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August 25, 2005

'We believe telephony should be free'


So said Janus Friis, a 29–year–old Dane and one of the co–founders of Skype, to Maija Palmer in a story published in today's Financial Times.


    There is no catch.

    We have no cost for each user joining us and we believe you shouldn't charge for something that has no cost.

If you work for a wired or wireless phone company you should be scared.

Very scared.

Because Skype is gonna eat your lunch along with the paper bag it came in.

FunFact: Friis and Niklas Zennstrom, Skype's co–founder, invented Kazaa. 'Nuff said.

If you own stock in a phone company you need not be scared: just sell the stuff before you're holding the equivalent of worthless paper.

VOIP is here: Skype now has over 51 million users, all acquired in the past two years, and the pace is increasing.

What is VOIP?

Find out here.

The free Skype software has been downloaded more that 153 million times in 225 countries.

At any one time 3 million people are making a call on Skype.

Consider that Skype has 51 million users and 200 employees.

How do you think a bricks–and–mortar company like Verizon, with 45.5 million customers and 210,000 employees, can possibly compete?

Long answer short: they can't and they won't.


Here's the Financial Times story.

    Skype Takes Telecoms To The Next Generation

    Ask any technology analyst about the Next Big Thing and sooner or later they will mention Skype.

    The company offers free phone calls over the internet and is only approaching its second birthday at the end of this month.

    It is still privately owned but is starting to take its place among the AOLs, Yahoos! and Googles as one of the brands that wield power on the internet.

    Officially headquartered in Luxembourg but run out of London, Skype's place in the big time appeared to be confirmed earlier this month when rumours circulated that News Corp was thinking of buying it for $3bn (£1.67bn).

    Its popularity with consumers is clear enough.

    In two years it has garnered more than 51m users of its free software.

    Skype software has been downloaded more than 150m times in 225 countries.

    And it is estimated that, at any one time, 3m people will be making a call on Skype.

    Skype has hundreds of competitors offering some version of so-called voice over internet protocol (VoIP) service.

    This week Google became the latest to enter the arena.

    Skype's success is in part down to the efforts and charisma of its two founders - Niklas Zennstrom, a 39-year-old Swede, and Janus Friis, a 29-year-old Dane.

    The pair, who were recently lionised in Vanity Fair, were also behind Kazaa - software that caused chaos in the music industry by allowing millions of people to pirate songs easily on the internet.

    "We want to build Skype to be one of the biggest communications companies in the world, and we believe we have built a platform that allows us to achieve that," says Mr Friis.

    The Skype business model has its doubters.

    The basic service - making a phone call from one computer to another - is entirely free, and the Skype software costs nothing to download.

    "We believe telephony should be free. There is no catch. We have no cost for each user joining us and we believe you shouldn't charge for something that has no cost," says Mr Friis.

    Most of the company's 51m users only use the free services.

    However, 2m or so use some value-added paid services, such as SkypeOut, which allows them to call normal fixed line telephone numbers at about 2 cents a minute.

    The SkypeIn service allows users to buy a regular telephone number that their Skype-less friends can call - this costs $37 a year.

    There is also a SkypeZones service that allows users to make Skype calls from 17,000 wi-fi hotspots around the world for $7.95 per month.

    Quite how profitable this model is, is hard to say: Skype gives little away about its financial performance.

    Mr Friis will only say that revenues are "very very good" and sufficient to fund the company's rapid expansion into new territories.

    "We are not facing any kind of cash crunch," he says.

    Analysts are more sceptical.

    "Revenues are likely to be very low," says Steve Blood, telecoms analyst at Gartner.

    "The paying Skype users cannot be spending more than €50 (£34) a year."

    At this sort of level, Skype's annual revenues would be about €100m, making the $3bn price tag suggested for the News Corp deal appear steep indeed.

    "It is only five years since the dotcom boom and so it is surprising that people would base super-high valuations on users who are mostly downloading stuff for free. You would have thought they would learn their lesson," says Lars Godell, telecoms analyst at Forrester.

    If Skype has a value to other people, it is more likely to be strategic than strictly financial.

    A content company such as News Corp, or a broadband company such as Comcast, might be interested in Skype's customer reach.

    Many believe it is only a matter of time before the 200-employee company is sold.

    It is backed by venture capital firms Bessemer Venture Partners, Draper Fisher Jurvetson, Index Ventures and Mangrove Capital Partners.

    Mr Friis says both a trade sale and a flotation are possible, but not yet - there is still development to do.

    Yesterday the company said it was opening up its software to other partners.

    So, an online game might include Skype as part of the programme, allowing players to call each other mid-game.

    Or, a blog web site could include a Skype link that allowed readers to call the author directly.

I found Sprint's ad in today's USA hugely amusing when I came upon it after reading the FT piece — the headline read:

"Can you talk all you want without huge overages?"


It's like the Chambers Brothers song: "Time has come today."

There is something wonderfully apropos about the fact that in 2005, the 30th anniversary of the paradigm–crushing "Blue Box" made and sold by the two Steves — Wozniak and Jobs (below, with a Blue Box) —


to enable free long distance calling, Skype has gone and done the very same thing.

August 25, 2005 at 04:01 PM | Permalink


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Posted by: Russ | Sep 12, 2005 1:54:28 PM

Don't be so fast to believe Skype is going to win here. With G-Talk, Yahoo Messenger (20Million users), AIM (40 Million users), Microsoft Messenger (13 Million users) and others moving to VoIP integration, there is going to be a war here. The carriers will come late to the game with their soft phones and get shut out. Skype is based on proprietary protocols. There is a lack of a centralized directory worth anything. They have enormous problmes with fraud. Their user base is very heterogenous and scattered so its unlikely that advertisers find real value yet. They passed on getting acquired by Google and it wouldn't surprise me if this was the impetus for Google going vertical and pushing G-talk out the door so quickly. In doing so Google was clever in going after the huge installed G-mail user base and getting the user phone numbers (required for G-talk). They know the central directory is where the value is.

Skype does know that short-term integration with the PSTN is required for survival and is doing so. They are moving toward owning some space on the phone top. This will be on the data side which will work when there is ubiquitous EVDO-A packetized voice on the data side.

Posted by: Gary Clayton | Aug 27, 2005 9:43:13 AM

The majority of customers and especially the business customers still need to connect to the Public Switched Telephone network. So Skype is only appropriate if you're talking to another Skype user. Also, what happens if you're away from your PC or have it turned off?

Yes, the traditional analog telephone line business model is not securre with such disruptive technology, however, cellular wireless is the current killer of the traditional residential phone service.

The phone companies have their own offerings.

Posted by: hi | Aug 25, 2005 9:00:00 PM

And on the same front, Google released GoogleTalk, which has voice capability too.

After one test my friend who has Skype calls GoogleTalk even better as far as voice quality goes.

It too is free and the app is readily available here: http://www.google.com/talk/

Note, however that it is beta.

Posted by: kurt place | Aug 25, 2005 6:07:09 PM

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