Skypes Rules! Well, Maybe Not…

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

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