Advertising is yet another lead weight attached to Skype's neck. These are the natural consequences of the "freemium" model, which ultimately will cause it to drown.    

The freemium business model says you can build a successful business by giving away your core asset and charging for extras and upgrades. The idea comes from the shaving industry in which shavers are given away but the customer is locked into buying a certain type of blade which is sold at a high premium. It works because because of an illusion that the user does not understand, that the blade is the accessory and the shaver is the core asset.  It works when that illusion can be maintained.  It doesn't work when there is no accessory being sold that can bear the weight of the business.   Examples of companies that are built on this false Freemium model include Twitter,  Pandora, and of course Skype, all of whom are struggling for relevance.

The "freemium" model can be compared to the "freebee" model in which something free is attached to something that is costly in order to add to its value, or its appearance of value. For example, a piece of hardware like a computer can be sold very at a very high price if it is loaded with software that makes it uniquely valuable. This is the model of Apple Computer. It's how their profit margins can be so high. 

The freemium model can also be compared to the "tiered services" model in which an introductory or low grade of service is offered for a small fee, or for free, but then layers of expanded features or services are quickly added so that most "customers" are paying customers.  

Not even 10% of Skype's customers are paying customers, and there is no prospect for improvement. Unfortunately or rather ironically, the most valuable part of Skype, its IP core, is being given away for free while the part that generates most of the cash (SkypeOut minutes) is a wasting asset. This is the freemium model in action. It's advocates insist that it is merely non-intuitive.  But that just makes for good parody. 

So now we come to Skype's tragic decision to accept advertising. It adds nothing to Skype's value.  In fact it takes value away.  The cries of outrage can be heard everywhere. As Skype approaches its IPO, it is making one desperate move after another in an effort to demonstrate that it can grow profits in a sustainable fashion.  

Yesterday, I wrote about its fateful mistake in trying to "integrate" with Facebook. Advertising is an even worse and more desperate decision.