Don’t Believe The Skype

Last week was good for old-fashioned telco execs. Sure, share prices are crumbling and that means some of them can expect to “earn” a few million less in bonuses than they had hoped. But on the other hand, Skype collapsed. For a couple of days, nobody could use its peer-to-peer VoIP service. That must have been good for traditional telcos in lots of ways. First, some of the 220 million Skype users unable to log in to the service must have blown the dust off their old phones and used them to make calls instead. Second, a good number of businesses must have stalled, suspended, reduced or scrapped plans to adopt VoIP. Third, old-fashioned telcos get a nice easy marketing pitch – reliability of service – that should help justify keeping their prices a little higher for a while longer.

Skype is back now, but the question is how much the outage will cost the company. The most recent quarterly revenues were about US$90m, so you can guesstimate that the outage has meant US$2m of potential sales were not realized. The longer-term consequences for the business are harder to determine. Many have turned into doom-sayers for VoIP, as a result of not just this failure but also the financial and patent difficulties faced by providers like Vonage. Others are more upbeat: this article sees the onward march of VoIP as inevitable, in part because it is cheap/free. I have to agree with that logic. People will always want plenty of something if it is free. But you will never make a profit by giving things away. Skype makes money through calls to old-fashioned lines. That means that its own popularity will eventually undermine its revenues: as more people adopt Skype, so more will make free Skype-to-Skype calls instead of chargeable calls. So the only business logic that makes sense is that a strong VoIP offering helps to maintain competitive advantage as part of a holistic internet offering where all needs are satisfied at a one-stop-shop. That must have been the rationale for eBay’s purchase of Skype, creating the trinity of eBay-Skype-PayPal. However, it follows that failures of any single component may undermine faith in the entire holistic product. I would not buy a car with faulty brakes, no matter how good the engine. By analogy, Skype may deter people from using eBay if they reason that the failure of one element may indicate the possibility of (undetectable) glitches elsewhere. Of course, there may be a radically different business model for Skype that most commentators have yet to apprehend. Top marks go to this conspiracy theory which argues that Skype will earn its revenues by spying for the USA. As Skype is headquartered in Luxembourg, one hopes that the EU has the wherewithal to spy on Skype and find out if they are spying on us!

Like most people, I am not overly worried about American secret agents spying on me. I am sure they do it, but it must get just as boring as watching Big Brother ;) No, a much greater concern is that the people behind Skype are also behind the new on-line television offering, Joost. Imagine depending on these guys for your television. Then imagine a two-day outage. That would be truly terrifying :)

Eric Priezkalns
Eric Priezkalns
Eric is the Editor of Commsrisk. Look here for more about the history of Commsrisk and the role played by Eric.

Eric is also the Chief Executive of the Risk & Assurance Group (RAG), a global association of professionals working in risk management and business assurance for communications providers.

Previously Eric was Director of Risk Management for Qatar Telecom and he has worked with Cable & Wireless, T‑Mobile, Sky, Worldcom and other telcos. He was lead author of Revenue Assurance: Expert Opinions for Communications Providers, published by CRC Press. He is a qualified chartered accountant, with degrees in information systems, and in mathematics and philosophy.