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VoIP is Dead. It's just another feature, now

How Hutch called Skype's bluff

By Andrew Orlowski, 29 Oct 2007

Analysis Business-wise, Skype is a basketcase. But that's just one of the things that makes it one of the most emblematic companies of our time - a real, Ur-Web 2.0 company.

Like so many internet companies, Skype has millions and millions of users. Like these internet companies, too, it can't make very much money off all these users. Hello, Facebook! And like these internet pin-ups, it owes a great deal to utopian power fantasies.

But what makes Skype so very of its time is the peculiar relationship it has with incumbent telecomms companies.

Think of Skype as a kind of parasitic virus that threatens to bring the host to its knees - but which can't survive without a living host. Bloggers and mainstream newspapers are another good example.

How so?

Well, Skype has no network of its own - it's simply an open protocol (SIP is more than one protocol, but bear with me) wrapped up in some proprietary bits. Apart from a few authentication servers, its only real asset is its "brand" - which isn't the most concrete or tangible line item to have on your balance sheet.

So at bottom, Skype needs somebody's else's network on which to operate. And because Skype has next to no income, and because its users can melt away as rapidly as they joined, it has no chance of attracting the capital investment needed to build a real network of its own, either.

(This is a problem for the entire VoIP sector - how do you attract capital when the price of the product itself is tending to zero? Only a fool would possibly see this as a good investment. Fortunately for Skype, it found its fool in the shape of Meg Whitman of eBay, who was dazzled by the Swedes' "front loaded" [translation: fictional] business plan).

All this means is that Skype is a kind of freestyle MVNO (Mobile Virtual Network Operator) - only without any contractual commitments, and utterly dependent on the generosity of hosts to permit it to operate. This isn't a problem when the access network is a commoditised and unrestricted internet connection - such as the home or the office network. But it's a huge problem when the user is out and about - because there's no ready host for the parasite to attach itself to.

So today Hutchison Wampoa, which owns the 3 networks, called Skype's bluff.

Hutchison has been pushing VoIP to the trapdoor for a while now. It recently killed the alternative "host" for the Skype-organism, by blowing away the business model for public Wi-Fi. 3 UK's excellent high-speed HSDPA network blankets much of the country - and you can access it from a laptop with a monthly tariff that's about the same as the price of an hour's Wi-Fi. If you're already a 3 subscriber, the network will throw in a USB dongle for free. If you need mobile data, you'd be bonkers to sign up to a Wi-Fi plan.

RIP, public Wi-Fi.

Come into my parlour, said the telco to the VoIP operator

So, what's in it for 3?

In this relationship, 3 uses Skype's branding to launch a low-cost tariff that undercuts its rivals, daring them to follow suit. It does so by corralling and taming the VoIP threat - by routing Skype traffic over its own network. (3 uses iSkoot to do the routing.) Calling your tariff a "Skype tariff" is a lot sexier than "Flex", and a lot cheaper to market, since the brand is already very well known.

3 ensures it owns the customer billing relationship, too, and integration proceeds at a pace it can dictate. The benefit for 3 is simply increasing its market share, or "increasing customer loyalty and reducing churn", as executives described it today.

Nevertheless, 3 probably averts the catastrophe of becoming commoditised, where it might simply be the nameless pipe provider, with open SIP providers such as Truphone or AQL owning the billing relationship.

It's not as if Skype becomes the way you make phone calls on the 3 network: you still need the new handset, or an X-Series contract, and with the latter it's severely restricted. The handset itself, while being a fine achievement and a feather in the cap for Qualcomm's BREW team, is not going to steal any style prizes from Sony Ericsson, Samsung or Nokia.

Having a Skypephone pretty much marks you out as a cheapskate.

And I detected a hint at today's launch that Skype is less of a threat to 3 than the press likes to imagine. 3 CEO Kevin Russell said that usage of Skype on the X-Series - it's been live for a year - was "reasonable". In other words, not that great. 3 really has nothing to fear here.

At very little risk, 3 has bought itself a great differentiator - one that marks it out as an agnostic "communications" company, rather than a "media company" as, say, Orange wants to be.

Skype owes everything to Utopian fantasies

The question of how Skype got as far as it did is really for another article. It's worth noting here that Skype owes everything to the utopian fantasies that circulated in the US in the early part of this decade.

You may have heard some of these already: Bloggers and User Generated Content would overturn the mass media; VoIP operators would overturn the evil incumbent telecomms companies. These fantasies came from deep in the can-do American Protestant ethic, exemplified here. Clay Shirky's ingredients are a pint of nostalgic, Wild West-style "barn-raising", a sprinkling of Ayn Rand, and a large dose of wishful thinking.

How different it might have been if the anti-incumbent camp (including Intel and Motorola) had been able to agree on using the same spectrum globally for WiMAX - rather than seven different bands. Some chance: the Wi-Fi crew couldn't even agree on roaming!

And for my money, it would have boiled down to CapEx anyway. Who would splurge $20bn per market on a service where 0.00p is the ultimate market price? Clearwire got lucky - and Google may yet have money to burn - but VoIP is now in its terminal stages of becoming another incumbent feature.

As for Skype, with no network, and no prospects of capital investment - licensing its brand is about all it has left to do.

Welcome to Telco 3.0 - the incumbents' revenge. ®

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