaid big time. After all, $8.5 billion is 10 times Skype's 2010 revenue ($860 million) and three times its valuation during the previous sale.

Analysts immediately started doing the maths: with an operating loss of $7 million in 2010, it looked like deja vu with the failed aQuantive acquisition. Sceptics said it was expensive and pointless, while optimists said it was strategically correct. For this deal to pay off, Skype had to grow rapidly and generate large profits.

Microsoft created a separate Skype division, headed by Tony Bates, and promised a lot - support for Mac, Linux, Android, and iOS would not disappear. Platform openness - at least in words - remained.

Major mergers began. In 2013, Microsoft closed Windows Live Messenger and transferred all its users to Skype. On the corporate front, Lync was merged with Skype and in 2015 was transformed intoSkype for Business. Skype was integrated into Outlook, Xbox (especially with Kinect), Windows Phone, and Windows 8/8.1, making it the default app.

But the most important thing happened behind the scenes: Microsoft has gradually abandoned Skype's P2P architecture. The distributed model, which once provided stability and savings, began to fail in the mobile era. P2P clients drained smartphone batteries, synchronisation didn't work as it should, and adding new features across all devices became a challenge.

So in 2012, Microsoft started deploying its own data centres with "supernodes", and in 2013, it began actively moving the Skype backend to Azure. By 2017, the service had finally moved to the cloud: chat, calls, user identification - everything worked on the new microservice architecture. They even moved 140 terabytes of data per region to Azure Cosmos DB.

The official explanation was to improve stability, speed, and scalability. And also to launch new things like Skype Translator or a bot platform. Some have criticised this as a way to centralise and therefore reduce privacy. But in the age of mobile and the cloud, it was inevitable. P2P was good at the start, but to survive in the new world, Skype had to change beyond recognition.

In 2016, Christopher Lloyd, known for the Back to the Future trilogy, joined Skype's promotional campaign.

and Paul McCartney:

Messenger competition and team growth (2017-2024)

Even after migrating to the clouds and becoming fully integrated into the Microsoft ecosystem, Skype began to lose its footing in the mid-2010s. The world of communications was changing rapidly. WhatsApp, Facebook Messenger, WeChat - the first wave of mobile messengers - took over as the main way of communication. And not just text: voice, video, stickers, boomerangs - all in one package. Apple, with its FaceTime, also sat quietly on millions of iPhones and did not need any third-party applications.

A collage of messengers. Illustration: gagadget

Against this background, new players have emerged. Zoom - minimalistic, fast, and stable - became a phenomenon, especially during the 2020 pandemic. Google was not asleep - it transformed Hangouts into Google Meet.

The market began to resemble a crowded party, and Skype looked like a guest who forgot to change his clothes back in 2010.

Instead of evolution, it was tossing and turning. In 2017, Skype decided to go "young" and added Snapchat-style features: stories, Highlights, and other visual banter. Users responded sharply: ratings in the App Store plummeted, features became more complex, and basic things were buried deeper. And all this against the backdrop of technical failures: freezing, device-to-device synchronisation, calls that cut off on the word "hello".

And the main competitor, as it turned out, was not even Zoom. It was Microsoft Teams. In 2017, the company launched Teams, initially as a response to Slack. But then the platform went on the offensive and entered the territory of Skype. Deep integration with Microsoft 365, aggressive promotion, and rapid growth: in December 2023, Teams had 320 million monthly active users. And what's worse for Skype is that in 2021, Teams was also positioned for home use. In short: "Thanks, Skype, but we have our own favourite now."

Skype lost its momentum. At the start of the pandemic (March 2020), it had 40 million daily active users, and three years later, it had 36 million. And this is at a time when video communication has become the new normal. Its share of the video calling market fell to 6.6% by 2021. Zoom, for comparison, is currently the leader by a huge margin.

In short: Skype, which once broke the rules of the game, has become a victim of the new rules. It did not have time to adapt to the world of smartphones and clouds. Its competitors were launching one-click calls without registration, while it remained stuck in a complex old model.

Skype was sandwiched between mobile messengers, Teams, and its own outdated solutions.

From being a symbol of the digital revolution, it turned into an app that we only open by accident, clicking on the wrong shortcut.

Curtain call: the 2025 shutdown and Skype's lasting legacy

Microsoft has confirmed what has long been in the air: Skype will leave the arena for good. The reason is the unification of communication services and the reliance on Microsoft Teams as a universal communication platform.

Here's what happens next:

• Movingto Teams: you can log in with the same credentials, most chats and contacts will be transferred automatically.
• What won't be migrated: work/student account history, private conversations, and Skype for Business history.
• Data export: available until January 2026. After that, it will be permanently deleted.
• Paid features: In-app purchases are no longer supported. Credits will be valid until the end of the term, but no later than 3 April 2025.
• Cross-platform: communication between Skype and Teams users will work until 5 May.

Why it was closed:

Skype could not withstand the competition of mobile messengers, technical debt from P2P architecture, and internal competition with Teams. Its time has passed.

But Skype leaves behind a powerful legacy:

• Affordability: making international calls commonplace.
• Popularisation of VoIP and video: paved the way for Zoom, Meet, FaceTime.
• Technology: P2P on a global scale, breakthroughs in codecs (SILK, Opus).
• "Skype Mafia": Estonian funders launched a new wave of startups - Wise, Bolt, Veriff, Starship.
• Culture: Skype became synonymous with video calls long before the pandemic.

Skype is not just disappearing - it is completing a cycle, changing an entire era of digital communication.

The bottom line: from breakthrough to digital history

Skype is a story of rise, fall and transformation. Built on the P2P experience of Kazaa, the service made international communication affordable and effectively broke the model of traditional telephony. But after a wave of success, billion-dollar deals, corporate wars, a restructuring to Microsoft's cloud services, and eventually competition with Teams and Zoom led to a logical end: Skype shut down on 5 May 2025. Its legacy is not just about calls, but a cultural and technological revolution: VoIP in the mainstream, the birth of the Estonian startup mafia, and a new era of global digital communication. Skype left, but it changed everything.

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