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Skype Calls Out, But Is the Pope In?

Light Reading
News Analysis
Light Reading
7/27/2004

Skype today launched its commercial peer-to-peer (P2P) VOIP service, SkypeOut, which allows users to make low-cost calls to fixed and mobile PSTN (public switched telephone network) lines (see Skype Launches SkypeOut and Skype Plans Some Ins & Outs).

And if he hasn't already heard, someone should alert the Pope about the tariffs -- and quick. Calls to the Vatican's PSTN lines are just 2 cents per minute from anywhere in the world, so the Holy Father's Hotline might just start smokin' from today.

Apart from the potential ramp-up in calls to the Pontiff, Skype CEO Niklas Zennstrom has high hopes for the service. Just as the company's free service attracted millions of users within a short time, Zennstrom reckons up to half a million people could be using the prepaid service within months.

That would start driving some meaningful revenues into the coffers of the privately held firm, which earlier this year raised its second round of funding (see VCs Pump $18.8M Into Skype ).

Skype's tariffed service, made possible through call termination deals with a number of network operators, is available as part of the new "Skype for Windows Version 1.0 software" (see Skype Names Carrier Partners). To date, users of Skype's free VOIP and messaging service have been using various versions of the firm's beta software.

Zennstrom is quick to emphasize that the service between Skype users will remain free, and that the commercial service is simply a value-added feature.

So how will SkypeOut charge for the service? Well, it has a relatively simple charging structure, with a flat per-minute fee that differs depending on the destination of the call and whether a mobile or fixed line is being called. The only variation between SkypeOut users is that those located in the EU countries have to pay value added tax (VAT), making their tariffs slightly higher.

The vast majority of the rates are less than €0.20 (US$0.24) per minute; all (except a handful) are less than €1 ($1.21) per minute; and there are 22 countries (such as Australia, Canada, France, Italy, Spain, the U.K., the U.S., and the Vatican!) included in the "Global Rate" of €0.017 ($0.02) per minute.

The only rates that top the €1 per minute limit are for calls to remote locations such as the Cook Islands, Diego Garcia, the island nation of Niue (formerly Savage Island), Sao Tome and Principe, the Solomon Islands, the lost continent of Mu, and calls to those exclusive enough to have a "United Kingdom Personal Number."

Zennstrom claims this flat fee structure is a key differentiator, as traditional phone companies force customers to choose from a range of complicated calling plans. Skype, he says, is intent on using the same plan for everyone. "One best offer for all destinations," says Zennstrom, lapsing into sales mode.

He says the tariffs are similar to local call rates, and that Skype can afford to offer those rates because of its low operations costs. "One of the benefits of Skype is that we don't have a network to operate," says Zennstrom.

Skype, which has relied on word-of-mouth recommendations and free publicity to build its user base, already has 8 million registered users, with a target of 10 million by the end of the year. Zennstrom expects "up to 5 percent" of those individuals to use the paid service, but insists it's too early to tell what sort of revenues to expect.

That uptake will again be achieved without a promotional marketing campaign, says Zennstrom, and so will mostly involve people already familiar with the free service and the way it works. As a result, the paying customers will also be clued up about issues such as call quality, which is often cited as an issue for VOIP.

On this issue the CEO is very bullish, even about the free service. "Skype-to-Skype quality is better than the PSTN because it's going over a broadband connection," Zennstrom claims, saying that no phone company in the world can guarantee voice service quality.

He also believes that people will be willing to pay for a service even if some calls were dropped because of issues such as network congestion. It's the same as with a mobile service, he says: If you use it in a garage or a building where there's bad reception, service quality will be affected, yet people still pay for the service.

So that's the service quality issue sorted out good and proper, then.

Next on the Skype launch pad is the SkypeIn service, which will enable people to contact Skype users from the PSTN, and other additional features such as voicemail and videoconferencing, though Zennstrom still maintains that "our core value proposition is the free service."

— Nicole Willing, Reporter, Light Reading


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