Skype: Net Telephony as File-Trading

[Dave Farber <dave () farber net>]

Delivered-To: dfarber+ () ux13 sp cs cmu edu
Date: Tue, 06 Jan 2004 08:34:42 -0800
From: Dewayne Hendricks <dewayne () warpspeed com>


Skype: Net Telephony as File-Trading

The peer-to-peer phone company, started by KaZaA's Scandinavian founders, 
aims to do to telecom what KaZaA did to the music biz
<http://www.businessweek.com:/print/technology/content/jan2004/tc2004016_5171_tc138.htm?tc>

Niklas Zennstrom and Janus Friis could be the two most dangerous men on the 
Internet -- dangerous to entrenched business models, that is. The 
Scandinavian duo created the KaZaA file-swapping software that became the 
dominant online music-trading platform after lawsuits killed Napster in 
2001. With tens of millions of Web surfers trading music files daily, 
KaZaA, as much as any other factor, forced the big recording labels to 
agree to offer music downloads for as little as $1 a song.

Now Zennstrom and Friis have drawn a bead on the phone business, where they 
see voice communications over broadband hookups as a huge, untapped market. 
Their weapon in this offensive is a piece of software they call Skype. 
Though it rhymes with hype, Skype is anything but. Distributed by 
Stockholm-based Skyper, a private company owned by Zennstrom and Friis, the 
free program gives Windows PCs with a broadband connection the ability to 
make high-quality computer-to-computer calls anywhere on earth -- as long 
as both parties are using Skype's software.

The founders plan to make money -- soon -- by charging for additional 
features such as voice mail or conference calling. But they swear that the 
basic program will remain free as a come-on to potential customers.

"SCREW THE PHONE SYSTEM"  That should frighten not only the established 
local and long-distance phone carriers but also cable-TV companies and 
startups that hope to sell Internet phone service. They generally charge 
$40 a month for unlimited local and domestic long-distance calls, and 
traditional phone companies charge more. Either price will look 
ridiculously high should Skype grow large enough to hit critical mass -- as 
it appears to be doing.

The success of Skype, which debuted only four months ago, raises a question 
whose answer could define the future of telecom: Can next-generation phone 
systems take the shape of decentralized, peer-to-peer file-sharing networks 
that run over the Net and eliminate phone-company middlemen? "What Skype 
and others like it say is: Screw the phone system.... Let's build a voice 
app -- software -- that does what the telephone does," says Clay Shirky, a 
consultant and adjunct professor at New York University who studies 
peer-to-peer and networking technologies.

Since Skype's software appeared on its Web site in August, it has gone 
viral. Without spending a dollar on marketing, Zennstrom and Friis have 
tallied more than 5.2 million downloads, and they figure that perhaps half 
that many people are using the software. True, that's a blip in the global 
telecom industry, which serves billions of customers and gathers about $200 
billlion in annual revenue. Yet Skype's biggest weakness -- that both 
parties to a conversation must have it installed to talk via their PCs -- 
is also what makes it a danger to the telecom Establishment.

GOING MAINSTREAM.  Anyone with access to large numbers of desktops -- from 
Internet service providers to sellers of operating-system software -- could 
in theory become a phone company by simply installing the software and 
eschewing investments in phone-system infrastructure. While it's easier to 
say that than to make it happen, the possibility is real. "There's no way 
anyone can combat what they're doing," declares Jeff Pulver, a telecom 
consultant and the founder of a competing no-charge VoIP offering, Free 
World Dialup.

Most VoIP competitors may not want to. Skype's business model contradicts 
the thinking of startups such as New Jersey-based Vonage, whose service 
apes existing phone systems. Though the Vonages of the world use the power 
of the broadband Internet to deliver cheap and extensive phone service, 
they remain wedded to the concept of paying the phone companies fees to 
complete calls.

Even so, the concept behind Skype is hardly new. Technology aficionados 
have been using Internet connections to create PC-to-PC voice connections 
for nearly a decade, engendering enough interest for such dot-com startups 
such as Net2Phone (NTOP ) and DialPad to survive.

"MARGINAL NICHE."  Now the popularity of this idea appears to be spreading 
beyond geeks and adventuresome chief information officers. Startup VoIP 
providers such as Vonage and 8X8 (EGHT ) expect to have millions of 
customers within three years. All of the major instant-messenger clients -- 
from America Online (TWX ), Yahoo! (YHOO ), and Microsoft's (MSFT ) MSN 
service -- already have some voice capability. Microsoft has quietly 
inserted key building blocks of PC-to-PC telephony into its Windows 
operating system. And Apple's (AAPL ) iChat AV software provides voice 
quality that rivals many cell phones and approaches the quality of a copper 
line.

Moreover, broadband's rapid adoption in the U.S., Asia, and Europe has made 
high-speed connections common enough to allow software-based telephony to 
approach critical mass. A roomful of low-end servers can now handle as much 
voice traffic as an entire old-line telecom-switching facility. "A company 
like Skyper can flourish in what for big phone companies would be a 
marginal niche," says Dave Burstein, publisher of DSL Prime, a 
telecom-industry newsletter. "They can make profits on a few hundred 
thousand users. All it takes is a couple of cheap PCs and some good software."

While several companies are trying to tap those dynamics, Skype seems to 
have broken from the pack -- mainly thanks to its ease of use. Unlike most 
other Internet voice applications, Skype automatically navigates through 
firewalls and network address translation systems, elements of broadband 
systems that commonly trip up phone software for PCs.

GROWING FAST.  Furthermore, Skype uses a peer-to-peer configuration that 
harnesses the broadband capacity of its users' PCs to build an 
ever-expanding network of nodes that can create highly stable and adaptable 
systems. This also means that Skyper itself doesn't have to pay for 
bandwidth to carry calls -- those who use it provide such capacity via 
their Internet connections.

To date, Skype says its network has handled as many as 170,000 concurrent 
users without a major outage. Its growth has been impressive enough to 
secure an initial round of venture-capital funding, rumored to be in the 
millions of dollars, with Bessemer Venture Partners in Larchmont, N.Y., as 
the lead investor. Skyper opened a London office in December and has 
already grown from less than a dozen employees to 25, with lots of new 
hiring ahead. It plans to introduce its premium products sometime this 
spring, and in the meantime, Pulver says, it has been talking to other VoIP 
startups about ways to more easily interconnect their respective customers.

It'll be awhile before Skype scares many phone companies. For one thing, 
the majority of U.S. households still don't have a broadband connection and 
therefore can't use it. And even many people with broadband probably remain 
leery of relying on an Internet-based phone service from an upstart, let 
alone one founded by the guys who helped bring music piracy to the masses. 
Further, few experts expect Skyper to become a major telecom provider. 
"It'll be a cottage industry," says Jeff Kagan, an independent 
telecommunications industry analyst.

Yet, Skype's experiment could help shape the future of telecom networks. 
And considering the impact Zennstrom and Friis have had on the online music 
biz, their influence could be significant -- and arrive sooner than you 
might think.

By Alex Salkever, Technology editor for BusinessWeek Online

Archives at: <http://Wireless.Com/Dewayne-Net>
Weblog at: <http://weblog.warpspeed.com>

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