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Skype Rules North American VOIP

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News Analysis
Light Reading

Calls using Skype Technologies SA account for nearly half of the VOIP minutes used (46.2 percent) and about 40 percent of the VOIP bandwidth used in North America, according to an analysis done by broadband management company Sandvine Inc.

That puts Skype usage ahead of Vonage Holdings Corp., Cablevision Systems Corp. (NYSE: CVC), and other popular branded VOIP offerings (see Skype Extends Its Tentacles and Does VOIP Business Add Up?). In fact, Sandvine says Skype users account for 35.8 percent of individual VOIP callers on North American networks. “So this is not like five guys who figured out they could call Slovenia 24 hours in a row; this is a mass market phenomenon,” says Sandvine’s Steve McGeown, the company’s director of product management and main architect of the research.

Sandvine says it has a unique vantage point from which to form its analysis (see Sandvine Counts 1,100 VOIP SPs). The company monitors broadband traffic in cable and DSL provider networks, including six of the 10 largest ones in North America (see Allot Strengthens Carrier Products). So it claims to be able to identify and classify the traffic coming from about 11 million of the 60 million-or-so broadband subscribers in North America.

Why does this matter? Well, now that AOL (NYSE: TWX) and Yahoo Inc. (Nasdaq: YHOO) have entered the VOIP game, and Google (Nasdaq: GOOG) is expected to follow in some way, it remains to be seen whether these recent entrants can leverage their brand names enough to approach Skype’s progress (see Yahoo Enters VOIP Fray).

McGeown sees all this data as more pressure for existing carriers to change their stripes. “Providers out there have to realize that this is a real economic threat, that they will have to figure out a way to really differentiate their services with true VOIP. Then you get into the vision for VOIP, which is integration into Outlook, voice-to-text translation, voicemail-to-email [translation], that sort of thing...

“Niklas Zennstrom -- I have a lot of respect for this guy,” McGeown says of the Skype founder. “He understood that voice is a commodity and he marketed it as such, and that’s why it came out for free, and it worked all at the same time.”

Table 1: VOIP's Leaders

VOIP Provider Paying Customers
Skype Technologies SA 1,000,000
Vonage Holdings Corp. 500,000
France Telecom SA 330,000
FastWeb SpA 300,000
Cablevision Systems Corp. 189,000
AT&T Corp. 53,000
Source: Sandvine and Point Topic

Zennstrom's economic model was based on two things, McGeown believes. Skype is all about getting users hooked on the free part and then charging for additional services like SkypeOut and video conferencing (see Skype Launches SkypeOut and Skype Signs Four Carrier Deals).

Vonage CEO Jeffrey Citron says the pricing models are different because the products themselves are different. In fact, Citron labels Skype an “ancillary service” and not a direct competitor. “Skype says it themselves, they are not a replacement for your home telephone -- they are an ancillary communication service. “What Skype does is allow you to make a cheap telephone call using your PC -- so as an ancillary communications provider, who are they impacting? They are certainly not impacting Vonage,” Citron says.

“Skype is having its own issues with growing so they will have to figure that out,” he adds.

Sandvine's McGeown believes Zennstrom’s master plan is to begin licensing the Skype software to handset manufacturers around the world. “It would be completely, utterly brilliant, because you would make a dollar on every Sony phone that ever got sold,” McGeown says.

So while Skype may be a threat to VOIP companies and wireline carriers now, it could evolve into a threat for mobile service providers.

“So you can imagine if you’re a wireless service provider how horrifying that must be when your economic model is predicated on, basically, a free phone, and you sign the customer up for two years of service,” McGeown says. “Oh great -- now the phone’s free and so is the service.”

— Mark Sullivan, Reporter, Light Reading

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User Rank: Light Beer
12/5/2012 | 3:10:49 AM
re: Skype Rules North American VOIP
Shouldn't the table include Yahoo!Japan BB phone numbers? Also isn't there a difference between Skype numbers and say Vonage numbers? Vonage subscribers pay monthly and Skype number is cumulative, meaning if a subscriber bought SkypeOut credit two times, then the count is incremented by 2 (in my understanding).
User Rank: Light Beer
12/5/2012 | 3:10:48 AM
re: Skype Rules North American VOIP

It's not easy to admit the world is changing. Vonage representative isn't the only who's trying to dismiss Skype. But it's hard to compete with something you get for free. And it works. And when you need more services, you pay for that (SkypeIn, Out and Voice Mail) only and that's it.

Isn't it exactly ten years ago when Netscape listed and gave Microsoft hard time, at least for a while? There are not many companies in the world that could attack as efficiently as Microsoft did and succeed. Carriers are not like Microsoft that would be able unite and get rid of a threat (well, you never know).

McGeown's excellent point GÇ£Oh great -- now the phoneGÇÖs free and so is the service.GÇ¥ reminds me of something: did you know that there are still some countries where it is prohibited for carriers to bundle the phone and the subscription? You buy your (GSM) phone wherever you want, walk into a carrier's retail outlet and subscribe to a network service that you use as long as you want and cancel whenever you want. It works, too.

User Rank: Light Beer
12/5/2012 | 3:10:45 AM
re: Skype Rules North American VOIP
"Zennstrom's economic model was based on two things, McGeown believes. Skype is all about getting users hooked on the free part and then charging for additional services like SkypeOut and video conferencing..."

But what do you do when most of your customers only want to use the free stuff?

GÇ£So you can imagine if youGÇÖre a wireless service provider how horrifying that must be when your economic model is predicated on, basically, a free phone, and you sign the customer up for two years of service,GÇ¥ McGeown says. GÇ£Oh great -- now the phoneGÇÖs free and so is the service.GÇ¥

Imagine your trying to sell a business model for VoIP where you give away the service/application, but someone still has to have facilities/physical plant to get the service from here to there (try to remember that OSI layer 3 don't go nowhere except through layers 2 then 1, and vise versa), and the faciities providers bill every month, without fail.

Anybody see a problem here?
User Rank: Light Beer
12/5/2012 | 3:10:44 AM
re: Skype Rules North American VOIP
What is John Malone orchestrating in Global Broadband??? Get on it Ray.
User Rank: Light Beer
12/5/2012 | 3:10:44 AM
re: Skype Rules North American VOIP
Have to disagree w/ Vonage's CEO on one point:
"They are certainly not impacting Vonage,GÇ¥ Citron says."

Skype offers an IP to PSTN softphone called SkypeOut (out of the IP network...) for 2 cents/minute in the U.S. You pay 10 Euros up front and use your minutes.
I use it when I'm on the road. Works fine.

Vonage has a softphone as an option to your flat rate account.
Vonage's Softphone option costs $10.00/month each month, every month. You get 500 minutes then it's 3.9 cents/minute after that.

Question? What if I don't use $10.00 worth of laptop to PSTN each month? I lose money.
Skypeout's pricing plan of pay for what you use, with no "monthly charge" is a much better plan.
If Vonage would match, I would add it to my Vonage account. They are losing my incremental business, so Citron is incorrect in stating Skype is not affecting him. It is. Not much, only incrementally, but isn't that what we are all trying to build/sell? (most of us). Incremental services, for that extra buck a month.
User Rank: Light Beer
12/5/2012 | 3:10:43 AM
re: Skype Rules North American VOIP
Does Skype conform with the FCC's pronouncements on 911 service? Or SkypeOut?

Do we need a broader taxonomy to deal with IP-only telecom (e.g. Skype, FreeWorldDialup, etc) separately from local- and long-distance replacement services (Vonage, Yak VoIP, etc)?

Regulators certainly seem to be making a distinction, at least in Canada and the U.S., among providers with and without PSTN connections. The latter are apparently not being considered as VoIP service providers per se.
User Rank: Light Beer
12/5/2012 | 3:10:36 AM
re: Skype Rules North American VOIP
say providing IP soft phone service for existing or even furture subscribers. Thus a subscriber is able to make unlimited calls at home using the real phone, and make unlimited calls from his/her
PCs as long as it's online.
User Rank: Light Beer
12/5/2012 | 3:10:36 AM
re: Skype Rules North American VOIP
User Rank: Light Beer
12/5/2012 | 3:10:35 AM
re: Skype Rules North American VOIP
they do...for unlimited calling for $25/month plus an extra fee for the softphone
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