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April 27, 2005

As the Phone World Turns Part 5 – SkypeOut: Monetizing the Skype Network

Skype built its impressive (some would say “frightening”) network of users by providing free software for free Internet calls between users.  So how do they ever make money?  They’ve begun to answer that question.

Skype introduced its first paid service,  SkypeOut, in the summer of 2004 and claims over 1.2 million users as of April, 2005.  It allows outbound calls from a Skype-equipped computer to ordinary phones at very reasonable rates.  For example, calls to Western Europe or US landline phones are 1.7 euro cents per minute.  Calls to mobile phones in Europe are more expensive.  The markup over the access charges which Skype directly or indirectly pays the owners of the fixed or mobile last mile is consistently reasonable.

I use SkypeOut to avoid paying outrageous phone bills to hotels when I travel. Last year on a trip to Europe I prepaid ten euros to Skype on my credit card and, at about US$.02/minute, have yet to use it up despite lots of calling by me and Mary and some by overjoyed travel companions whom I let call home on my computer.  These are typically calls to the US, UK, and Belgium where my children are plus our business and nonprofit board and conference calls mainly to the US.  If made on a hotel phone or mobile phone, these calls would typically cost over $1.00/minute and sometimes much more.

The quality has always been good enough so that, even on a conference call, other participants are surprised to hear what technology we are using.  The only flaw, and it’s a big one, is that DTMF (touchtones) are not handled well so that is often difficult to check voice mail or do other automated functions with SkypeOut.

SkypeOut only works when there is an Internet connection wherever you are calling from.  It doesn’t have to be a great Internet connection, though.  The software is good at dealing with poor connections.  From an economic point of view, I don’t count what the hotel charges for an Internet connection (the rule seems to be: the more expensive the hotel, the more it charges for Internet access).  I don’t count the cost because I always pay whatever I have to pay for an Internet connection whether I’m going to use SkypeOut or not; but, if you are only paying for the Internet connection only to use SkypeOut, then this cost needs to go into your equation.

SkypeOut also works from WiFi hotspots.  Edward Vielmetti blogs about a Skype-Skype call (I originally thought it was SkypeOut) from an associate aboard an SAS flight equipped with Boeing’s in-cabin broadband Connexion Service but apparently SkypeOut doesn’t work well from inflight broadband yet.   Remember what calls from international flights used to cost?

Note that SkypeOut does NOT include any unlimited free calling to ordinary phones.  That wouldn’t work with Skype’s business model since they don’t charge any monthly subscription fee as Vonage, for example, does.  Free calling is only between those using Skype.  Skype founder Niklas Zennstrom is very clear that Skype’s model is to charge incrementally when there is a significant incremental cost to Skype.  Calls to ordinary phones cost Skype per minute so they charge for them on a per minute basis and use them to earn revenue.  Calls between Skype users have no significant incremental cost to Skype and so they are given away free in order to build the size of Skype’s network and create a market for paid services.

Skype now has two new paid services in Beta:  SkypeIn and Skype Voice Mail.  More about them later.

The first post in this series is everything you ever wanted to know about legacy access charges.

The second is about the cost of “free”.

The third explains Metcalfe’s Law of network value.

The fourth is about how Skype built huge network value.

The sixth is about Skype reproducing the OLD telephony business model with SkypeIn.

A related post contains a very short abstract of what Skype founder Niklas Zennstrom said at VON (Voice On the Net) Canada and a way to download the slides of my talk there.

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