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Why Skype is Good News for Service Providers � Part 1

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September 29, 2009

Why Skype is Good News for Service Providers � Part 1

By Jon Arnold, Principal, J Arnold & Associates

I’ve been following Skype (News - Alert) from the beginning, and cannot think of any new entry that has had as much impact in so little time on the IP communications market. Can you? Many companies have come and gone, but Skype has taken a very simple concept – free voice calls – and built it up into a unique community that continues to grow at a pace that conventional service providers can only dream about.

Skype has proven the exception to the rule in terms of starting out as a free offering and creating the business model afterwards, once critical mass is reached. 

This almost never works because it is so difficult to convert free users into paid subscribers. In Skype’s case, however, they have built such a large community with practically zero marketing spend, they don’t need a high conversion rate – nor do they need much in the way of ARPU - to remain viable. Even without the eBay (News - Alert) storyline, Skype has proven that this approach can work, and represents an alternative business model for service providers.

Last week I attended a keynote by Christopher Dean, Skype’s Chief Strategy Officer, and it’s clear to me that Skype has reached a point where they could well become a service provider’s best friend. If you only think of Skype as free/low cost Internet calling/chat, then you need a re-fresh, especially for service providers catering to SMBs. I’m going to fast forward to one of the last things Christopher said, and it’s a position I’ve been advocating for years. When Skype came on the scene, they were very disruptive – no doubt about it. By driving down the cost of long distance calling, Skype was going to kill this market, and that was poison to conventional telcos. 

Nonsense. Sure, tons of minutes were siphoned off the PSTN to Skype, but that was bound to happen anyway. More importantly, Skype got people talking more.

It’s simple economics: the propensity to consume always increases when prices fall. Dean backed this up with data, noting that prices have fallen 7%, but minutes have increased 13%, and the net gain overall in this market has been 4%. You can take issue with these numbers, but the overall result is clear: Skype has made the pie bigger, not smaller.

Why should this matter to service providers, especially those with SMBs customers? During his keynote at VON, Dean outlined a new direction for Skype in the business market – becoming a channel play with VARs, and position Skype as a strategic partner for carriers to enhance their current offerings to businesses. This is a long way from the days of free calls using the PC, and to support my premise, we need to examine a few things. However, there’s too much to cover in one write-up, so I’ll set the stage in the remainder of this article, and complete the picture in the next installment.

I’d like to focus here on some of the key trends that Dean reviewed which create an attractive environment for carriers to partner with Skype. They certainly don’t need – or want – Skype when it comes to everyday telephony, especially in the residential market. For consumers, Skype is primarily about voice, and there is limited opportunity for carriers to benefit from teaming up with them. Skype will continue to make money from consumer VoIP, but will have a hard time growing ARPU, which is why they are motivated to attack the business market. ARPU opportunities are better here, but their odds of success are much better by partnering with carriers than trying to go it alone. 

Historically, Skype has been dogged by concerns about reliability and voice quality in the business market, where the stakes are higher than with consumers. When Skype works, the experience is great, but it is prone to the vagaries of the public Internet - and when your personal calls are free or near-free, you can accept this tradeoff. Most businesses are not willing to make that compromise, so take-up in this market has been slow to materialize for Skype.

Let’s get back to Dean’s trends. The business market is much more attractive for Skype today when you consider the confluence of several trends. He started with the smartphone, and I couldn’t agree more on its potential for business users. Before presenting data points, he took a quick audience poll. Almost everyone had a smartphone, which I didn’t find too surprising. What was surprising, though, was the strong show of hands for those using two smartphones – it seemed to be about half of the room. In short, there must be a lot of people carrying their BlackBerry (News - Alert) for email, and their iPhone for just about everything else.

In terms of data points, Dean noted that smartphones account for about 15% of mobile devices today, but will hit 38% by 2013, at which point there will be over 1 billion of them in use. While RIM may dominate the business market today, he added that 20% of iPhones are used for business now, which is way up from 6% when it first came out. All told, smartphones have become one of the key “screens” for business users, and need to be part of a carrier’s offerings to this market.

There are two important aspects regarding smartphones that create opportunity for Skype. First, Dean pointed out that the ecosystem in this space is still fragmented. There is no dominant mobile OS, GSM hasn’t taken over the market yet and almost anyone can create something new for the vendor app stores. As such, there is still a large window for Skype to become an integral part of the mobile ecosystem.

Secondly, mobile VoIP is poised for growth, even among major operators like T Mobile and Verizon (News - Alert). In time, carriers will come around to mobile VoIP, especially as the adoption of smartphones increases. Dean noted that only 45% of smartphones support WiFi now, but by 2013, 90% will. As WiFi becomes ubiquitous, it’s inevitable that carriers will have to offer mobile VoIP, or risk losing subscribers altogether. Skype is not the only solution to consider for mobile VoIP, but operators will be hard pressed to find a partner with a bigger footprint.

This plays nicely into a broader trend around FMC, which is primarily a business market play. Mobile broadband and smartphones are making FMC an increasingly attractive capability for businesses, and the benefits go well beyond extending the desktop PBX (News - Alert) feature set to workers on the go. Voice is really just the foundation for FMC, and when all these elements come together, FMC enables multimedia applications such as video, IM, conferencing and social media.

Think about extending the Skype interface to mobile devices and the value-add for businesses gets pretty interesting. More importantly, this offers a feature set that operators cannot readily replicate on their own.

There’s more to this story, and I’ll continue the thread in my next column. Until then, there is a brief announcement about Skype’s partner program on their website, and I’m sure there will be updates coming there soon.

Jon Arnold, Principal at J Arnold & Associates, writes the Service Provider Views column for TMCnet. To read more of Jon’s articles, please visit his columnist page.

Edited by Kelly McGuire

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