Skype Piles It On

As rivals ramp up, the Internet phone service unveils software for the rapidly growing number of home and business users

The growing legions of Skype users are getting a little something extra from the Internet phone service. On May 3, Skype unveiled a new version of its popular software, which allows computer users to call each other for free and even to make and receive calls from regular phones. The public release of Skype 2.5 in a Beta version came less than a week after another Skype milestone: On Apr. 27, the company, now a unit of auction giant eBay (EBAY), announced it surpassed 100 million registered users worldwide. In September, when eBay paid a whopping $2.6 billion for this Web-calling outfit, Skype only numbered 54 million customers.

The question is, of course, whether Skype can sustain this breakneck pace of growth and reach 200 million users by late fall. The feat is becoming increasingly more difficult as rivals AOL (TWX), MSN (MSFT), Yahoo (YHOO) and Google (GOOG) beef up their Web-calling services, available through their instant messaging services. The portals are improving their services' call quality, which is still generally believed to lag Skype's. The portals have also been working on tying their Web-calling functionality with e-mail and social-networking services in order to ramp up Web-calling's use among their IM customers.


  Skype and the portals are chasing the growing Web-calling market, which is expected to reach 32.6 million Americans by 2010, up from 5.2 million last year, according to consultancy eMarketer. Unlike Skype, these portals offer a wealth of content and features other than Web calling, and "there're a lot more reasons to stay on those IM services and do things," says Jon Arnold, principal at Web-calling consultancy J Arnold & Associates. "Skype has to keep pace or watch its audience shrinking."

In effect, to keep on growing, Skype has to start offering more functionalities -- and that's where Skype 2.5 comes in. The new version of the software offers a slew of incremental improvements designed to make the program even easier to use for the non-geek crowd. Users can now pay for a subscription with 15 currencies, compared with just a handful in the current version. The sign-up process has been condensed from three screens to one. And instead of users launching searches to find contacts with Skype addresses in their Outlook e-mail program, Skype will now automatically search for contacts. "It's sweating the small stuff," says Saul Klein, vice-president of marketing at Skype.

But it's the big stuff that can be glimpsed in several of Skype's new features. Analysts believe that these features indicate that Skype, long known as ad-free, might be considering running ads, and that the company might be about to go more aggressively after small business and wireless users. One example: The new software allows users to send short-text messages (SMS) to cell phones. The price will depend on who calls whom and from what device, but it will average around 10 cents per message, which is about what most wireless service providers charge.


  With SMS capability arriving just a week after Skype announced it will sell popular song ringtones, the function is a clear indication that Skype is making a big push to become the de facto messaging platform on cellular and Wi-Fi phones, says William Stofega, an analyst with consultancy IDC. (See BW Online, 4/26/06, "Skype's Music Overture"). In the next six months, Stofega believes Skype will announce agreements with municipal and commercial Wi-Fi network operators. And he says he would keep an eye on EarthLink (ELNK) in particular.

Already, last summer, Skype agreed to provide service though Boingo Wireless, founded by EarthLink creator Sky Dayton. Now, EarthLink, in partnership with Google, is planning to build out a citywide Wi-Fi network in San Francisco. And on May 2, Dayton launched Helio, a new wireless service provider serving affluent young cell phone users. Skype could be a potentially good fit for use on both, says Stofega. Already, Skype is beefing up the assortment of Wi-Fi phones using its service. On May 1, networking company Netgear (NTGR) unveiled its $250 Skype Wi-Fi phone, preloaded with Skype software.

Skype is also aggressively pursuing small businesses, which already account for more than 30% of its user base. Skype Version 2.5 smoothes the wrinkles out of conference calling. For instance, if several people are on a Skype conference call, a special indicator lets you know if someone has begun speaking, so participants don't keep interrupting one another.


  Simultaneously, Skype is rolling out a new line of gear that could win over some business-user skeptics. On May 1, Polycom (PLCM), which brags more than 90% market share in office speakers, announced a co-branded speaker for Skype that's expected to retail for $129. It's just the first product expected to stem from the new Polycom-Skype alliance, and it speaks volumes of Skype's dedication to its business users. For starters, "Polycom is the standard in the business market for speakerphones," says Stofega. "It adds some cachet to Skype's efforts to go after these customers."

The device could also pave the way for a premium -- read paid -- conferencing business service from Skype. The Polycom device allows for high-fidelity conferencing. That means that, depending on the network, the speakerphone's voice quality can be higher than a conventional phone's. Skype potentially could configure its network to give priority to conference calls made by users paying for a premium service.

Also, Skype has released a preview version of a new conferencing service that could hold particular appeal to small business customers, especially those who blog and make podcasts. The service will allow users to create something called "Skypecasts." A Skypecast can be thought of as a public online discussion that can include up to 100 people. Each discussion has a moderator who can keep other participants in a listen-only mode or pass the virtual microphone around.

This Skypecasting software, being piloted by popular blogging software maker Six Apart, will make it easy for podcasters and small businesses to promote Skypecast times on their Web sites. Skype will also set up a special directory, listing times when the various Skypecasts are scheduled to run (See BW Online, 4/7/06, "Podcasts Calling").


  This directory and several new functionalities found in Skype 2.5 hint that Skype, which has long said it would never run ads on its service, might be reconsidering that strategy, say analysts. After all, advertisers love targeting users with specific interests. A Skypecast talking about gadgets might be a prime target for ads of new PCs and video games, for example.

Skype 2.5 offers more grouping capabilities as well. Users of 2.0 had the ability to cluster contacts in their phone books -- such as "family." With Skype 2.5, a user will be able to share that "family" cluster of contacts with mom, who is not tech-savvy. This feature works like viral marketing, organically expanding the net of Skype users. Plus, it creates clusters of people with deeply targeted interests that are coveted by advertisers. A cluster of "techie friends" could be prime target for gadget ads, for example.

For Skype, running ads (and the ads don't have to be disruptive and annoying) makes sense. And if Skype does pursue that option, it will be the last major IM service to do so. MSN Messenger has recently allowed its users to view Warner Bros. movie trailers and look up show times in local theaters. MSN Messenger users could also download pictures from movies (see BW Online, 2/1/06, "Voice over Microsoft Protocol"). Meanwhile, Yahoo Messenger offers IMVironments, advertising jeans and other products.

Skype, expected to book $200 million in revenue this year, clearly needs to find more ways to get to profitability and greater sales growth. Business services, content like ringtones, and advertising could be it. For sure, Skype is in for many changes in the coming months. After all, with its rivals ramping up their Web-calling efforts, Skype can't afford to sit still.

    Before it's here, it's on the Bloomberg Terminal.