FREE SPEECH: Reach for the SKYPE

Skype expands

The peer-to-peer telephony software company targets more traditional phone carrier consumers.
December 22, 2004


Skype Technologies, one of the leading Internet telephony companies, positioned itself Wednesday to capture more traditional callers by announcing new partnerships with two major European telecoms. The company, which already boasts 19 million users worldwide, will now allow its pre-paid SkypeOut service users to make better-quality calls from their PCs to customers of U.K.’s Cable & Wireless and France’s B3G Telecom.



SkypeOut is part of the Luxembourg company’s peer-to-peer telephony software that allows members to make calls to traditional phone and cellular lines in any major country for about $0.02 per minute. This partnership makes way for Skype to boost revenues by an amount that company officials would not disclose. A spokesperson, however, said that Skype currently has 500,000 customers who have prepaid about $13 each for the SkypeOut service.



Skype has already made similar agreements with other carriers such as iBasis of Burlington, Massachusetts, Level3 of Broomfield, Colorado, and Teleglobe of Bermuda.



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Analysts said the new partnerships could spell cuts in revenue for incumbent telcos such as Verizon and France Telecom as more calls are placed over the Internet. Worldwide consumer voice-over-IP (VoIP) revenue will be in the range of $8 billion to $15 billion by 2008, according to Boston-based telecom consultancy firm Adventis.



The new alliances follow a recently forged partnership with Kazaa, a peer-to-peer file-sharing software, which was co-founded by Skype CEO Niklas Zennstrom. Over the last 20 months, Internet users all over the world downloaded the popular peer-to-peer telephony software 50 million times.



Mr. Zennstrom sees the new agreements as part of the company’s long-term strategy to expand its international presence, provide more value-added services to its customers, and increase its paid user base. “The more carriers we have, the better quality and price we can provide,” said Mr. Zennstrom.



The business plan is simple. Skype will provide free PC-to-PC calls for as long as possible to develop a loyal customer base, said Mr. Zennstrom. The latest agreement calls for Skype to pay Cable & Wireless a fixed sum at a wholesale rate for calls made to its customers. The revenue comes by charging Skype customers retail.



Bob Rosenberg, president of Insight Research, said it was interesting to see that Skype struck deals with European telcos as opposed to North American companies. The company already has a majority of its user base in Europe – 46 percent – and only 13 percent in North America. Skype could be trying to win customers in the U.S. by offering clearer transatlantic calls with this partnership, said Mr. Rosenberg.



The emerging VoIP market is growing crowded and competitive. In addition to competing with other IP telephony firms such as Vonage and AT&T’s CallVantage, Skype will likely face pressure from instant message vendors, such as Yahoo and MSN, who haven’t yet moved into Internet telephony, said Jupiter Research senior analyst Joe Laszlo. “It wouldn’t surprise me to see them make a foray forging into deals with carriers,” he said.



To be a viable company, Skype needs to come up with more revenue-generating services, said Mr. Laszlo. “It almost feels less like a business and more like a passion for the guys who run it,” he said.



In a bid to become more profitable, in 2005 Skype will introduce its SkypeIn paid feature, which will assign phone numbers to members that can be dialed from any land or cellular line around the world. The company also is talking with cordless phone makers such as Siemens and V-Tech about connecting cordless phones to PCs using Skype. Other services that could be provided in the future could be video telephony and voice mail, said company officials.