Can Skype live up to the Net phone hype?

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Can Skype live up to the Net phone hype?

By Ben Charny CNET News.com September 27, 2004, 10:00 AM PT

 

When Sun Chun first heard of Skype and its promise of free,

high-quality Internet phone service, he figured the claims were mostly

hype.

 

Chun, who generally considers himself an early adopter, had tried

broadband phone services before, only to suffer lost calls and garbled

conversations. So he was skeptical when reports began circulating a

year ago of revolutionary peer-to-peer software that could render

traditional phone companies obsolete, much as file-swapping services

threatened the recording industry.

 

The jury is still out on whether Skype will take down the Bells. But

Chun, for one, is kicking himself for waiting so long to try out the

software.

 

" The conversations with our friends are surprisingly clear and crisp, "

Chun, a San Jose, Calif., tech worker, said in an e-mail. " Calls to my

friend in Australia were also of equal crisp quality. So now, I am

urging all my friends and family to install this incredible software. "

 

Just over a year after Skype's launch, the Luxembourg-based upstart is

showing signs of being the real deal. But as with early predictions

about peer-to-peer technology and the music business, the expectations

about an overthrow of the telephone industry remain unfulfilled.

 

In fact, as much as Skype presents a budding competitive challenge to

the old-line companies, it's also looking for ways to cooperate with

them. The start-up voices lofty goals of expanding the way people

communicate, but it still faces the down-to-earth demands of

broadening its own sources of revenue.

 

And although users like Chun say they're impressed by Skype's voice

quality, there are still some rough edges. Both caller and receiver

must have the voice over Internet Protocol (VoIP) software installed.

Calls to ordinary phone customers will still have a cost. And the

software works only on PCs and a handful of niche devices--not regular

phone handsets.

 

" VoIP didn't become successful until it moved off the PC, " said Sara

Hofstetter, a senior vice president at Net2Phone, a VoIP provider

that, unlike Skype, does not use peer-to-peer software.

 

You say you want a revolution?

Even taking into account such pitfalls, Skype signals a major upheaval

for the phone industry.

 

Because of its peer-to-peer architecture, Skype requires absolutely no

infrastructure and only minimal capital investment compared with phone

companies that own their own lines and switches. Rather, Skype's

750,000 daily users create the network on the fly, sharing computer

resources to manage traffic flow and ensure call quality. Skype claims

its network can grow organically without the need to add new equipment

to support increased traffic demands.

 

This " network free " concept is unprecedented, even for Net phone

providers that are already turning the century-old telephone industry

on its ear. With Skype, one no longer needs a few hundred thousand

dollars in start-up costs typically associated with Net phone service,

let alone the billions of dollars in investments to become a

traditional phone company.

 

" I knew it was over when I downloaded Skype, " Federal Communications

Commission Chairman Michael Powell said recently. " When inventors are

distributing…a program to talk to anybody else, and the quality is

fantastic, and it's free, it's over. The world will change now

inevitably. "

 

Skype has turned heads for its unique blend of technology and rapid

grassroots adoption. The company claims more than 22 million downloads

since the software was first made available in August 2003. It is

currently signing up about 60,000 new registered users every

day--numbers that draw comparisons to free software downloads that

swept the Internet during the late 1990s, such as the ICQ instant

messaging service.

 

" Its growth rate is sky high, " said Tim Draper, managing director at

Draper Fisher Jurvetson, which has invested $9 million into the

company. " I don't think there's been this speed of adoption since

Hotmail. We are thrilled with what Skype's been able to do. We think

it's a global phenomenon that will change communication for the better. "

 

Following in Kazaa's footsteps

Skype has also drawn comparisons to Kazaa, the wildly popular

file-swapping software created by Jan Friis and Niklas Zennstrom--the

same pair of developers behind Skype.

 

Like Kazaa, Skype uses peer-to-peer technology that connects PCs and

turns them into a powerful, collaborative network without the need for

central servers to direct traffic or otherwise administer the system.

 

In Kazaa's case, people can search and retrieve files stored on one

other's computers--a capability that has drawn the wrath of the

entertainment industry over allegations of massive copyright violations.

 

With Skype, people can place phone calls without touching the

traditional phone network. That means callers can avoid long-distance

charges, regardless of the destination, provided both caller and

receiver have the Skype software.

 

Although other companies such as Vonage, Packet8, VoicePulse and AT & T

have launched similar broadband phone services, most use centrally

managed systems to handle call transfers to the traditional phone

network. Most also charge a flat monthly fee.

 

Skype, by contrast, charges only when its users need to make a call

that goes off the peer-to-peer network to a traditional telephone

line, a capability made available recently through a new feature known

as SkypeOut. The service charges a flat rate of about 2 cents a minute

to 20 countries in North America, Western Europe and Australia.

Different rates apply elsewhere.

 

Rivals argue that Skype's free calling network is a essentially closed

one and thus won't have broad appeal to people wanting to call anyone

without the software. As a result, rivals that offer flat billing

rates may have wider appeal.

 

" Skype might have great software, but its business case and its reach

is very limited, " said a Vonage representative. " They aren't going to

take over the world the way they are doing it now. "

 

What's in store?

With all its momentum, it's surprising to hear that Zennstrom isn't

interested in putting traditional phone companies out of business

anytime soon--if ever.

 

Rather, he said, a major theme for the company is how VoIP and phone

companies can work together.

 

In this relationship, Skype plays the role of lure by supplying a

tempting Internet application--in this case free Internet calling with

loads of extra features--that phone companies can use to sell

broadband to their customers.

 

" Fax machines did not kill the post office. E-mail didn't kill the

fax. Our objective is not to kill any telephone companies. People will

be using phones of all kinds in the future, " Zennstrom said. " If

anything, we are there to help drive sales of broadband. What we want

to do is expand how you communicate, adding on text messaging, file

transfer, video. Voice is just one way to communicate. "

 

Another priority is profits. " In a world of many, many billions, it's

easy to find 10 million geeks, " said Net2Phone's Hofstetter. " The real

question for Skype is how are they going to make money? "

 

Skype's only revenue sources for now are sales of $55 " Cyber Phones "

for laptops, and a number of Plantronics combination

headset/microphones. In mid-2004, it significantly expanded its

commercial efforts with SkypeOut, in which Skype users can call cell

phones or landline phones. People create an account of $12, $30 or $62

worth of voice minutes. The accounts are charged at various rates,

depending on where the call originates and which region is being

called. Zennstrom wouldn't say how much the company now earns from

these and other ventures.

 

" We are very focused now on the short term and introducing our

commercial services, " Zennstrom said.

 

Jumbo phone booths

Looking ahead, Skype plans to fine-tune what is already one of the

best voice qualities in the business. It is testing new applications

for videoconferencing, which will accompany the dozen free features

Skype already offers. In addition, the company is busy making versions

of its software for mobile devices, a difficult technical feat that

could have a huge payoff.

 

The push began in early 2004, when Skype released a version of its

software for Microsoft-powered personal digital assistants.

 

With such a combination in hand, the public venues, transportation

hubs, stores, restaurants and offices with high-speed Wi-Fi wireless

networks could become oversize phone booths, where Skype users can

call each other for free, or reach the traditional phone network for a

couple cents a minute.

 

The next step, said Zennstrom, is creating a version of Skype for cell

phones. A Skype representative said the company is testing Skype for

cell phones using a European cell phone network equipped with 3G, or

third generation, wireless broadband gear that typically downloads

data at the speed of a digital r line connection.

 

But this push into phones is raising questions. Skype calls on a cell

phone would rely on wireless data networks that are for now expensive

to use. But Zennstrom is confident the price of such services will

drop to palatable levels.

 

" That's definitely where we are going, " Zennstrom said. " This will be

a very big step for us. "