Skype can give away free video calling because customers pay for all the expensive marginal costs.

• With every account, Skype hosts account creation, account backup, and presence service on their servers. These are very lightweight, low cost services but they grow linearly with the user population.
• Skype also provides technical support, customer service, security and R&D, spread across all users, fee and free. The costs of these services grow slower than the user population.
• Skype’s customers pay for their own microphones, cameras, computing, and P2P connectivity. So while this is a linear marginal cost, Skype doesn’t pay.

Contrast this with Yahoo!, Microsoft, SightSpeed and other VoIM providers. They have Skype’s fixed costs and more. They pipe all talk through hosted servers. So every additional free user requires them to pay for more server capacity, bandwidth, and server farm management.

Skype doesn’t pay when customers

• speak more often
• to more people
• for longer times
• through more bandwidth-consuming media.

P2P’s low marginal cost helps Skype scale and tweak their freemium rate.

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