By Mark Evans
Anyone looking at Skype may have a difficult time avoiding a troubling case of dot-com deja vu.
The Luxembourg-based company, which makes software that lets computer users make free phone calls over the Internet, sports many of the characteristics evident during the dot-com boom: minimal revenue, no profits and an unproven business model, but plenty of hype surrounding its efforts and lots of financial support.
Skype's notoriety and ability to attract money has much to do with the buzz over Voice over Internet Protocol technology, which lets voice traffic travel inexpensively over high-speed networks.
Skype has another component attractive to investors: two high-profile founders, Niklas Zennstrom and Janus Friis, who made their mark developing Kazaa, the peer-to-peer software that has drawn the wrath of the music industry by letting computer users share billions of free songs over the Internet.
It has become increasingly difficult to avoid Skype amid a steady stream of recent announcements about partnerships, new services and investments. Earlier this month, the company raised US$18.8-million from a group of investors that includes Draper Fisher Jurvetson. The money will be used to expand global operations and enhance its technology.
Make no mistake, Skype's technology is intriguing. Its software has been downloaded 9.5 million times since it became available last August.
The software features conference calling, instant messaging, personal ring tones and call history. Skype makes the bold claim its service is superior to traditional circuit switched networks.
Not surprisingly, there are many telecom analysts and executives who think Skype is more style than substance. They believe while Skype has capitalized on the interest in VoIP, its ability to become a viable player and a serious threat to phone carriers is far from assured.
Brian Van Steen, a principal with PointEast Research, said Skype will do well with early adopters but it will face a large challenge when carriers and cable companies launch their own VoIP services. “I don't see the mass market using [Skype],” he said.
Brad Fisher, general manager, consumer services development with Bell Canada, adds that Skype's technology is not innovative because computer users can already do Internet telephony using instant-messaging and chat software. While he concedes the Kazaa connection has driven Skype's popularity, Mr. Fisher said it is unclear how Skype will make money and how it will pay for the large investments to upgrade its service in the future.
“As customers are asked to pay for features, their expectations of quality will shift,” he said. “No longer will outages due to downtime be acceptable because consumers have paid.”
Skype is hoping to address its growth issues with the recent cash infusion. One of its first goals will be connecting the free service to traditional phone networks. This will see Skype buy large amounts of minutes from carriers and make them available to its users who subscribe to premium services.
Skype has heard all the arguments why it will not succeed. Their confidence, however, is ground in the belief that high-speed networks will change the telecom industry, and VoIP will join e-mail as a Web-based “killer app”.
“It is a matter of shifting values,” Mr. Zennstrom said in a recent interview. “Innovation creates technological evolution. It means you don't need costly circuit-switch and billing systems in place. We are building an alternative network called the Internet that you can use for any type of communication. ”
Skype's business model is still a work in progress, although a free service will remain a key element. Mr. Zennstrom, Skype's chief executive, said the strategic priorities are making sure the software is easy to use and that the service is as good as traditional telephony services.
As more people use the software, he said, Skype will launch new features so it can be used with personal digital assistants, mobile phones and cordless phones. Most important, it will launch, fee-based services such as voice-mail.
After enraging the music industry with Kazaa, Mr. Zennstrom said he and Mr. Friis do not see themselves as telephony rebels. Instead, he said they are simply introducing disruptive technology that is less expensive and superior to current technology.
“To me, business is nothing more than that,” he said. “At the end of the day, we are trying to make products great for consumers.”
Despite its challenges, Skype has its believers. Jon Arnold, an analyst with Frost & Sullivan, said Skype may be successful because the service's quality and ease-of-use are top-notch. And with three million users, he said, Skype is building a large user base that could make it financially viable if it can launch premium services to lure consumers away from carriers.
The key, he said, will be migrating people from the free service to fee-based services such as voice mail and the ability to track missed calls.
“That is the logical thing where they say 'for $2 a month or $5 a month, we will add basic features you add on your regular phone'. It doesn't sound like a lot of money but if you have a few million people, it adds up.”
Mr. Arnold said Skype has its skeptics because the service is still free and the VoIP market is moving slowly. What people should not ignore, he said, is Skype's users, which have been attracted with little marketing. “I am not saying [Skype] will be big tomorrow or a year from now, but you could look back five years from now and say 'this is the thing that spelled the end for the [regional Bell carriers]',” he said.
© National Post 2004

Desperate measures call for desperate times. You would think that given Enterprise Capital Management's latest attempt to kill the Manitoba Telecom Services-Allstream deal by leaning on little-used Toronto Stock Exchange regulations to force a meeting of MTS shareholders. The biggest problem – and one Enterprise appears unable to overcome – is that MTS's board approved the $1.7 billion acquisition of Allstream, and MTS has a binding agreement to complete the deal. Unless Enterprise can find a loophole or BCE, which owns 21% of MTS, steps into the fray, it seems like the acquisition will close in June.

With apologies for going off the telecom track today, it would remiss not to mention the impending retirement of Cognos CEO Ron Zambonini. Not only one of the most colorful individuals within Canada's high-tech industry – and we can always do with a little personality, can't we? – Zambonini should also be acclaimed for the impressive job he has done making Cognos the world's leading business intelligence software maker. In a world dominated by big players such as Oracle, SAS and SAP and, increasingly, Microsoft, Cognos stands out as the little software company that could.

By Mark Evans, Financial Post
A new study says telecom carriers can reduce their operating costs by as much as US$14.5-billion by sending high-tech and other business functions offshore to countries such as India, China and Canada.
The study by Deloitte Touche Tohmatsu, which interviewed executives from 42 telecom firms around the world, is more evidence of the growing interest in outsourcing. With thousands of jobs leaving high-cost countries such as the United States, outsourcing has become as much of a political issue as an economic one.
Phil Asmundson, a deputy managing partner with Deloitte, said offshore outsourcing has not been widely used by telecom carriers, mostly due to opposition from unions, concerns about a political and public image backlash, and the tendency among carriers to control all parts of their businesses.
Mr. Asmundson said, however, said it will be difficult for carriers to ignore the economic benefits of employing offshore operations.
“We think offshoring can be quite substantial and the survey's respondents agreed with that,” he said. “They agreed that 10% of their operating spending — US$57-billion — can be offshored by 2008. If you use typical cost-savings extrapolations of 25%, you would get US$14.5-billion in potential savings.”
While many carriers may not have carefully examined offshore operations, they are intimately aware of the importance of cost-savings programs.
Bell Canada, for example, has implemented an extensive cost-reduction and productivity improvement strategy since Michael Sabia took over as president and chief executive of parent BCE Inc. in 2002. Telus Corp., meanwhile, has gone through a restructuring that has eliminated more than 6,500 jobs.
Cost-cutting has become a way of life for many carriers because there is little revenue growth. A major culprit is the launch of lower-cost Internet-based services that have started to cannibalize older, high-margin services.
The growing interest in offshore opportunities could be good news for Canada, which already has a large call-centre industry. Deloitte ranks Canada as a second-tier country, which means it has “moderate” offshore capability owing to its lower wages, educated workforce and use of English. Other tier-two countries include China and Ireland.
India, which is the dominant offshore supplier to the communications industry, is the only tier-one country because of its highly educated workforce and low wages.
Other countries on the horizon include tier-three “up and comers” such as Israel and Estonia. The tier-four neophytes include Bangladesh and Vietnam.
Deloitte found that wages in India for high-tech positions are US$5,000 to US$12,000 a year, while wages in China are roughly US$3,000 to US$8,000. In Canada, salaries are in the US$25,000 to US$50,000 range. And in the United States, the salary range is US$60,000 to US$90,000.

It looks like the days of sharp reductions in capital spending by North American carriers could be a thing of the past. According to a new report by Infonetics Research, capex is expected to only drop 2% this year to about US$47.2-billion. This compares with a 22% decline in 2003 from 2002. As important, it appears the capex-to-revenue ratio has levelled off at about 14%. If you are Nortel, Lucent, Ciena, etc., this has to be the best news you've heard in a long time. It's also a positive signal for Nortel, which has been so engulfed in accounting issues that many investors fail to realize it is poised to capitalize on the equipment market's rebound.