Skype Rules North American VOIP

Light Reading
News Analysis
Light Reading
6/16/2005



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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