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Skype�s Attack on Traditional Telecom: Where Will it Lead?

By Mike Katz


By now, you�ve all heard about the leader in virtual telecom, Skype, which has more than 100 million customers worldwide, and how it has thrown its competition � VoIP operators, alternatives like Microsoft (News - Alert) (which, by the way, has a free calling beta going on with a limited customer base), Google (News - Alert), Yahoo, AOL, and the legacy telecom operators, a gigantic curve ball, according to the press. To recap, from now until the end of 2006, users will be able to make SkypeOut calls for free. From Skype�s perspective, it�s simply the choice to try an alternative virtual telecom service. This means you can call anyone in North America and Canada for nothing using Skype. So, what�s the likely effect on the rest of Telecom? Is it the end of the legacy telecom operators� reign over every call we make? Will VoIP operators, like Vonage (News - Alert), still have an IPO, or worse, a business? Will the legacy telecom providers just strike out, or will they strike back.

Skype�s Market Attachment

While I applaud Skype�s marketing chutzpa, it�s not a sustainable business model for a telecom operator to give away free calls to subscribers. The call termination cost alone in the six months left in this year will be significant. The real experience to date, as of five days after the launch of the service, is mixed. One in five calls doesn�t get through and most failed calls prompt the message, �You need to purchase SkypeOut credits to make a call.� While I�m sure that these are just start-up woes, it does take the shine off of the offer.

However, this is really a marketing promotion, after all, and the termination fees are really just customer acquisition costs for SkypeOut as a service. This promotion targets the hardest market to penetrate: North America. Skype�s adoption rates in North America have not been good, compared to its successes in other countries. So, free calling makes Skype more interesting to try and potentially keep using after the six month free call period ends. Assuming the start-up woes diminish, this move will put pricing pressure on all of Skype�s rivals. Who will lose? Who wins?

Real Data Behind the Hype

A fair analysis of both legacy and virtual telecom offers yields an interesting picture. To be fair, Skpye�s offer is only one-half of typical Telecom needs: you need to purchase inbound call support, or SkypeIn. SkypeIn is $38.20 per year ($3.18 per month). You�ll also need a DSL line and, at a minimum, what most carriers refer to as a �dry loop,� a DSL-capable phone line without the voice service. Taking a liberal 30% of the cost for voice service adds at least $10.50 more per month. Third, Skype, unlike the legacy telecom service offerings and the alternative VoIP offerings, does not support 911 calls. No costs are apportioned for this unsupported service. Given these issues, is Skype�s offer a good deal for most consumers? (See table 1.)

Table 1 notes:

(1) Based on Verizon (News - Alert) Freedom calling plan and Vonage published rates as of May 19, 2006.

(2) Skype-in is required to receive calls. Fee is 1/12th of the yearly cost of $38.20.

(3) Applications are provided FREE with the virtual operators solutions. Verizon�s Iobi service adds like functionality to their land line offering for $7.95 per month.

It�s the Applications That Count!

If we stay strictly with the data, Skype�s offer is less then a third the cost of a Verizon landline offer for the same set of services, including applications and half of what the leading VoIP alternative charges. Does 911 support count? Yes, but how long will it be before Skype gobbles up an E-911 service provider and offers its own branded version to its users? This event is real change in a market so often viewed as ponderous and slow. Skype has am already enormous base, to which it is focused on adding additional customers and new applications (e.g., Video calling, conferencing, and more). But wait, so are Vonage, CallVantage, Google, Yahoo, Microsoft and AOL. They, along with Skype, realize that the market is beyond merely a voice call and its feature sets and that its application services that differentiate legacy offers from theirs both today and tomorrow. Even Verizon gets this, with its Iobi home service. Will legacy providers get it together in time? Will they strike back by banning VoIP traffic on their DSL offers, � la a recent announcement in the wireless world from T-Mobile regarding its Web �n� Walk service? Will all talk about IMS convert to action and save the day? Either way, Internet telephony and value added application services are poised to strike out the legacy landline providers and they must strike back. IT

Mike Katz is director of product marketing for NMS Communications. For more information, please visit the company online at (news - alerts).

If you are interested in purchasing reprints of this article (in either print or PDF format), please visit Reprint Management Services online at or contact a representative via e-mail at [email protected] or by phone at 800-290-5460.

Average Monthly Telecom Consumer Costs Comparision

Table 1


Verizon (landline)



Local and unlimited long distance telephone service (1)




Monthly Inbound line # and line cost (2)




Applications and incremental features (web account access, Voicemail, Video service, addtional features plus self service feature management like Caller ID, Voice Mail retrieval (requires a compatible Verizon Home Voice Mail product), real-time Call Management, Call Forwarding, Calendar, Address Book, Text Messaging) (3)




Monthly portion of a DSL line used for calls — 30% (dry loop charge w/out voice calling
capability + DSL fee)

Not Required








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