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Why Jobs Should Heed VoIP's Call

By Alex Salkever The hype surrounding the Aug. 31 launch of the third-generation iMac stole the thunder from another launch of great interest to Mac users. I'm referring to the public release -- also on Aug. 31 -- by free Internet telephony company Skype of a long-awaited beta version of its software for Apple (AAPL) OS X.

Apparently I wasn't the only Machead jonesing for Skype. According to the company, 105,000 people have downloaded its Mac software since its launch. And bear in mind that this is a true beta version -- definitely not ready for prime time and lacking some of the key features of the full version available to Microsoft (MSFT) Windows and Linux users.

MOSTLY EXCELLENT. Nevertheless, within minutes of my download, I was on the network making calls over my cable broadband connection free of charge to Skype users in distant places. (Skype is the only company I can think of that rivals Apple in making hard tasks really, really easy.) However, I found Skype's claim of providing voice quality superior to that of regular phone lines untrue. My international Skype calls were punctuated with buzzes and pops, as if my neighbor's microwave was interfering with my 2.4-gigahertz cordless handset.

Then again, for long stretches of conversation, Skype offered much better clarity and sound quality than regular voice networks. And as the global Internet continues to provide higher speeds to consumers and businesses, the quality of Skype calls will improve. In fact, I would wager that within the next five years, Skype calls to any seriously wired country will easily surpass the quality of similar calls on legacy twisted-copper networks.

A while back, I wrote a column noting that Apple's impressive iChat instant-messaging software could easily replace phone lines for many purposes (see BW Online, 07/09/03, "With iChat, Who Needs a Phone?"). Skype blows away iChat in terms of voice quality. My recent test drive of Skype for OS X led me to conclude that it's time for Apple to start a phone network -- Macphone, if you like.

CORD-CUTTING CUSTOMERS. I don't mean Apple should lay a bunch of fiber-optic cable and fill large buildings with high-price switching equipment. Rather, Jobs & Co. could provide the graphical interface and the ease of use. For the guts of the network, Apple could easily contract with other companies or try a bring-your-own bandwidth peer-to-peer approach like Skype. The potential downside is minimal. The possible upside is significant. Here's why:

Everyone knows the business models that powered old-style phone networks are rapidly unraveling. The Baby Bells have seen a steady decline of the number of phone lines connected to their networks. Consumers are increasingly cutting the cord and using a cell phone as their primary mode of communication.

At the same time, hundreds of thousands of Americans are now using Internet phone services to transmit voice traffic over their broadband connections and plug those calls into the public phone network. That number will soar as cable companies such as Cox (COX) and Comcast (CMCSA) and long-distance outfits like AT&T (T) and Sprint (FON) roll out Internet phone service for their subscribers.

MORE FLEXIBLE. The new reality is that voice service will ride atop a network connection, just like e-mail and Web browsing. AT&T Call Vantage customers can connect to the AT&T phone system just fine over a Verizon (VZ) DSL line or a Time Warner (TWX) cable-modem link. And it will be a pure service powered by software.

What's more, it will be far more flexible than existing landline and cell networks because these calls will travel over the ubiquitous Internet, not over specialized networks that can't easily talk to each other. That's why Skype can do what it does. Driven by a quest for quality, the company writes great software that's easy to use. Its motto is "Internet telephone that just works." Sound familiar?

Apple already has the pieces in place to do what Skype is doing -- and it actually has a better chance of success. For starters, it has a paying customer base. It sells around 3 million computers a year, and it also enjoys an installed base of close to 20 million users, most of whom continue to pay money to Apple to purchase periodic software upgrades.

SMALL TECH CHALLENGE. About 500,000 Mac users fork over around $130 per year to subscribe to the .Mac service, which includes an e-mail address and online mail storage, 100 megabytes of online file backup, antivirus software, and tools for building and posting Web pages. Millions of Mac users buy songs on Apple's iTunes music store. The upshot? Apple has lots of potential phone-service customers.

From a technical standpoint, it wouldn't be all that tough to pull off. Apple's iChat software already works through firewalls and is very easy to set up. Hooking the new Macphone service up with a regular phone company so that Macphone users could call out wouldn't be too hard. Level3, Colt (COLT), and others have already done so in providing public phone service for SkypeOut.

Very good software packages are already available that provide features such as Internet voice mail. Apple could use these software systems on the back end. It would need to provide a good graphical user interface, which it could probably do easily by layering these features atop iChat and adding some menus.

HOW TO CHARGE? The trickiest question is whether Apple should follow Skype's peer-to-peer model for telephony, in which the bandwidth provided by those logged on to the network actually carries all the calls and routes them to other Skype users. A peer-to-peer network offers incredible efficiencies. Skype pays almost nothing to add a user to its network since its cost of distributing another copy of software is next to nothing. Apple could also use such a network to distribute software fixes or even to make it easier for iTunes customers to share songs.

If the record labels don't like that, no sweat. Apple could control the network and set the rules. Peer-to-peer works well for many, many things in this age of widespread broadband connectivity. And Skype has shown that you only need a few hundred thousand simultaneous users to make such a network viable.

Now, how could Apple make money on its new Macphone network? It has many ways, and some aren't necessarily obvious. The easiest is to mimic Skype and charge on a per-minute basis for calls to the public phone network. Skype charges 2 cents a minute for calls within and between 22 countries. Those include most of the developed world. While that may seem low, Skype insiders have told me that the outfit expects to make a handy profit.

Down the road, Skype also plans to charge for added features. Apple could do the same: Offer the basic service for free and charge for things like voice mail and portable buddy lists.

YOUR MAC IS RINGING. Or maybe Apple could explore adding a phone service as part of its .Mac service. Perhaps it should award .Mac subscribers a bundle of voice services and a few hundred minutes per month of calls from a Macphone account to the regular phone network.

Most ambitious would be to use the Macphone service to launch a new line of Apple-branded mobile phones, which the company has talked about for some time. It makes sense. Apple likes to package devices with services. Witness the twinning of the iPod and iTunes.

A new line of Macphones that could easily talk to other Macphones over any Internet connection using iChat software would be amazingly cool. This is not a pipe dream. In many big cities, Wi-Fi coverage is almost omnipresent, and handset companies are already building phones that can handle standard cell communications and VoIP using Wi-Fi.

What I'm proposing isn't really such a big leap for Apple, which has slowly but surely morphed into a service company: Look at iTunes and .Mac. And OS X requires regular upgrades, so it's also something of a service business. Apple already has 90% of the expertise and the infrastructure in place to make this work.

Steve Jobs, phone home. Salkever is Technology editor for BusinessWeek Online. Follow his Byte of the Apple column, only on BW Online

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