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April 29, 2005

As the Phone World Turns Part 6 – SkypeIn: The Plot Thickens

Skype, which started as free computer-to-computer calls only, is beginning to look more and more like an alternative phone service.  With SkypeIn (now available in paid Beta) Skype users who buy phone numbers from Skype can be called from ordinary phones or from other VoIP services.  Ever since the summer of 2004, Skype users have been able to purchase SkypeOut calls to nonSkype phones.

SkypeIn is as significant for what it ISN’T as for what it IS.  From a user’s point of view, SkypeIn opens up the formerly closed Skype network by assigning inbound phone numbers which can be reached by nonSkype subscribers.  However, any call to a SkypeIn number must go through the PSTN (Public Switched Telephony Network – the legacy phone network).  Even calls originated on the networks of other VoIP providers such as Vonage, AT&T CallVantage etc. must hop off the Internet, traverse some part of the PSTN, and then hop back on the Internet to get to a SkypeIn subscriber!

It’s ironic that the PSTN has become the switching point between VoIP calls from different networks. Just as with a traditional phone company, there is no way to reach a Skype user except through Skype the provider.  Unlike a traditional phone company with a wireless or wireline network, Skype could allow IP access to its users directly since they are physically connected to the Internet and not to Skype. It’s significant that this arrangement puts Skype in a position to collect tolls on inbound calls to its users.

These tolls on inbound calls are called access charges.  They are a huge source of revenue to both wireline and wireless phone companies.  They are an attractive source of revenue because they appear (indirectly) on somebody else’s customers’ bill.  They are also not price-sensitive because they are a monopoly rent.  You can’t reach a Verizon customer, wireless or wireline, except through Verizon, wireless or wireline.  And you can’t reach a Skype subscriber except through Skype.  There is no mechanism for collecting these tolls on true VoIP calls.  But, once the calls pass through the PSTN as SkypeIn calls must, the tolls can be collected by Skype using existing mechanisms at the interface of the PSTN and the Internet.

I don’t know whether Skype is currently collecting these tolls or not.  The way the PSTN works, if Skype is not collecting the tolls for calls to “its” numbers, then some other phone company along the call path is getting to keep the tolls for itself.  As long as the call path to Skype users includes the PSTN, Skype OUGHT to get its share of the access charge revenue.  In fact, there is no reason Skype shouldn’t to continue to charge a toll to traditional phone companies whose customers are calling SkypeIn subscribers; these carriers are charging their customers for the calls and the carriers are charging Skype for SkypeOut calls to their subscribers.

But what about calls from subscribers of one VoIP service to subscribers of another?  These calls are actually degraded by having to pass through the PSTN and, for technical reasons alone, should be routed around the toll booths.  Skype positions itself as saying all calls should be free but, unfortunately, legacy phone companies make that impossible today.  To be consistent with that positioning, Skype would have to make it possible for users of other VoIP services to reach Skype subscribers “free” just as Skype subscribers reach each other at no cost. 

Note that this is not a moral pronouncement by me.  Skype has invested money it raised itself in its business and has a right to charge for its services anyway it wants to.  Since Skype never had the advantage of being a monopoly provider and has neither been awarded rare frequencies nor given permission to dig up city streets, it has no public obligation other than normal commercial honesty.  As impressive as the size of the Skype user network is, Skype isn’t a monopoly so it doesn’t need to be restrained except by its own business imperatives.

However, Skype the company may have made a rare mistake.  Because of Metcalfe’s Law, it is hard to unseat the carrier who has the largest network.  Skype has elected, for the moment, to make its subscribers more expensive to reach from other VoIP services than from its own service.  In the short term, that enhances the value of Skype to its subscribers because there are more VoIP users reachable on Skype’s network than any other.  But it also opens Skype up to competition from a rival who does allow free inbound access from other services to its subscribers.  There is a value to subscribers in being cheaply reachable.

To be fair, with the exception of Jeff Pulver’s FreeWorldDialup, other VoIP services have not made interoperability a priority and you cannot call VoIP-VoIP between them; you have to use the PSTN just as with Skype.  However, most of the other services use an open protocol called SIP so it is fairly easy to see how interoperability can be achieved.  Skype uses a proprietary protocol, perhaps for quality reasons, so it is harder to see how they will become interoperable and very difficult to see how interoperability might be “forced” on them.

These are interesting times.  Will the advent of VoIP break the old model of closed phone networks which are connected only through toll bridges?  The email model says NO!  Email started as a number of proprietary networks.  They were quickly joined because of the huge network value that was created.  The phone model says YES!  People are willing to pay to reach each other so why not charge them for off-net access.

My prediction is that the email model wins, not because VoIP providers are more noble than PSTN providers but because the real power to control VoIP lives with the users out at the endpoints.  Skype is not providing me with any physical pipe; as soon as someone can offer me a better deal. I’m gone.  The SkypIn number I pay for may be a slight barrier to switching, but not much, I’m guessing, because it is unlikely to be primary number – it’s only usable through my computer today – and because I think a rival will offer very good directories.

The features of SkypeIn are interesting.  More on that in a future blog about Skype features.

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 fifth is about Skype’s first paid service SkypeOut.

The seventh is a summary of Skype features.

The eighth begins coverage of Vonage’s strategy.

The ninth asks whether we need phone companies.

The tenth asserts that we won’t need traditional mobile carriers either.

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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