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Skype: $30/year, all you can eat long distance

Skype will no longer be free in North America.  The NY Times reports this morning that as of January 1, the fee will be $30/year for annual calling.  It’s a neat move.

The Times quoted Jeffrey Halpern at Sanford C. Bernstein, saying that Skype isn’t a threat to telephone companies. 

“Skype requires a behavioral change. Consumers have grown quite comfortable using their telephones,” said Jeffrey Halpern, a telecommunications services industry analyst with Sanford C. Bernstein & Company. “I don’t view Skype as a real threat to the telephone companies or even Vonage or the cable companies.”

I must disagree. 

The first generation Skype / WiFi phones are coming to market now, as Glenn Fleischman noted.  By all accounts they’re very good, although not as roaming phones.  What they are, however, are capable replacements for the home land line.  Andy Abramson expects that people will use them that way, warning however that they don’t have 911 support.

Moreover, with yesterday’s announcement of Skype Mobile 2.2 on Windows Mobile handsets, there are now 120 handsets you can use Skype Mobile on.  The argument that you must carry two handsets to be mobile with Skype is simply not true.  You will, however, need an unlimited data plan, or a dual mode WiFi / cellular handset. 

This is a one-two punch to all the alternative VoIP providers out there. A nice Skype handset, plus a phone number and unlimited calling is just about the same price as SunRocket, and a whole lot less money than Vonage.  But unlike Vonage and SunRocket, Skype has the power of viral marketing propelling their subscriber base.  There aren’t any $272 acquisition costs here.

Skype is clearly moving to become an alternate carrier.  Jeffrey Halpern has his eyes firmly glued to the rear-view mirror. 

Can they do it, profitably?

Some reports peg Skype users at 35.8% of all North American VoIP callers.  Last week, it was widely reported that TeleGeography estimated 8.2 million VoIP subscribers in North America, which would put Skype usage at about 3 million (give or take a few).  How many of those users would pay?  It may be more than you might think.  In September, Jajah CEO Roman Scharf told me that over 70% of his callers call non-Jajah users and thus pay for terminations, despite the fact that calls between Jajah users are free.  If Skype could hit the same kind of home run with this offer, it would bump their revenues up by about 20% from where they are now.

Clearly Skype execs have modelled costs carefully, but it still gives pause.  The average North American telephone user uses just 300 minutes of calling per month.  VoIP users tend to be much higher, in the range of 600 minutes. Terminations, while cheap, are not that cheap.   Skype must be banking on:

  • a substantial number of their subscribers will buy the package, and simply not use all the minutes, perhaps because as the subscriber base grows, fewer people will need them.
  • the profitability of selling a DID for $30/year, when the actual cost is in the range of $1.50.
  • and… click to call? 

As for me?  Well, I’m heading over to the Skype site to buy $15 of unlimited North American calling.  Oh, by the way… when will you be providing Canadian DID’s, Niklas?

{ 9 comments… add one }

  • Donald Smith December 13, 2006, 6:47 am

    The problem with Skype is it doesn't "just work". It's extremely unreliable. I work for a small not-for-profit and we desparately try to use Skype as much as possible. It just doesn't work, and we use the phone way more often than not. Conference calls become obscene when people try to skype into them. Configuring the headset to work with Skype on my laptop is an almost full time job. $30? Well, if that comes with some sort of improvement in reliability and quality – maybe. The Times is right, if Skype doesn't work 1 in 20 times, it just ain't going to be a big impact on the phone companies. I've already taken it off the "startup" list on my machine, so only use it when I'm in a playful mood.

    – Don

  • Doug Hawkins December 13, 2006, 7:33 am

    I have to laugh at the fact that some company had to "estimate" the number of Skype users. All you have to do is look at the numbers in the Skype window on your desktop; which at this time stands at 8,266,559.

    As to what Don Smith writes, he is right on the button. Skype is not ready for prime-time. They suffer mightily in two departments 1) Customer Service, e.g., there is not a single phone number anywhere, research that, for the user to contact Skype, and 2) Technical competance, e.g., they are understaffed with low-grade techs who are so hard trying to build market-share and develop new services that they cannot even keep Skype on-line without going black for extensive periods of time. I do not rely solely on Skype, I have Yahoo too. Maybe, put together, I can make consistent calls.

  • Chris December 13, 2006, 9:18 am

    Alec, the issue I struggle with is yes, there are fringe users for just about any scenario and adopting a Skype-Wifi phone with inbound and outbound PSTN calling, with all of the behavior changes, QoS, and usability issues that come with it, is no exception, but how large is that market? Users already have free nights and weekends on their wireless phone, and millions are migrating to unlimited domestic plans for their existing residential phone. For these users, offering cheap minutes has no incremental value and sounds a lot like offering someone a 25 cent beer after they’ve already paid for the open bar. I continue to find it hard to talk about Skype without putting it in the context of who their owner is, which is a person-person commerce platform churning billions of transactions every year. I still think that’s where the real money is for eBay as selling cheap telephone minutes is basically a race to zero and I would like to believe that eBay is smarter than that. Have a great holiday!!

  • Irwin Lazar December 13, 2006, 10:45 am

    Just to be clear, the price for unlimited calling in 2007 within North America is $14.95 until Feb. 1st, after that it rises to $29.95.

  • Alec December 13, 2006, 11:36 am

    Chris — I do agree that the real money will be in the transaction based stuff. But the moves that they’re making to embed themselves in the call path have got to be taken seriously. Everything they’re doing is built around a model of dropping Skype clients onto existing devices.

  • Alec December 13, 2006, 11:38 am

    Irwin — I should have noted that. Having lots of experience with retail promotions, my belief is that they will see a lot of uptake on the $14.95 deal, and much slower on the $29.95. Price promotions tend to compress the sales cycle, but do little to bump overall demand. If the cut-price deal works, expect to people that would normally delay their purchase just make it a little sooner.

  • Alec December 13, 2006, 11:41 am

    Hey Don and Doug — what we’ve found, using it a lot, is that the quality of the firewall matters a great deal. We’ve just junked our old hardware firewall, and put a Linux PC up, for instance, and all of the sudden the calls are crystal clear.

    And, as you both point out, the quality of the product is sometimes suspect. But you know… expensive IP Phones are only marginally better sometimes… It will all get better with time, as they all make improvements.

  • Moshe Maeir December 13, 2006, 11:42 am

    Cheap minutes is no longer the game. Service is King! http://flatplanetphone.com/wordpress/?p=17

  • Alec December 13, 2006, 1:08 pm

    I’m with you Moshe! Nice post.

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