fusion of disruptive technologies:: lessons from the skype case

doi:10.1016/j.emj.2006.03.007

European Management Journal Vol. 24, Nos. 2–3, pp. 174–188, 2006

� 2006 Elsevier Ltd. All rights reserved.

0263-2373 $32.00

Fusion of DisruptiveTechnologies:Lessons from theSkype Case

BHARAT RAO, Polytechnic University, New York

BOJAN ANGELOV, Polytechnic University, New York

ODED NOV, Polytechnic University, New York

In this paper, we study the effects of integration ofone or more disruptive innovations and ask if theresultant (new) innovation can have a dramaticimpact on new and existing markets, and the resul-tant technology paradigm. We describe the evolu-tion and dynamics of this process using Skype asa case in point. Skype successfully fused peer-to-peer computing (P2P) techniques and voice-over-Internet-protocol (VoIP) to create a newstandard and operating model. We discuss whethersuch integration of disruptive technologies maylead to a ‘‘marriage of equals’’ or whether it leadsto dominance by a single technology – and if so,in what circumstances.� 2006 Elsevier Ltd. All rights reserved.

Keywords: Disruptive innovation, Fusion, Integ-ration, Skype, VoIP, P2P, Standards, Peer-to-peer,Telephony, Communications

Introduction

Previous research in technology management has ad-dressed the issue of disruptive innovation as it re-lates to a single technology. One novel questionwhich can now be considered is the potential impactof a merger or integration of two or more disruptivetechnologies and their resultant pattern of innova-tion. In this paper, we use the case of Skype to exam-ine what happens when two or more disruptivetechnologies combine to offer a potentially new valueproposition.

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Skype, a European-based startup, had launched ahost of services by fusing VoIP (voice over internetprotocol) and P2P (peer-to-peer) computing. Itsought to offer a challenging alternative to existingvoice communication solutions. While each of thesetechnologies (VoIP and P2P) was inherently newand potentially disruptive, a unique combination ofthe two as offered by Skype promised to radicallychange the telecommunications landscape. Usingthe disruptive innovation literature as a theoreticalbackground, we develop a framework that examinesthe potential impact of a merger of multiple disrup-tive technologies.

Background

Over the past decade, the telecommunications indus-try has witnessed rapid changes in the way peopleand organizations communicate. Many of thesechanges sprang from the explosive growth of theInternet and from IP (Internet Protocol) based appli-cations. The Internet became a truly ubiquitousmeans of communication, and this is reflected inthe amount of data exchanged and commerce trans-acted over this medium. Today, the total amount ofpacket-based network traffic surpasses traditionalvoice network traffic. Interestingly, even on the pack-et based network, the amount of bandwidth taken upby Internet surfing is much lower than that taken upby various file sharing services like BitTorrent (whichuses P2P technology, a feature described later in thispaper). In the wake of these technology advance-ments, it became clear to entrepreneurs that voice

Management Journal Vol. 24, Nos. 2–3, pp. 174–188, April–June 2006

FUSION OF DISRUPTIVE TECHNOLOGIES

traffic and services would be one of the next majorapplications to take full advantage of IP. This expec-tation was based on the impact of a new set of tech-nologies generally referred to as Voice over IP (VoIP)and IP telephony. VoIP had the potential of creat-ing many unique capabilities for carriers and cus-tomers who depended on IP or other packet-basednetworks. In parallel, innovations in the area ofpeer-to-peer computing meant that data could beefficiently distributed over a vast network with littleor no centralized control.

Disruptive Innovations

The role of disruptive innovations in creating newmarket value has been an important area of study intechnology management (Christensen, 1997; Hamel,2000, Tushman & Anderson, 1986). These disruptivetechnologies and innovations often create new mar-ket value in unexpected ways, both independentlyand through combination with existing standardsand protocols (Bower & Christensen, 1995; Christen-sen, 1997; Hamel, 2000, Tushman & Anderson, 1986,Tushman & Nadler, 1986; Ahuja & Lampert, 2001).While sustaining technologies serve the needs of mostcustomers, and are improved along the trajectory val-ued by mainstream customers, disruptive technolo-gies take on a different trajectory as they diffuse inthe marketplace. Typically, such technologies areoften cheaper and inferior in performance, yet theyinvolve features that may provide competitive advan-tage in the future. As Paap and Katz (2004) point out,the disruption in the term ‘‘disruptive technologies’’is the effect some technology based innovations ap-pear to have on markets affected by technology-basedinnovation. However, we argue that disruptive inno-vation need not necessarily be inferior in quality.Although not as common as the bottom-up variety,top-down disruptive innovation aimed at high-end(and least price-sensitive) customers can actually out-perform existing products and will sell for a premiumprice rather than at a discount 1. In addition, techno-logical convergence is yet another example of howdisruptive innovations can occur, but in this case, itis the combination of incremental innovations that be-comes disruptive (Hacklin et al., 2004). Before the no-tion of technological convergence as a precursor todisruption, technology fusion was described as beingnonlinear, complimentary, cooperative, and marketrevolutionizing (Kodama, 1992). On the other hand,Markides (1998) and Hamel (2000) acknowledgedthe existence of disruptive opportunities not only inthe process of the evolution of technologies, but alsoin the evolution of business models. Using the aboveperspective, we find that both VoIP as well as thepeer-to-peer mode of distribution represent disrup-tive phenomena. In addition, they thrive in a net-worked environment where the growth patterns canbe extremely rapid depending on initial acceptanceof such solutions.

European Management Journal Vol. 24, Nos. 2–3, pp. 174–188, April–June

The Rise of VoIP and P2P: Two Distinct

Disruptive Technologies

The Rise of VoIP

VoIP was developed as an IP based application inorder to provide convenient communication betweenusers using a variety of device types. VoIP essentiallyreferred to the delivery of voice communications overan IP network, specifically the traffic managementmechanism but not necessarily the layered applica-tions or services. IP telephony is described as the basicvoice communication services delivered using IP net-work, and enabling asynchronous and real-time voicecommunications. In the user environment, examplesof IP telephony included dial tone, voice messaging,call management, caller ID and other functions con-sidered common or traditional telephony features.Examples in the carrier domain included featuremanagement and billing/performance measurement.The underlying technology also enabled another cat-egory of integrated voice applications (advancedcommunication applications) that would be deliveredto users over an IP network. These applications wouldhave been impossible, or prohibitively expensive, forimplementation in a traditional telecommunicationsenvironment (e.g. TDM). Examples of these applica-tions would include presence-awareness phone fea-tures, find-me-follow-me services integrated withcollaboration tools such as calendar/schedulingprograms, screen-pop provisioning beyond the callcenter environment, and similar applications. A num-ber of these applications could also be custom-built todeliver advanced location based services to users in acontext-specific and time-sensitive fashion (Rao andMinakakis, 2002). Given these various applicationtypes and potential revenue streams derived fromthem, there were a host of VoIP providers operatingin the marketplace. As an illustrative example, we de-scribe the key players in the US market at the time ofSkype’s launch (see Table 1).

As can be seen from the exhibit, the competitivelandscape was diversified, with firms approachingthe same market through very different routes. Typ-ical competitors included cable companies, tradi-tional telcos, a number of pure-play VoIP firms,and other challengers like IM (instant messaging)platforms and SIP (Session Initiation Protocol)phones. Typically, the cable companies and telcos of-fered VoIP services as an additional service offeringto their existing portfolio of audio, video, and contentprogramming. On the other side, the major drawbackconsidering VoIP service included reliability of thecalls and vulnerability to security threats:

‘‘Administrators may mistakenly assume that since digitizedvoice travels in packets, they can simply plug VoIP componentsinto their already-secured networks and remain secure. . . 2

– Security Report by the National Institute for Standardsand Technology.

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Table 1 Major U.S. VoIP Service Providers

Company Location Details of VoIP Offering(s)

Cable companies

Time Warner Cable Stamford, Conn. This subsidiary of Time Warner launched VoIP service in Maine in 2003 and

is planning a nationwide rollout this year. It’s rumored to be an IPO candidate

as a way for parent Time Warner to buy out 18% investor Comcast.

Cox Communications Atlanta Cox offered VoIP in one cable market, Roanoke, Va. The company also

provided digital phone service—including traditional circuit-switching

technology—in other markets, where it pays phone companies to carry

some calls. Cox customers paid between $9.99

and $15.89 a month for their first line.

Cablevision Systems Bethpage, N.Y. Cablevision offered ‘‘Optimum Voice’’ VoIP service to high-speed Internet

customers for unlimited calling in the U.S. and Canada at $34.95 a month.

Its target market included its one million-plus cable-modem customers;

the product launched in September 2003.

Telcos (Voice Carriers)

AT&T Bedminster, N.J. Ma Bell announced business and residential VoIP services in major cities in 2004,

with rollout in ‘‘select metropolitan markets’’ during the first quarter of 2005.

VOIP was seen as a defensive move. Began offering the

CallVantage plan in March, 2004.

Verizon New York City The largest telco in the US planned to build the nation’s biggest

‘‘converged network,’’ which includes VoIP. It started with the Verizon

VoiceWing broadband telephony service for $29.95/month.

Pure play VoIP Firms

Net2Phone Newark A VoIP pioneer, it was focused on selling wholesale VOIP service to cable

companies (although it generated its revenues by selling phone cards at

convenience, for example).

Vonage Edison, N.J. The biggest independent, Vonage offered national VoIP service. Monthly rates

ranged from $15 to $35, and the service worked with any cable modem or

DSL connection. Announced IPO plans in February 2006.

8 · 8 Santa Clara, Calif. A former chip company, 8 · 8 began offering its ‘‘Packet8’’

VoIP service nationwide in 2002. For $19.95, plus a $29.95 activation fee,

customers get unlimited local and long-distance calling in the U.S. and Canada.


P2P Redefines Digital Distribution

In parallel to the trend of using internet telephony fortransmitting voice signals, another major develop-ment was enabling the rapid transfer of data packetsusing peer-to-peer networking, a paradigmatic shiftover the client-server computing model. This peer-to-peer mechanism was formally defined as theaction of mutually exchanging information and ser-vices directly between the producer and the con-sumer to achieve purposeful results 3. A moreprecise understanding for the technology was pro-vided by the P2P Research Group, IETF/IRTF 4:

‘‘Peer-to-Peer (P2P) is a way of structuring distributed applica-tions such that the individual nodes have symmetric roles. Ratherthan being divided into clients and servers each with distinctroles, in P2P applications a node may act as both a client anda server.’’

While P2P was not necessarily a technological leap inthe sense of a new manufacturing or functional inno-vation, it represented a fundamental paradigmaticand philosophical shift in the way data was distrib-uted and content accessed over a networked plat-form such as the Internet. P2P could be viewed as a

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decentralized paradigm of networking with distributedusage of resources, such as bandwidth, memory, pro-cessing and computing power. No particular clientsand servers were present as in the traditional formof networking, but all nodes could act both as clientsand servers at the same time. P2P systems could bedesigned using various topologies, starting from cen-tralized P2P systems like Napster, decentralized sys-tems like Gnutella, hybrid like Fast Track/KaZaA,and structured P2P systems like Chord 5. Severalinteresting applications based on P2P technologyhad been launched with varying degrees of success(see Table 2).

Integration of Disruptive Technologies:The Case of Skype

While the exercise of plotting the trajectories of VoIPand P2P along an individual timeline is in itself aninteresting project, we believe that the more interest-ing question lies at the level of merger of the twotechnologies. Prior literature has not examined thisangle of disruptive innovations due to a persistent


Table 2 P2P Application Types and Examplesa

Application Type Examples

P2P file swapping (sharing) Napster, FreeNet, Gnutella, KaZaA, eDonkey, Morpheus, Grokster, EZPeer, Kuro

P2P communication NetNews (NNTP), Instant Messaging (IM), Skype

P2P lookup services and applications IRIS, Chord/CFS, Tapestry/OceanStore, Pastry/PAST, CAN, HP2P

P2P overlay networking BGP, RON, PDF, Detour, LRR

P2P multimedia streaming CoopNet, Zigzag, Narada, P2Cast, Streamlla

Proxies and Content

Distribution Networks

Squid, Akamai, DigitIsland

Overlay Testbed PlanetLab, NetBed/EmuLab

Distributed data processing and

science content sharing

Quarknet, SDSS, Neptune, SETI, Folding, Fightaids

P2P gaming Many multiplayer online games and several ongoing hybrid projects

aSource: Chun-Hsin Wu, ‘‘Differentiated Admission for Peer-to-Peer Systems,’’ Academia Sinica – Taiwan, April 20, 2004; Ivyes

Poppe, ‘‘The Peer 2 Peer Internet,’’ PowerPoint Presentation, May 13, 2004. Networld & Interop, Las Vegas, NV.


lack of qualified examples and the difficulty inemploying an appropriate framework of analysis.In order to examine this interesting question, we turnto the case of Skype, which represents a unique andnovel merger of two disruptive technologies. Using acase-based analysis of Skype’s technological under-pinnings and its approach to the marketplace de-rived from Rao and Angelov (2005), we describehow Skype has successfully fused two distinct dis-ruptive technologies to deliver its unique brand ofservice offerings. In essence, we refer to case studiesusing Yin’s ‘‘technical’’ definition (Yin, 1994):

‘‘A case study is an empirical inquiry that investigates acontemporary phenomenon within its real-life context;when the boundaries between phenomenon and contextare not clearly evident; and in which multiple sources ofevidence are used.’’

Yin (1994) argues that a ‘‘how’’ and ‘‘why’’ questionabout a contemporary set of events is the proper re-search strategy when the investigator has little or nocontrol over behavioral events. We believe that theresearch question of our interest, analyzing howand why disruptive technologies integrate, requiredstudying cases, and Skype is the choice we made.In addition, Eisenhardt (1989) identifies case-studiesas a highly appropriate research approach in investi-gating new topic areas or when a fresh perspective isneeded. According to Eisenhardt, the resultant the-ory (built from the case-study) is often novel, test-able, and empirically valid. Even though there areseveral methodological problems raised by the studyof a single case (Lee, 1989), Lee describes the scien-tific method of case studies and proposes responsesto the problems involved in the study of a single case(the case of Skype fits into Lee’s single case category).More specifically, Lee (1989) focuses on the issues ofmaking controlled observations and deductions,while allowing for replicability and generalizability.In analyzing the integration of disruptive technolo-gies, our paper utilizes Skype as a case in point,and as such it can be evaluated using the previously


mentioned literature related to the case-study basedresearch.

Skype: An Integration of VoIP and P2P

Skype represents one of the first and most successfulefforts at fusing together two distinctly different tech-nological breakthroughs. The founders of Skype hadintroduced a P2P based VoIP software that would pro-vide audio quality equivalent to conventional phonelines. This P2P technology could take various formsthat differed in their functionality and feature offer-ings, such as instant messaging and communicationtools, file sharing utilities, and distributed comput-ing. In the case of Skype, all these features were inte-grated in an attempt to provide impeccable quality ofthe voice service, along with various possibilities ofvalue-added packages at the lowest cost possible.While Kodama (1992) differentiates between a break-through and a fusion approach to technology strategy,Skype is clearly a representative of a fusion strategyinvolving two breakthrough technologies. In addi-tion, Skype’s fusion process follows Kodama’s threebasic principles of: (1) demand articulation, (2) infor-mation collection and dissemination incorporatingactive receivers, and (3) reciprocal and substantialindustry relations. According to the founders ofSkype, a true P2P system would have all networknodes joined together to dynamically participate intraffic routing, processing and bandwidth intensivetasks that would have otherwise been handled bycentral servers. Skype thus successfully leveragedall available resources in the network and had noinfrastructure implementation and maintenance costs.

Technical Characteristics of Skype

In order to deliver its ‘‘state-of-the-art’’ IP-based tele-phony, Skype employed several techniques 6:

(a) IP addresses – No end-user configuration of gate-ways and firewalls was required, thus avoiding

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one of the major issues with the existing VoIPservice providers.

(b) A global and decentralized user directory – inorder to deliver high quality telephony with thelowest possible cost, a third generation of P2Ptechnology (3G P2P), or Global Index (GI) wasnecessary for development and represented yetanother paradigm shift in the notion of scalablenetworks. The GI technology represented amulti-tiered network where all supernodes com-municate in such a way that every node in thenetwork has full knowledge of all available usersand resources with minimal latency.

(c) Intelligent routing – Skype used the mosteffective paths possible to intelligently routeencrypted calls. It kept multiple connection pathsopen and dynamically chose the one that wasbest suited at the time. This increased the callquality throughput by reducing the latency.

(d) Security – Skype employed special encryptiontechnology (256 bit AES) to protect all calls andinstant messages for unrivaled privacy.

(e) Simple user-interface – Skype designed a verysimple and intuitive to use interface, requiringno special technical skill-set, to enable quickadoption among various consumer segments.

Skype initially offered only PC-to-PC calling, com-bining the features of both IM and VoIP. The Skype-Out service, enabling connectivity to the POTS (PlainOld Telephone Service), was added later on, as ithappened with the SkypeIn service, enabling connec-tivity from the POTS. The hardware requirements touse Skype were 400-MHz CPU, 128 MB of RAM and10 MB of hard drive space, microphone, sound card,and speakers/headphones. A broadband Internetconnection was required to ensure superior voiceand service quality.

Skype: Service Offerings and Expansion

The VoIP industry could be segmented into threemain categories (Research and Markets, 2003). Thefirst category was represented by the technologyproviders, offering solutions for wholesale carriersand enterprises, supplying endpoints (IP-phonesand soft phones), communication servers, applica-tion servers, switches, routers, signaling pointsand gateways. This segment included companiessuch as 3Com, Cisco, Lucent, Siemens, Nortel Net-works, and many others. The service providers likeNet2Phone, 8 · 8, Dialpad, Iscom, Vonage, Talking-Nets, Skype, ICQ and others, formed the secondsegment. The offerings of this segment includedPC-to-PC, PC-to-Phone, hosted flat-free, callingcards and number portability services for bothenterprises and consumer customers. WholesaleCarriers represented the third segment. The compa-nies in this segment, such as iBasis, ITXC, Genuityand others, offered network services to serviceproviders.

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Given this multiplicity of offerings and vendors,Skype tried to differentiate its offering immediatelyin order to provide a more distinctive appeal tousers. It made available free downloadable softwarefrom its website, which enabled customers to signup and use the service almost immediately. The freenature of the initial service along with the superbvoice quality of the service made Skype stand outfrom the rest of the IP telephony providers. In addi-tion, interoperability with popular industry stan-dards such as Microsoft’s Windows OS and LinuxOS ensured a wider adoption. In order to exploitthe ever-increasing proliferation of Wi-Fi enabled de-vices, Skype developed a Pocket PC version of itssoftware, which essentially enabled calls to be placedthrough the Skype account from a PDA. Skype’s co-founder, Niklas Zennstrom, provided an analogy tothe introduction of the e-mail and the fax technology.In the same way that e-mail did not replace the tradi-tional fax service, Skype (or IP telephony in that con-text) would not replace the traditional PSTN. Thisdid not mean, however, that Skype was not goingto try to approach the PSTN market. Through thelaunch of the SkypeOut service (and later on theSkypeIn service), the company attempted to integrateits VoIP offering with the old PSTN by extending itsservices and allowing connection to users not havingSkype. Through a SkypeOut account, a customercould call a traditional phone line (landline or mo-bile) at a competitively low (local) rate. In addition,by introducing the new SkypeIn service, Skype userswere able to obtain up to 10 different telephone num-bers, which made them accessible to the conventionalPSTN users. The obtained telephone numbers couldbe local numbers from different countries in theworld. Capitalizing on the Internet as the global dis-tribution medium, Skype offered its product for dis-tribution in fifteen languages allowing immediatepenetration to over 165 countries. In addition, Skypepartnered with Plantronics and Siemens AG tolaunch branded headsets and accessories. These stra-tegic partnerships had a long-term objective of en-abling seamless customer transition from traditionalservices to their VoIP product. Plantronics was a pro-ven headset manufacturer, particularly popular withthe Internet customer base, while Siemens AG pro-duced high quality telephone equipment and com-puter hardware. Targeting the market niche,Skype’s position in the IP telephony was based oninnovation and personalization of the services.

‘‘Voice is just the beginning. Once you are in the IP environmentyou bring in video and data, it’s all about who can create the bestapplication . . . it’s about interactive media.’’ 7

– John Arnold, VoIP program leader for Frost & SullivanInc.

The advertising and promotion strategy used bySkype was simple and effective. It used strong‘‘word-of-mouse’’ networks to build up a criticalmass of users. It was the classic example of viral



promotion. Once a user had the software, he/shewanted friends and relatives to have it as well. Conse-quently, in just one week of availability, 60,000 peoplehad downloaded the free Skype software. The mostessential advantages of the P2P business model forSkype were the immense scalability options, easyand cost effective marketing, and efficient retailingand distribution through partnerships. The fact thatthere was no special infrastructure to support the pro-motion, customer recruiting process, and the distri-bution channels, gave Skype a strong competitiveadvantage over the rest of the VoIP service providers.In essence, the combination of viral marketing andfree PC-to-PC telephony promoted Skype into a cus-tomer-friendly company, and did a better job at gain-ing market popularity than expensive marketing andadvertising campaigns, similar to those employed byVonage 8. In this context, Skype exhibited the some-what hidden characteristic of ‘‘disruptiveness’’. Itchanged the traditional marketing and businessmodel by letting the customer dictate the pace, andeven though it lacked the sophistication and depthof a well developed marketing campaign, it got themessage across better, cheaper, more effectively,and on target. In addition, if the incumbents tried toimitate this approach, they were doomed to fail be-cause their business model was based on traditionalrevenue generating processes, and their customerslacked the enthusiasm and incentives to virally pro-mote their products. With Skype, they feel part ofthe marketing team, and there are no hidden fees orcheap advertising tricks to lure them into using atechnology they do not need or want.

Revenue Models

The long-term goal of Skype was to provide fee-based services on the top of its basic plan. The pre-mium services offered to specific customer groupswere designed as a major form of revenue for thecompany. Constantly adding value for their users,Skype was planning to build high customer loyaltywhile building the critical mass needed to supportthe company’s growth. SkypePlus, the premium ser-vice offered by Skype, included Voicemail, mappingof DID (Direct-Inbound-Dialing), ad banner, andother value added services. Considering the largecustomer base, Skype planned to include specialthird-party advertisements and e-commerce featuresto increase the revenue possibilities 9.

Two new services, SkypeOut and SkypeIn weredeveloped to complete the service offering and addvalue to the existing customers. It was very clear thatSkypeOut, a connection to the regular PSTN, couldserve as a viable revenue generator 9. It providedlow-cost international calls and had attained popular-ity among its users. Mr. Zennstrom, the co-founder ofSkype, revealed that about 5 percent of Skype mem-bers used SkypeOut or SkypeIn 8. Another form ofrevenue for Skype surfaced from its partnership withPlantronics and Siemens AG. Skype opened an online


‘‘Skype Store’’ offering desktop and wireless Plan-tronics headsets that were compatible with the Skypesoftware. It also offered the Siemens Internet tele-phone, the Gigaset M34 USB PC Adapter as part oftheir product portfolio. As part of Skype’s plans to be-come a platform for a new form of seamless commu-nication (free telephony), the company teamed withMotorola to develop products including headsetsand mobile devices for Skype users 10. Another possi-ble revenue model for Skype was leveraging thelicensing of the Skype API to third-party developersand carriers. As the popularity of Skype and VoIPgrew, along with the improvements in reliabilityand security, licensing its software for handheld de-vices and phones could prove to be an extremelylucrative business for Skype 11. This model could sub-stantially increase Skype’s presence in the telephonymarket and promote the company into a key playeron the market. One such example was a small Cam-bridge based start-up, iSkoot, which uses Skype tech-nology to make cell phone calls 12. As far as businesscustomers were considered, Skype estimated that 30percent of its 40 million users (as of July, 2005) werecorporate 13. In addition, most of them were smalland medium-sized businesses using Skype to savemoney and add functionality to their conference calls.This segment of the market could also be a substantialrevenue generator since it was willing to pay premi-ums for value-added services while experiencing sig-nificant savings by not paying for the telephony itself.It is interesting to notice that there was a growingagreement in identifying corporate VoIP users asthe key to complete VoIP prominence 14. In essence,analysts showed that return-on-investment (ROI) ofVoIP involves multifaceted costs and savings 15, butimproved productivity (as in the case of unified mes-saging) and new services were probably as importantas direct ROI 16. Therefore, as a long-term strategicgoal, it was important for Skype to attract as manycorporate customers as possible and build an imageknown both for innovation and reliability. Throughthis variety of ways, Skype was attempting to createa new-market winning strategy.

EBay and Skype: A Promise for RevolutionizingE-commerce

While analysts were trying to determine Skype’s pos-sible long-term impact on the telecommunicationindustry 17, the company announced that it hadagreed to be taken over by eBay Inc., the leading on-line auction-house 18. This acquisition ignited a hostof different opinions about the real value of Skypeas a company and about the nebulous business plansof eBay (concerning its new acquisition) in the fu-ture 19. One of the reasons for these reactions wasthe price eBay agreed to pay for Skype. The online-auction giant would acquire all of the outstandingshares of the privately-held Skype for a total upfrontconsideration of approximately $2.6 billion; $1.3 bil-lion of which was in cash and the rest in eBay’sstock 20. In addition, there was a performance-based

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earn-out as big as $1.5 billion, if Skype reached cer-tain performance goals by 2009. Even though therewere many experts who believed Skype could be aGoogle-sized opportunity 17 (one of them beingKevin Werbach, legal studies and business ethicsprofessor at Wharton Business School), most of themagreed that a takeover of the company had potential,but it would be definitely a surprise for them (con-sidering the difference in culture between Skypeand major telecom and media companies). Andwhile companies like Yahoo, Microsoft, Google, andNews Corp. were rumored to have a vested interestin buying Skype 21; eBay was the company that actu-ally did the acquisition.

Even though eBay announced that it was not going totransform itself into a phone company 22, it didemphasize the importance of communications asbeing at the heart of e-commerce and community,thus considering Skype as the road towards creatingextraordinarily powerful environment for businesson the Net 23. In some way, the partnership betweeneBay and Skype could turn out to be another type ofpotentially disruptive opportunity. Skype could nowcount on eBay to support its brand and image (alongwith its financial needs). This could prove extremelyfavorable for Skype, especially in times when the VoIPcommunity believed in corporate customers to be thekey towards global telecommunications convergence,and whilst Skype was being attacked for its reliability,quality and security promises 24. As a business oppor-tunity, Skype could increase the velocity of trade oneBay, add a voice bargaining option to its large cus-tomers, and introducing ‘‘pay-per-call’’ advertisingwith the potential of generating significant revenue.As far as Skype’s future was considered, PayPal (aneBay owned company) could provide simple, secure,and reliable billing and accounting, exactly whatSkype needed for its corporate customers 23. In addi-tion, eBay’s strategy left Skype highly independentas a brand and as a business, something large telecomand media companies would have rarely done 18.

The acquisition of Skype has definitely shed a differ-ent light on the previously acclaimed disruptivecharacter of the company. However, the fact thatSkype was bought by eBay, not Microsoft or NewsCorp., left room for additional opportunities for tech-nology and business fusion, and thus for a host ofnew ‘‘potentially’’ disruptive technological and busi-ness models. If today we are interested in the impactof the fusion between VoIP and P2P, future researchcould delineate the possibilities of combining P2Pand online auctions or advertising.

Disruptive Innovation: Antecedentsand Consequences

Disruptive technologies like VoIP and P2P can oftenrepresent a new value proposition in the way prod-

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ucts and services are delivered. The antecedents ofdisruptive technologies are varied. Once they areintroduced in the marketplace, they can take multi-ple paths to market dominance or their eventual de-mise. Prior research confirms how such innovationscan often find new uses in untapped areas and alsorecombine with other standards and protocols (Tush-man & Nadler, 1986; Ahuja & Lampert, 2001). Inaddition, when they combine in such meaningfulways, the net result can have a dramatic market im-pact, as we see in the case of Skype.

Why are VoIP and P2P Disruptive?

VoIP and P2P are individually characterized by pro-cesses, products, services or business models that of-fer lower performance along traditional trajectories.In the case of VoIP, the underlying innovation isthe use of the Internet to transfer voice data. In thecase of P2P, it is the use of a new form of distributionto speed up such data transfers. Following the normsof evolution of disruptive technologies, both VoIPand P2P were individually under-valued by tradi-tional lead customers in their respective marketsand were generating lower gross margins, in addi-tion to being perceived as ‘‘low-end’’ by industryincumbents (Thomond et al., 2004).

Traditional phone companies did not perceive VoIPto be a serious challenge to their existing monopolies.And while VoIP was becoming more attractive toresidential customers, the real opportunity lay inthe corporate market. The Internet was at the heartof VoIP and equipment vendors played a major rolein supporting the technical infrastructure requiredfor reliable IP-telephony. Since large corporationswere ‘‘big spenders’’ on IT equipment, their VoIP-oriented strategy directly influenced the growth ofVoIP infrastructure 25 provisioning. Acknowledgingthe changes in the telephony sector, many telecom-munication incumbents were entering the high-end(business) VoIP market 26, along with software giantssuch as Microsoft 27 (primarily interested in corpo-rate videoconferencing) and Google (with GoogleTalk). On a residential level, while Microsoft didnot plan to offer conventional phone service overthe Internet 28 (its acquisition of Teleo Inc., a VoIPtechnology company, was aimed at improving thevoice capabilities of Microsoft’s IM service), Yahooannounced that it would offer new services thatblend its IP technology with the PSTN, providing‘‘intelligent presence’’ for its customers accompaniedwith voice email and search 26.

Businesses engaged in various forms of distribution(including music, movies, etc.) had only recentlybegun to perceive the threat posed by P2P distribu-tion mechanisms. The music industry in particular,had been aggressively going after companies likeKazaa and BitTorrent, which enabled such viral dis-tribution. In addition, the revolutionary P2P technol-



ogy had expressed its technical disruptiveness byproving itself to be unbreakable and technicallyunstoppable (Montemagno, 2005). On another level,P2P seemed to have awakened people’s need for ‘‘so-cial sharing’’, and started to challenge the conven-tional marketing and business models.

What made both VoIP and P2P interesting at theindividual level was that they each introduced newperformance criteria in certain niche market settings.VoIP represented a cheap and alternate method ofdoing something very traditional – placing a phonecall. P2P, in turn, represented a faster and more con-venient method of accessing files and content overthe Internet. Slowly but surely, each of these twotechnologies were going mainstream and reaching awider and perhaps a critical mass of customers. Aspointed out by previous research, a period of exploi-tation and upstream migration upstream towardhigher-end customers could eventually redefine theparadigms and value propositions on which existingindustries were based (Thomond et al., 2004, Chris-tensen 1997, Christensen and Overdorf 2000). Skyperepresented a successful fusion of two disruptivetechnologies. What made this integrated or joint leveloffering significant was that it represented a discon-tinuous innovation that could rattle the existingindustry structure and create completely new formsof value delivery. There was already some evidencethat services like SkypeOut and SkpyeIn were amove in that direction. We describe this phenome-non in the section below.

When Disruptive Technologies Integrate:

Evidence from the Skype Case

Why is Skype a Discontinuous Innovation?

Skype represented the fusion of two disruptive tech-nological paradigms (i.e. VoIP and P2P) that hadresulted in a discontinuous innovation offering.According to Kodama (1992), technological fusionhad the characteristics of nonlinearity, complemen-tarity, and cooperativeness. This is how Skype’s tech-nological model integrated the scalability of P2P withthe functionality and efficiency of VoIP. At the sametime, Skype also fused the underlying P2P philoso-phy of ‘‘social sharing’’ with the cost-effectivenessof VoIP in order to shape its business and marketingmodel. Typically, discontinuous innovations offeredmajor improvements in performance in the directionthat lead-consumers desired, yet were challenged byimplementation and adoption issues (Christensen1997, DeTienne and Koberg, 2002, Thomond et al.,2004). In the case of Skype, the end result was discon-tinuous because a) Skype offered a revolutionary leapin performance over conventional VoIP, and a leap infunctionality over traditional voice calling, and b)there was indication that lead-users of Skype (whoare typically more comfortable with making calls over


the Internet) are delighted with the voice quality andservice options and are eager adopters. In addition,Skype could be considered a radical technology.Using Dahlin and Behren’s (2005) definition of‘‘technological radicalness’’, Skype fulfilled the threenecessary criteria of novelty, uniqueness, and adopt-ability. This definition focused more on the techno-logical impact rather than on market impact.

It was also possible that the VoIP-P2P combinationcould emerge as the next platform for a new set ofcontinuous or incremental innovations in the future(Clark & Henderson, 1990). The eBay acquisition ofSkype could be an introduction into a future lateraltechnological and business convergence (Hacklinet al., 2004), characterized when mature (known)technologies or businesses (eBay) integrated withtechnologies (new technologies) or business in theirearly/growth phase (Skype). When such conver-gence occurred, the potential for disruption of thetraditional technological and business models (re-lated to the mature technology) could be immense.Using the same model of technological convergence(Hacklin et al., 2004), Skype’s fusion of P2P and VoIPcan be labeled as potential convergence. However,traditional customers of voice services (both corpo-rate and consumer) had not yet fully embraced thisnew technology and associated services. This wasdue to a number of factors including low awareness,hesitation in using an online platform for voice call-ing, and a desire to see a more stable and reliableservice quality both online and phone-to-phone.Therefore, it remained to be seen if Skype woulddominate the voice market in the conventional sense,and disrupt it irrevocably. In order to do so, itneeded the market coverage and traction that werecurrently the perquisite of the large voice carriers.It was possible that relational arrangements betweenSkype and such players might ensure a wider dis-semination of P2P based VoIP. As pointed out byLynn, et al. (1996), the case of Skype confirmed thatthe most consistent feature of a discontinuous tech-nology was the high degree of uncertainty about itsfuture and the potential for interaction between var-ious types of uncertainties (like market, technology,timing, managerial control, etc.). Further, the futureactions of competitors and the ongoing trends inindustry consolidation could also alter the impactprocess. For a discontinuous innovation like Skypeto be truly disruptive, successful exploitation of itspotential was vital, and the result could be a signifi-cant transformation of the mainstream market and itsvalue proposition (Thomond and Lettice, 2002).Using Christensen’s (1997) understanding of thedisruptive technology phenomenon, Skype can beviewed both as a bottom-up and top-down disrup-tion 29. Its low cost (no infrastructure cost), radicalnature, and temporarily lower quality than thetraditional PSTN (in this case we consider Skype’srequirement of having a PC and a broadbandconnection as an inferiority to PSTN, for whichthe same non-requirements represent performance

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oversupply) give Skype a bottom-up disruptiveappearance, but its new functionality, value-addedpossibilities, and highly sophisticated users makethis company a top-down disruptive technology.

Impact on the Marketplace

Skype’s market potential was considered to be vast, aswere the number of determined competitors. Depend-ing on which segment of the market it sought to enter,there were a number of alternate strategies that couldbe pursued. By entering the IP telephony market,Skype had garnered the attention of other VoIP pro-viders, such as Vonage, Net2Phone, 8x8, DialPad,FreeWorld Dialup and others, and traditional voicecarriers such as AT&T, Verizon, Qwest etc. Despitethe clear service differentiation of Skype, the fighton both market fronts was inevitable. These twogroups represented the key market segments formedby the alternative VoIP service providers, and the tra-ditional voice carriers and MSOs. The battle with thealternative VoIP providers was considered an easyone by the founders of Skype. In this segment, compa-nies like Vonage 30 (41 percent US market share in2004) that had well-established pricing models suf-fered from very high infrastructure costs, thus clearlygiving Skype an upper hand in the market. To add anew user, Vonage had to spend almost $400 (com-pared to no cost for Skype). In addition, the pricingmodel, as opposed to the free basic service, was amajor disadvantage in obtaining a critical mass of users.On the other hand, Vonage used telephone adaptersand provided regular PSTN connection, while Skypewas based on the PC platform and its users were notavailable outside Skype’s network. With the introduc-tion of SkypeIn and SkypeOut services, Skype en-abled full connectivity of its users to the PSTN.

The second representative of the VoIP segment, viz.the popular instant messaging (IM) providers(Yahoo, AOL, ICQ, MSN, Netscape and others),had an immense shortcoming in the poor quality ofthe voice service. Their infrastructure and technologywere not designed to support high-quality voicecommunications since telephony was their second-ary service. As with alternative VoIP providers usingtelephony as a primary service, the IM providers’centralized infrastructure represented additionaldrawback considering their customer expansion. An-other new entrant with a potentially discontinuoustrajectory was the SIPphone. Based on the popularSession Initiation Protocol (SIP), SIPphone was astand-alone appliance easy to use and configure. Itrepresented direct competition to Skype. A majordisadvantage was the limited interoperability withnon-SIP devices and the traditional PSTN. In the cor-porate domain, Avaya was the global leader in com-munication systems, applications and services.Avaya’s market share was substantial and based onthe reliability, security, customer relationship, andthe effectiveness of their offering 31. In addition,

182 European

pure-play VoIP providers like Vonage were offeringmore enhancements to their services by integratingVoIP calling over wireless broadband networks.Vonage had recently announced the launch of Wi-Fi phone that could make calls over the Internet athomes or at public Wi-Fi hot spots. Vonage subscrib-ers would thus have access to a limited-use cellphone with no extra costs (Davidson, 2004).

Even though Skype declared itself as a second phonealternative to the traditional PSTN it was more thanmere competition for the traditional telephonyproviders.

‘‘In the big picture this is very threatening (to traditional telecomproviders) because it works. They’ve demonstrated that they canmake end-to-end phone calls and cut the phone companies out ofthe equation.’’ 9

– Jon Arnold, VoIP program leader for Frost & Sullivan Inc.

The big telcos, forming the second segment of thecompetition were skeptical of Skype’s potential:

‘‘What Skype is doing is like a toy. They will realize they can’tscale it, they don’t have a brand like the AT&T brand, and theydon’t have the local footprint, which we have. It’s going to bevery hard to compete with someone like AT&T.’’ 32

– Hossein Eslambolchi, AT&T’s CTO and president ofAT&T labs.

Despite its dismissal of Skype, AT&T had entered theIP telephony battle. So had other carriers like Veri-zon, Qwest, Cox, Cablevision, and Time WarnerCable. The competition was intensifying and a low-cost service was a critical tool for attaining competi-tive advantage. In addition, the traditional telephonycarriers were still considering the PSTN as a majorbusiness opportunity (their main form of revenue),thus relentlessly trying to ‘‘keep it alive’’ as long aspossible.

In terms of revenues, despite its sharp growth, Skypehad experienced only a modest payoff (according tosome analysts 33). The VoIP company earned $7 mil-lion in revenues last year, and it is on track to gener-ate $60 million this year and $200 million in 2006. Onthe other side, a report by Evalueserve 34 predicted atleast 22-26 percent reduction in overall profitabilityand revenues by 2008 for incumbent telecom opera-tors offering fixed services, and a 5 percent reductionfor operators offering mobile services. In the mean-time, Skype was supposed to reach between 140–245 million users worldwide. In addition, the reportstated that European incumbent telecom operatorswere at greater risk than their US counterparts, andthat VoIP providers could lose up to 90 percent oftheir revenues unless they change and adjust theirbusiness model accordingly. These forecasts can beinterpreted as a result of the value-creation potentiallying in the convergence process (Nystrom & Hack-lin, 2005) of the two disruptive technologies



integrated in Skype’s offering (P2P and VoIP). Build-ing a disruptive technology resulted in a disruptivebusiness model. If we consider value as what cus-tomers are willing to pay, what happens if they don’thave to pay anything? Skype is as close to that valuepromise as no telecom incumbent has been before. Inaddition, by using viral marketing, Skype deliversyet another value promise to its customers, thus rais-ing the general expectations in the global communi-cations industry. The technical capabilities of theintegrated P2P and VoIP offering are well abovewhat the traditional telecom operators can provide,and the richness of the value added features sets anew standard in the industry. Thus, a total reinven-tion of the telecommunications business becomesinevitable. On top of it, if we take a company per-spective and a network approach in defining value,as something created between actors in exchangerelationships (Nystrom & Hacklin, 2005), eBay’sacquisition of Skype promises even more staggeringvalue creation possibilities.

Research Propositions

Based on our analysis of some of the key features ofSkype’s business model and its marketplace position,we propose a set of research propositions for furtheracademic and managerial considerations. Thesepropositions demonstrate the importance of agilityand flexibility in meeting challenges posed by recom-binant disruptive innovations. Depending on the typeof marketplace player (large or small, new or incum-bent), the strategic and operational implications canrange from nonexistent to the dramatic. We organizeour propositions under four key headings.

In a previous section, we discussed how Skype repre-sented a successful integration of two distinctly dif-ferent disruptive innovations. The key here is torealize that this fusion can create an entire new dy-namic and result in a technological and/or market-place discontinuity. As Internet-based technologiesgain more traction and the capacity to integrate di-verse innovations based on networked infra-structures gain popularity, we can expect toencounter more examples of such fusion. One relatedreason for such developments is the fact that internetprotocol facilitates modular and plug-and-play ap-proaches to building new service capabilities (suchas IPTV 35). Entrepreneurs will find more opportuni-ties in integrating technologies as diverse as biomet-rics, nanotechnology, and information technology, toname a few.

Past research recognizes two distinct ways by which adisruptive technology could impact an industry. Onepotential method is to exploit performance oversup-plies and attack lead players through a low-end dis-ruption using simplicity and novelty (Christensen,1997; Charitou & Markides, 2003). Another thesis


points to a strategy of targeting ‘‘non-consumers’’ ina particular industry – i.e. those who have historicallylacked the skill or money to use their products (Gil-bert, 2003; Gilbert & Bower, 2002). Through incre-mental improvements from this starting position,the pool of non-consumers can be expanded to in-clude consumers of incumbents and eventually exist-ing markets could be entered using this strategy. Inthe case of Skype, the ‘‘non-consumers’’ turn out tobe very demanding and sophisticated, and actuallyrepresent a unique and perhaps premium niche seg-ment of early adopters. They also perform anothervaluable function in this context – through their‘‘word-of-mouth’’ recommendation; they increasethe pool of customers for Skype’s services. In thiscontext, we believe that the traditional notion of‘‘non-consumers’’ being naıve, unsophisticated, or re-source-poor needs to be revised. An important wayfor such innovations to gain traction is by attractingan early set of sophisticated customers, who inturn influence others to consider the newcomersproducts and services. Combining this feature withthe networked power of the Internet means that theentire process can be significantly accelerated, boththrough firm-centric managerial intervention, andcustomer-centric adoption and co-creation (Prahalad& Ramaswamy 2003, Iansiti & MacCormack 1996).

Based on the above discussion, we offer the follow-ing research proposition:

P1: Recombinant (disruptive) innovations can result in adiscontinuous innovation

Given the plurality of visions and strategic goals asdescribed in the previous sections, we envision mul-tiple paths to achieving greater integration of multi-ple disruptive technologies like VoIP and P2P inthis market landscape. Each of these paths also repre-sents strategic postures adopted by players operatingin each of the sub-domains. We categorize theseapproaches based on two axes:

(a) Degree of convergence: This axis represents thedegree to which the service package consists ofa number of converging elements. In our analy-sis, this would typically represent a portfolio ofservice offerings including voice calling, e-mail,instant messaging, video communication, filesharing, etc.

(b) Degree of discontinuity: On this axis we classifythe different approaches based on the degree towhich the inherent innovation driving the busi-ness models are discontinuous, i.e. the extentto which they shift the learning curve due tomore attractive performance metrics.

We present a summation of some of these paths inExhibit 1.

As can be seen in the exhibit, one immediate way ofcountering the effect of an innovation like Skype is

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Exhibit 1 Paths towards Integration of MultipleDisruptive Technologies


to rapidly embrace the new technology or set of tech-nologies that enables a drastic improvement in per-formance metrics and delivers a high-quality andcost-effective solution. This view is most applicableto the industry incumbents, i.e. the traditional voicecarriers. However, the voice carriers do not perceivean immediate threat due to certain other advantagesthey currently enjoy, like a large installed subscriberbase, a more grounded and stable technology plat-form, and certain size and tenure-related advantages.Given the turbulent technological environmentthey find themselves in, these incumbents need tobe extremely flexible and responsive insofar as incor-porating new technologies and product introductions(Iansiti, 1995). However, it is likely that dominantfirms are likely to adopt more incremental innova-tions rather than take a radical approach (Utterback,1994).

The second path consists in gradually adding newservice options through a steady migration upstreamtowards more technological domains and opportu-nity areas. Some carriers are beginning to see theimportance of VoIP, cable, DSL and potentially P2Ppowered solutions and are making slow but steadystrides to shore up their learning and capacity inthese areas by taking the second path, which we labelthis ‘gradual upstream innovation’ in the Exhibit.There are examples in the literature of such organiza-tions responding successfully to discontinuous inno-vations despite various structural and organizationallimitations (Macher and Richman, 2004).

The third option, and perhaps the safest position tobe in the current scenario, is the space occupied by

184 European

cable and DSL providers who offer a wider rangeof bundled services. Since they typically possess acritical media foothold into the homes and officesof end-users, they enjoy a major advantage in eitherpushing or rejecting new and potentially disruptivetechnologies (a classic ‘‘entrenched’’ position). Thisgives them some slack before they figure out whetherto operate in relatively new and risky markets. Someof these cable and DSL operators are already offeringbundled VoIP services as they seek to price the tradi-tional voice carriers out of the market, and also in-crease customer switching costs. In addition, theymay seek to embrace a medium like Skype in the fu-ture either through acquisition or licensing, and thusoffer more choice to their customer base. By adoptinga skills-acquisition approach that employs recombi-nation of their current capabilities (Kogut and Zan-der, 1992), these firms can approach new marketsand opportunities as those represented by an integra-tion of VoIP and P2P. This is consistent with a port-folio-based strategy of innovation where firmsgradually move into different markets by extendingexisting current technical trajectories (Abernathyand Clark, 1985; Venkatraman and Lee, 2004).

The fourth path that can be also taken by someindustry players is to engage in direct head-to-headcompetition with Skype. In order to do this, theyhave to possess an equally novel or comparableunderlying technology and distribution mechanism,and be willing to aggressively go after new custom-ers. The pure-play VoIP players and SIP Phone pro-viders, VoIP-WiFi combination services providers,and instant messaging platforms are key representa-tives of this strategic group. They face challengessimilar to those faced by Skype, including the chal-lenge of rapidly growing the customer base (by add-ing both new and current customers of incumbents),uncertain returns on technological investment in theshort run, and lack of clarity in market definition andcompetitive potential. Their high-risk, high-returnprofiles mean that there could be big winners andsignificant failures in the group.

There are thus multiple paths to migrate towards ahigh-value position even in this crowded market-place. Increasing levels of convergence and disconti-nuity can be proving grounds for a new breed ofplayers who offer a range of products and servicesfor communications, connectivity, commerce andentertainment. Following the previous rationale, thesecond research proposition is as follows:

P2: Alternative paths exist in successful integration ofdisruptive technologies

Given Skype’s differentiated positioning in the VoIPand convergent communications space, traditionalvoice carriers face a critical decision on how to chal-lenge or incorporate the discontinuous innovationrepresented by Skype. Several firms in the past have



vanished because of an unwillingness to anticipateand/or embrace ‘‘disruptive innovations’’. If tradi-tional voice carriers believe that Skype representeda new and more effective paradigm for deliveringservices that are core to their business proposition,they will need to rethink their technology and busi-ness strategies accordingly. Skype represented a un-ique case where a combination of two disruptivetechnologies had created a strong discontinuousinnovation space. As previous research has uncov-ered, the introduction of a technological disconti-nuity often gives rise to an era of ferment anduncertainty as new and incumbent firms try to intro-duce new products and processes that aim to captureprofits from the emerging technology paradigm (Ma-cher and Richman 2004). Flexibility, responsivenessand dynamism would be critical to entrenchedincumbent’s success in such turbulent transitions(Iansiti 1995, Thomke and Reinertsen, 1998; Tushmanand O’Reilly, 1996). Also, as described in the sub-sec-tion above, certain types of diversified incumbentsmight enjoy more of a leeway in responding to apotentially discontinuous innovation.

Hacklin et al. (2004) argue that in times of drasticchanges in the market environment (when disruptivetechnologies appear) it is crucial for industry incum-bents to focus on a resource-based view of the firmactivity. On the other side, it is very uncertain forthe ‘‘disruptor’’ of the marketplace (in this caseSkype) whether it will continue its disruptive path,or end up as a trophy in some large incumbent’sshowcase. What is the likelihood of integratingSkype in an incrementally oriented business com-pany? Nystrom and Hacklin (2005) confirm the the-ory that technological convergence could representa special case of disruptive innovation, and eBay’s re-cent acquisition of Skype may turnout to be a perfectcase in point. In addition, it is tempting to examine ifeBay and Skype can create a new business dynamicfollowing the method of lateral convergence (Hacklinet al., 2004), which occurs when a known, incremen-tally oriented company converges with a new, dis-ruptive market entrant. This takes us to the thirdresearch proposition:

P3: Disruptive innovation can grow to become a sustain-able and dominant innovation model after an establishedand incrementally oriented company acquires a new anddisruptive firm

Finally, one cannot discount the role of managerialintervention in shepherding a potentially discontinu-ous innovation to marketplace success. It is here thatSkype enjoyed a strong competitive position. Har-nessing their prior experience, exposure and indus-try connections with the launch of Kazaa, thefounders of Skype were determined to make theirnew company a success. They adopted a number ofstrategies that play to their position of strength butat a low incremental cost. These included a low-costviral marketing strategy, the free distribution of


initial software, and the rapid buildup of a viableand global customer base. Even though Skype haddeclared itself as an alternative to the traditionalPSTN, it was more than mere competition for the tra-ditional telephony providers.

‘‘In the big picture this is very threatening (to traditional telecomproviders) because it works. They’ve demonstrated that they canmake end-to-end phone calls and cut the phone companies out ofthe equation.’’ 9

– Jon Arnold, VoIP program leader for Frost & Sullivan Inc.

In addition to the successful launch of their initialproduct, the founders of Skype had also demon-strated agility and quick maneuvering. A spate ofnew product features had been launched, with theobjective of improving customer experience and alsoreducing dropout rates. In the long run, this wouldprovide the company with a more sustainable com-petitive advantage. The fact that the peer-to-peerand Internet-based nature of the service allowed forrapid product and service development and rolloutwas not lost on the management team at Skype. Theyhad clearly identified their core capabilities and werewilling to compete and excel based on them (Stalk,Evans and Shulman, 1992).

‘‘By having telephony as a Net application, we can develop newfeatures faster. . . it takes a long time for traditional telephonecompanies to develop new switches.’’ 9

– Niklas Zennstrom.

Even though researchers have suggested numerousreasons why incumbents fall victim to disruptiveinnovations (Christensen, 1997; Hamel and Prahalad,1990; Anderson and Tushman, 1991) and explana-tions of the managerial influence in that process(White, 2004), it is our opinion that managerial visionand intervention is an absolute requirement for atechnology, along with its business model, to becomedisruptive. Similar to our previous deliberations, weconsider Skype as a well-suited example of this ratio-nale. In addition, we suggest the following researchproposal:

P4: For a discontinuous innovation to become disruptiveit has to be spurred by managerial vision and interven-tion accompanied by engineering creativity and excel-lence

Conclusions

It is well established in the literature that innovationin the form of new combinations of products, mar-kets, supply sources, and organizations can some-times lead to the destruction of incumbent firms,industries or technologies (Schumpeter 1943). In

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addition to such ‘‘creative destruction’’ dynamics,there could also be periods of technological disconti-nuities where one technology displaces another dueto new and fundamental breakthroughs in underly-ing technologies or delivery paradigms. As Amit &Zott (2001) point out, innovative models that facili-tate creative destruction can also relate to exchangemechanisms and transaction architectures, a factbecoming more common as platforms like the Inter-net emerge as an important backbone network infra-structure on which other applications and servicesare based. Skype represents a novel case of discontin-uous innovation that has arisen out of a tangiblecombination of two or more disruptive technologiesbeing deployed in the form of novel transactionarchitecture. As the underlying technology and theassociated services it offers becomes more widely ac-cepted and diffused in the marketplace, it is likelythat Skype will pose a serious threat to industryincumbents. A critical mass of discriminating anddemanding users who are willing to make the switchto a relatively new form of communication willdetermine the next winners and losers in this area.In the meantime, industry incumbents would do wellto learn about the implications of Skype on their ownbusiness models. Despite the novelty and attractive-ness of Skype’s technology and business proposi-tions, forecasting its eventual success or failure isfraught with uncertainty. In addition, such innova-tions very often serve different markets with differ-ent characteristics and which lie at different pointsin the diffusion process (Linton, 2002).

In this paper, using the case of Skype, we have dem-onstrated how two or more disruptive technologiesin concert can result in a new discontinuous innova-tion that can create new forms of market value. Theresultant innovation can be discontinuous in that itrequires shifting to a different technological learningcurve, and enhances and even redefines extant per-formance metrics. Both incumbents and new marketentrants can investigate the impact of such an inte-gration of disruptive technologies to determine whatimpact, if any, it will have on their own businessmodels and future outlook. In particular, we believethat the space of Internet-based and convergence-ori-ented services will offer a rich diversity of modelsand approaches by which this phenomenon will fur-ther play out.

Notes

1. Nicholas G. Carr, ‘‘Top-Down Disruption,’’ Strategy + Busi-ness, Summer 2005.

2. Cara Garretson, ‘‘VoIP Security threats: Fact or fiction?,’’Network World Magazine, July 25th, 2005.

3. Dana Moore and John Hebeler, Peer-to-Peer: Building Secure,Scalable and Manageable Networks (Osborne: McGraw-Hill,2002), p. 4.

4. IETF/IRTF (Internet Research Task Force/Internet EngineeringTask Force), Excerpt from the Chapter of P2P Research Group,

186 European

<http://www.irtf.org/charters/p2prg.html>, accessed 6/24/03.

5. Chun-Hsin Wu, ‘‘Differentiated Admission for Peer-to-PeerSystems,’’ Academia Sinica – Taiwan, April 20, 2004.

6. Source: Skype website, URL: <www.skype.com>. Baset, S.A.and Schulzrinne, H. (2004) An Analysis of the Skype Peer-to-Peer Internet Telephony Protocol. Department of ComputerScience, Columbia University, New York, URL: <http://arxiv.org/pdf/cs.NI/0412017>.

7. IDG News Service, ‘‘Skype’s Net calling service reachesbeyond the PC,’’ IT World.com, August 27, 2004, <http://www.itworld.com/Net/3303/040727skype/pfindex.html>,accessed 9/24/04.

8. John Gapper, ‘‘How to make a million connections,’’ FT.com,July 7th, 2005.

9. IDG News Service.10. Steve Ragner, ‘‘Motorola and Skype team on mobile VoIP,’’

VNU Network Business Publications, 2005, URL:<www.vnu-net.com/2126745>, accessed 9/20/05.

11. Knowledge@Wharton, ‘‘The Hype over Skype: Can It Go theDistance?,’’ URL: <http://knowledge.wharton.upenn.edu/index.cfm?fa=printArticle&ID=1258>, accessed 8/19/05.

12. Peter J. Howe, Globe Staff, ‘‘Cambridge firm uses Skypetechnology to make cellphone calls,’’Boston.com, URL:<www.boston.com/business/technology/articles/2005/08/01/start_up_slashes_cost_of_international>,accessed 9/20/05.

13. John Gapper.14. Phil Hochmuth, ‘‘Carriers are key to VoIP prominence,’’

Network World Magazine, September 26th, 2005.15. Robin Gareiss, ‘‘The ROI of VoIP: A step-by-step guide to

determining the true cost and benefits of VoIP,’’ NetworkWorld Magazine, July 11th, 2005.

16. Tim Greene, ‘‘Inside telephony of the future,’’ Network WorldMagazine, June 13th, 2005.

17. [email protected]. Telecoms and the internet, ‘‘The meaning of free speech,’’ The

Economist, September 15th, 2005.19. Joseph Weber and Robert D. Nof, ‘‘Tech Deals: Back with a

vengeance,’’ Business Week, September 26th, 2005.20. FT.com, ‘‘eBay to Acquire Skype,’’ September 12th, 2005.21. Jim Wagner, ‘‘Skype Downplays Takeover Talk,’’ internet-

news.com, August 8th, 2005, URL: <www.internetnews.com/infra/article.php/3525806>, accessed 9/20/05. Telecoms andthe internet, ‘‘The meaning of free speech,’’ The Economist,September 15th, 2005.

22. Tim Greene, Phil Hochmuth and Denise Pappalardo, ‘‘eBaybid shows promise of VoIP,’’ Network World Magazine,September 19th, 2005.

23. FT.com.24. Kevin Tolly, ‘‘Skype: Hazardous to network health?,’’ Network

World Magazine, September 26th, 2005. Stephen Lawson, IDGNews Service, ‘‘Test shows VoIP lagging in quality,’’ NetworkWorld Magazine, July 18th, 2005.

25. Phil Hochmuth, ‘‘VoIP start-up leans on Fidelity’s software,’’Network World Magazine, September 26th, 2005.

26. John Dix, ‘‘VON offers glimpse at a new VoIP wares,’’Network World Magazine, September 26th, 2005.

27. Jason Meserve, ‘‘Tightening video Integration with Microsoft,’’Network World Magazine, July 18th, 2005.

28. Robert A. Guth, ‘‘Microsoft, Seeking to Beef Up Services, BuysVoIP Specialist,’’ Wall Street Journal, August 31st, 2005.

29. Nicholas G. Carr.30. Vonage Holdings Corporation, ‘‘Vonage,’’ Vonage Holdings

Web Site, <http://www.vonage.com>, accessed 9/24/04.31. Avaya Company, ‘‘Avaya,’’ Avaya Company Web Site,

<http://avaya.com>, accessed 10/01/04.32. Daniel Roth, ‘‘Skype: Catch Us If you Can’’, Fortune, January

26, 2004.33. Joseph Weber and Robert D. Nof.34. An Evalueserve Report, ‘‘Impact of Skype on Telecom Service

Providers,’’ Evalueserve, January 6th, 2005.35. Papagiannidis, S., Berry, J. and Li, F. (2005) Well beyond

streaming video: IPv6 and the next generation television.Technological Forecasting and Social Change.


http://www.irtf.org/charters/p2prg.html

http://www.skype.com

http://arxiv.org/pdf/cs.NI/0412017

http://arxiv.org/pdf/cs.NI/0412017

http://www.itworld.com/Net/3303/040727skype/pfindex.html

http://www.itworld.com/Net/3303/040727skype/pfindex.html

http://www.vnunet.com/2126745

http://www.vnunet.com/2126745

http://knowledge.wharton.upenn.edu/index.cfm?fa=printArticle&ID=1258

http://knowledge.wharton.upenn.edu/index.cfm?fa=printArticle&ID=1258

http://www.boston.com/business/technology/articles/2005/08/01/start_up_slashes_cost_of_international

http://www.boston.com/business/technology/articles/2005/08/01/start_up_slashes_cost_of_international

http://www.internetnews.com/infra/article.php/3525806

http://www.internetnews.com/infra/article.php/3525806

http://www.vonage.com

http://avaya.com


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BHARAT RAO, Depart-ment of Management,Polytechnic University, 5Metrotech Center, Brook-lyn NY 11201, USA.E-mail: [email protected]

Bharat Rao is AssociateProfessor of Managementat Polytechnic University,New York. His researchfocuses on the impact of

information and communications technologies, wirelessand broadband innovation, the diffusion of emergingtechnologies, and global innovation strategy.

BOJAN ANGELOV,Department of Manage-ment, Polytechnic Uni-versity, 5 MetrotechCenter, Brooklyn NY11201, USA.

Bojan Angelov is a Doc-toral Candidate in tech-nology management atPolytechnic University,New York. His researchcenters on disruptive

technologies and global innovation strategy.

ODED NOV, Depart-ment of Management,Polytechnic University, 5Metrotech Center, Brook-lyn NY 11201, USA.

Oded Nov is AssistantProfessor of Managementat Polytechnic University,New York. His researchfocuses on knowledgemanagement, managingtechnologies and organi-zational behaviour.


188 European Management Journal Vol. 24, Nos. 2–3, pp. 174–188, April–June 2006

fusion of disruptive technologies:: lessons from the skype case

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