Getting Skype Off the PC

A new phone by Philips could help widen Skype's appeal and take on a raft of competitors aiming to make Web-based calling more user-friendly

Use Skype? Millions of people do, but they typically need to have a personal computer up and running to take advantage of the phone service that can be free or low-cost. That's about to change.

On Aug. 31, electronics giant Philips (PHG) is introducing a phone for Skype that doesn't require users to have a PC at all. Plug the Philips VOIP841 into a broadband connection and traditional landline, and you can make calls using Skype—as well as a regular landline—with a single device. The model, expected to become available in late 2006, is the first Skype cordless phone that doesn't require support from a booted-up home PC. Netgear (NTGR) is expected to introduce a similar landline/Skype combination phone in late 2006 or early 2007.


  The devices have the potential to radically change the way people access the Skype service and could step up the pace of growth if they're well-received. Internal trials indicate that users of the Philips phone rely on SkypeOut, a service allowing PC users to call regular or mobile phones, twice as much as an average Skype customer, says Manrique Brenes, director of hardware at Skype.

SkypeOut is a key revenue driver for Skype. While the service is free for calls within the U.S. and Canada as of May, most Skype users are still in Europe and Asia, and they pay between 2 cents and 76 cents a minute, depending on the destination, for the service. Skype's user base rose 20%, to 113 million people worldwide, in the second quarter from the first.

Much of Skype's revenue is, in fact, tied to SkypeOut and SkypeIn services. Skype's sales grew 26% to $44 million in the second quarter from the first, according to a July earnings filing from Skype's owner, eBay (EBAY). That's impressive growth, but still a small revenue base for a company that fetched $2.6 billion a year ago. "They need to find a way to grow revenues in the next year to one-and-a-half years," says Will Stofega, an analyst at consultancy IDC.

In part, eBay purchased Skype to weave Skype's calling features into its own existing services. Still, the company is eager for other ways to make good on its investment. One way to do that is moving Skype away from being a PC-only application.


  Combining Skype service with a traditional phone service—without requiring a booted-up PC—could help the company reach an untapped market of mainstream consumers who are not tech-savvy, says Stofega. "This is a more familiar setting for people who are not the early adopters," he says. One possible target market: older adults. And users of all ages will appreciate being able to call 911 in an emergency. Skype alone doesn't connect 911 calls.

An earlier Skype-compatible Philips phone, the VOIP321, was announced in January and combines Skype and landline calling, though it needs a PC outfitted with Skype to be up and running somewhere in the house. That handset "has been selling incredibly well," says Nick Dosanjh, general manager of the communication and connectivity group at Philips. The new model will further simplify the user experience.

The phone is also another step toward getting Skype users accustomed to using the service on devices other than the PC. Skype already works on high-end Pocket PC devices like Hewlett-Packard's (HPQ) iPaq hw6900 series. In August, Skype signed a co-marketing agreement with iSkoot, a maker of software that lets Skype work on mobile phones. In July, Skype introduced the world's first Skype-certified Wi-Fi phones; the models will become available in the third quarter. But it takes a bit of tech savvy, or at least determination, to load applications onto phones or set up Wi-Fi at home.


  Meanwhile, Skype's rivals are many. Some also are pulling out hardware guns. Vonage (VG), a competing provider of Internet-based calling, has introduced a slew of new phones of late. A handful of startups is ramping up efforts to provide Web-calling service to any residential or mobile phone. One, Jajah, has the backing of the powerful venture-capital firm, Sequoia Capital, which funded PayPal, also now owned by eBay.

Another is a Swedish outfit called Rebtel that's due to launch Sept. 1. It's run by Hjalmar Winbladh, who several years ago sold wireless Internet company Sendit to Microsoft (MSFT) for $150 million. Rebtel lets users register online and, for $1 a week, make international and long-distance calls from their mobiles at a local rate. Unlike Skype, Rebtel and Jajah don't require a software download, and they work on any cellular or residential phone, making them more appealing than Skype, says Web-calling guru Jeff Pulver.

Clearly, the competition in Web-based phone calling is on the rise. And Skype knows it will need to become more than a PC-based calling service to keep pace.

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