Analysis: Skype Pushes the Envelope

Nearly 300 million people can call one another anywhere in the world for free. They can call everyone else for a fraction of what they'll pay with most phone services. Their secret? VoIP provider Skype Technologies.

Until recently, the company's service was accessible only to people with a microphone and speakers, or a headset, connected to a computer. But now Skype is upping the ante.

Last month, the Luxembourg-based company launched Skype for Business, allowing small businesses to leverage voicemail and off-network calling (to non-Skype subscribers), and to link multiple accounts through a control panel.

Already, Skype's forward push is opening doors for solution providers, some of which have partnered with the company to bundle its service with handsets. For channel players that sell, service and deploy IP telephony, Skype could have a huge impact--one, by further driving down the cost of phone services; two, by easing the integration of telephones and the Skype network via nifty new wares. Skype hopes those factors can give it a foot in the corporate door too.

"I see it [Skype] changing the telecom landscape in general," says Scott Bockbrader, owner of CAC Technology, a solution provider based in Akron, Ohio. "Customers don't necessarily care what the underlying technology is as long as it functions and the price points are right."

Phil Downs, principal consultant at Atlanta-based Downs and Co., a solution provider that sells and deploys telephony systems, says Skype "is huge in the personal PC-to-PC calling market, and I think they will cause a shakeout in the business market as well."

A new product from Skype partner and broadband product developer Actiontec Electronics, called VoSKY Exchange, is a PBX with IP support that can be set up to dial out to up to four Skype lines. The user dials "9" to get a traditional phone trunk or "8" to use Skype. Sunnyvale, Calif.-based Actiontec uses the Skype interface on its NEC PBX in Japan and the United States, allowing users to make free calls.

"For branch offices, this is pretty remarkable," says Gunjan Bhow, Actiontec's director of marketing. He says the company is exploring whether to offer stackable units or a self-contained system that eliminates the need for a PC. As it is, Actiontec will be adding more communications ports to VoSKY Exchange.

"That's coming down the road," Bhow said, adding that, in the next few months, the company plans to offer an eight-line system that "will most likely be stackable."

Meanwhile, D-Link's new DPH-50U, which connects to a PC's USB port, links any corded or cordless phone via the RJ-11 ports to the Skype network. ClearOne Communications offers a full-duplex speaker attachment, and Polycom says it will be rolling out new, Skype-compatible products next month, although it declined to elaborate.

In addition, phones from Linksys, TrendNet and USRobotics connect to a PC's USB port and then function effectively as cellphones. Linksys, in fact, just released its LVS 9000 small-business phone system, which consists of a turnkey PBX with support for up to 16 phones and a preselected link of VoIP providers. The vendor says it hasn't ruled out adding an interface that would support the Skype network. "We're very open to doing anything that's going to drive volume for our business," says Sherman Scholten, director of product marketing at Linksys' engineering group.

NEXT: Third-party offerings.

Then there's the slew of third parties offering integration with the Skype network. One of those is Conversos, which offers ad hoc collaboration. Digitrend provides language translation, and Salesforce.com has added Skype functionality to its AppExchange platform.

But Skype's push into the SMB space has raised more than a few eyebrows. Many argue that Skype is a consumer service, at best.

"In a business setting, the product still has a residential flavor to it," says Steve Hilton, SMB analyst at Yankee Group, a Boston-based telecommunications and IT research firm. "If I'm on the phone with a client, it doesn't make a good impression." Although the audio quality can be quite good on Skype, unless the customer has a dedicated WAN link, the quality of the phone and service is only as good as the weakest link, Hilton says.

Small businesses with less than, say, five people can get away with using Skype for international calls, but Hilton doesn't foresee it scaling beyond that. "And that's not where VARs and agents make their money," he says.

Skype executives admit that they're targeting small businesses with fewer than 10 employees--at least for now--but the company foresees big business in the corporate sector. According to its own survey of subscribers, 25 percent use Skype's service for business. Of those, 63 percent conduct business abroad, 25 percent operate more than three locations, and 75 percent have fewer than 50 employees.

Skype proponents think the company's services might do for the telecom space what eBay did for the buying and selling of commodities. (It's ironic, considering that eBay just recently acquired Skype for $2.6 billion.)

When it comes to offering an alternative to telephony, Skype has already made its mark. According to Sandvine, an Ontario-based firm that tracks telecommunications traffic, Skype's service accounts for 46 percent of all VoIP minutes used in the United States. At any given time, there are 4 million concurrent calls on Skype, Sandvine says, and more than 1,000 developers are said to be building hardware or software for the Skype network. More than 200 million individuals have downloaded the Skype client, an applet that's similar to instant-messaging software such as AOL AIM or Yahoo Messenger.

IM players, in fact, are looking to tap into Skype's user base as well. Yahoo has added Phone In and Phone Out--analogous to Skype In and Skype Out--to its Messenger app, allowing customers to make or receive off-network phone calls. Others, such as TelTel and Vonage, have partnerships with key hardware providers and are beefing up their services, and trimming prices, to better compete with Skype.

What remains to be seen is whether Skype can become people's primary--or mainly used--VoIP network.

"There are a lot of customers who want more robust quality of service-enabled services," says Nigel Williams, Linksys' vice president of channel and service providers at Linksys.

That said, Williams doesn't dispute Skype's impact on the IP-telephony market to date. He says the company's service is a "good secondary form of communication for small businesses."

D-Link is hedging its bets by releasing products that support not just Skype but other players in the VoIP space as well, including Vonage and TelTel.

Some telephone-system suppliers, such as PBX provider Nortel, don't dispute the pricing pressure Skype has applied in the market for telephony services but say that Skype is just one face in the crowd, that there are many players offering support for IP-based standards--notably, SIP, or the Session Initiated Protocol.

"A good chunk of Skype today is proprietary," says Alex Pierson, general manager and vice president of Nortel's Enterprise and Small-Medium Business Communication Systems. "Services like Skype's have flattened out the price you can get for a lot of your services, but that doesn't mean [standards are] less important."