Can Skype ride the hype to VoIP success?

[Dave Farber <dave () farber net>]

From: Dewayne Hendricks <dewayne () warpspeed com>
[Note:  A better take on the future of Skype and the investment that I 
reported on yesterday.  DLH]

March 16, 2004

Can Skype ride the hype to VoIP success?
<http://blog.redherring.com/MT/archives/main/000139.html>

Skype, the voice over IP (VoIP) telephony company founded by the 
instigators of the filesharing system KaZaA, has raised $18.8 million in a 
second round from Draper Fisher Jurvetson and Index Ventures. The 
Amsterdam-based company hasn't said what it will do with the money, but we 
have a few ideas.

Right now, Skype's free software and free service allows PC users to call 
one another over the Internet using a microphone connected to their 
computer. At this point, it is probably best described as "voice instant 
messaging" because it relies on buddy lists of alphanumeric names (not 
telephone numbers) and does not interconnect with the packet switched 
telephone network (PSTN). Skype claims 8.9 million downloads of its 
software; based on our experience, at any time a couple hundred thousand 
people are logged in, but because it is a peer-to-peer system, only part of 
the network should be visible to any individual peer at any time. The voice 
quality is excellent, but it is a PC-to-PC service and, for now that limits 
its utility.

 By contrast, VoIP provider Vonage, which provides an interconnection from 
its IP-based service to the public switched voice network, seems a more 
effective offering today. It's $49.99 unlimited calling plans for business 
and personal services that start at $14.99 and range up to $34.99 give the 
customer a phone number and the ability to call any phone and have the 
virtue of fitting telephone customers' existing purchase habits while 
delivering substantial savings.


"[Vonage's technology] doesn't destroy the PSTN model, but it does change 
it a lot," said Vonage Holdings CFO John Rego in a conference call hosted 
by this writer for InnovationWORLD on Monday. In fact, Vonage partners with 
phone companies and traditional telecommunications companies in each region 
it enters. The company raised $40 million in February and Rego expects it 
to break even and reach approximately 700,000 subscribers by year-end.

Skype says it will not charge for phone service at any point. It's business 
model appears to be aiming for fees based on new capabilities built into 
its software.

"Skype will always provide the free features our users have grown to 
expect, and we will continue the enhancements in our premium version that 
will launch later this year,"CEO Niklas Zennstrom said in February, when 
Skype introduced conference calling for users.

 The challenge of inventing a whole new phone in software is a significant 
undertaking, but we think that Skype cannot manage to subvert the PSTN in a 
timely way, at least not fast enough to satisfy investors. The total cost 
of that project is incalculable, though probably surprising low. With MCI 
writing down $60 billion in assets this week due, in addition to $8.8 
billion in fraud-related asset value, there is ample evidence that the 
PSTN's value is diminishing rapidly. Nevertheless, there is a massive 
installed base of telephones and, more importantly, telephone numbers.

At some point, then, Skype has to provide interconnections with the at 
least one billion existing telephones in the world and that is what the new 
round will likely go to, along with marketing. If it does not, Skype may 
enjoy continued growth in free usage, but it will be hard-pressed to 
attract paying customers who need to connect to friends or colleagues with 
plain old telephone service.

The capital expenditure required to interconnect with the PSTN is quite 
low. Rego said Vonage was able to add service in Canada in a matter of 
weeks and for approximately $200,000. It's capital spending to date is a 
remarkably low $12 million. Where Vonage has invested most heavily is in 
marketing. It has placed television, print and online advertising to 
attract the approximately 100,000 customers it has now.

Skype, if it were to tackle U.S. and European local interconnections, would 
need to raise more capital very quickly to follow up that capital 
investment with marketing.

In the meantime, Vonage has introduced a software-based phone for the PC 
and PocketPC devices, allowing wireless connectivity from a wi-fi enabled 
handheld.

 The two companies are converging on the same market with very different 
models. And the technology will allow new competition to emerge quickly 
from other quarters.
Posted by Red Herring at March 16, 2004 09:13 AM

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

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