[IP] Can Skype ride the hype to VoIP success?
From: Dewayne Hendricks <dewayne@xxxxxxxxxxxxx>
[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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