6 August 2004
Francis Till asks: Is it really the end of telephone companies?
Skype user screen
Off in the not-ready-for-enterprise sandbox but showing signs of growing into a tsunami that could engulf the telco industry is geography-negating Skype -- a "peer-to-peer" (P2P) software-based, Windows-only technology that lets any computer user talk to almost any telephone in the world for pennies.
Until last week, the service -- an invention of the same two Dutch Davids who nearly killed the music industry's Goliaths with file-sharing network KaZaA, Niklas Zennström and Janus Friis -- was strictly computer-to-computer but free to download and use. The catch was that both parties had to have the software installed -- but nearly eight million people met that threshold requirement only months after the company launched.
As of last week, those C2C calls (and the application) are still free, but Skype calls -- through what the company calls SkypeOut -- can now be made over any connection (broadband is not required, but is preferred) from any internet-capable device to almost any landline or mobile phone in about 170 countries at a tiny fraction of normal rates.
This is, as the company celebrates, disruptive technology of the first order -- especially in the mature telephony market. How disruptive will depend on how popular it becomes and on countermeasures as carriers become alert to the threat.
It comes at a fraction of the cost: calls are billed in euros and charged to pre-paid accounts, with the cost of calling a landline in the UK and 21 other major countries, including Russia, Norway and Chile from New Zealand at any time set at E0.017 a minute (that's roughly NZ3c). Calling a mobile phone number costs more: E0.205 a minute (about NZ53c).
Calls to more exotic locations cost more but calling a landline in Afghanistan for E0.288 a minute is an extremely good deal in the current pricing market. Off-peak, through Telecom, that call costs $1.88 a minute and on a Monday at midday $2.33 a minute. Meanwhile, Skype C2C calls remain free, regardless of location, provided a user in a place like Afghanistan can find a working, affordable ISP.
Calls can be initiated from an enormous range of internet appliances, including wi-fi-enabled handsets and even their less exotic cousins, wi-fi-connected personal digital assistants, provided they're running Windows PocketPC software -- Skype doesn't run on Palm.
What's more, users can carry their entire Skype account and all the tools required to use it in keychain storage, making it even more mobile than a mobile phone.
That's because Skype, which is completely software-based, takes up just over 10MB of hard drive space and so can live comfortably on a tiny flash storage device. Anyone with a Skype-loaded flash storage unit can plug it into a USB port and instantly turn that computer into a personal Skype phone. That makes personal accounts machine-agnostic -- and requires no downloads when using borrowed, corporate or leased hardware.
What's more, a Skype user who sets up such a temporary connection is instantly visible online to his network of contacts including family and co-workers -- and can be called at the click of a button by the boss -- or a spouse.
The system is almost completely configuration-free -- that is, because it uses a specially designed P2P layer on the internet, it bypasses most firewalls as if they didn't exist and requires no decision-fraught setup on any computer interface. It installs itself, it is intuitive to use and, as the company says, "it just works" once installed (although you may have to fiddle with your volume controls a bit, especially if you use a headset).
Skype's PR says it provides a connection that's better than the regular telephone system and the calls are loud, crisp and have no lags or echoes, regardless of distance. That alone distinguishes it favourably from the voice-over-internet-protocol (VoIP) telephony offers of the stumbling Net2Phone network as well as the primitive services provided by MSN and Yahoo Messenger connections.
Unlike those "hobby networks," Skype calls are secure and encrypted and the system is both ad-free and spyware free. It also supports conference calls of up to four users and features a searchable, self-propagating user directory.
So is it perfect? Most of the time yes.
But there was such a surge of interest immediately after the SkypeOut program was introduced that some callers experienced quality issues on some calls, the company said -- and then made a very un-telco gesture by suspending charges as it upgraded its systems.
Some users have also complained that Skype calls can interfere with other applications open on a user's computer but Skype says it is close to fixing that problem.
Is free a viable business model?
That is: will this service vanish the moment you come to depend upon it?
The P2P network created for Skype depends on scale: it works better as its user numbers increase. This was part of the magic of KaZaA and Napster. Once KaZaA reached a satisfactory mass -- about 200 million of its current 350 million users -- the owners switched on a built-in adware network, AltNet, which caused an enormous outcry but did little to stem the growth of the network.
Here, the revenues will come from the termination charges associated with calling regular telephones -- so there may be no need to inject an advertising revenue stream.
More, if the KaZaA and Napster experiences are predictive, alienating core users of the system by introducing an advertising or spyware scheme will only spawn rival networks.
Earlier this month, Skype cemented that revenue stream by signing agreements with four über-carriers -- Colt, iBasis, Level 3 and Teleglobe -- to enable termination of internet calls on landline phones in most of the world.
Skype is privately held, with investments from Tim Draper, Draper Fisher Jurvetson ePlanet, Index Ventures, Bessemer Venture Partners and Mangrove Capital Partners.
The Skype Group is headquartered in Luxembourg with offices also in London and soon in Tallinn, Estonia.
Right now, Skype has been downloaded almost 19 million times. Not enough to threaten the telephone industry -- but only a few zeroes away from cutting into important revenue streams.
6-Aug-2004