Skype's Mobility Problem

Skype for Mobile wants to get on your cell phone, but technical hurdles and tough competitors may stand in the way

Concern that Skype's efforts to move into mobile calling may be in jeopardy surfaced on Sept. 28. That's when a Finnish newspaper published an interview with Skype Chief Executive Officer Niklas Zennstrom, who was quoted as saying the company is running into "technical obstacles" in making Skype service available on regular cell phones. Zennstrom also said he can't "give a timetable" on when Skype-enabled mobile phones from big manufacturers like Nokia (NOK) will debut.

Skype, purchased by online auctioneer eBay (EBAY) last year, specializes in low-priced PC-to-PC calling. But for two years it's been trying to expand into calling for mobile devices. Analysts saw the move as a way to boost sales. "Having a mobility [offering] is key for them to generate stronger revenues with higher margins," says James Friedland, an analyst at Cowen & Co. (COWN).

Higher sales and fatter margins would go a long way toward helping eBay justify the cool $2.6 billion it spent on Skype, a company that in the second quarter generated $44 million in sales, compared with eBay's $1.41 billion. The online auction giant has said the deal wasn't just about getting a revenue boost, but also about giving its millions of users an additional suite of tools for making deals. But investors wouldn't mind a bigger sales contribution from the newly acquired business.


  And Skype for Mobile was expected to be a big growth engine. Today, Skype users pay about 2 cents a minute to call home or mobile phones via Skype. But Skype for Mobile could charge as much as 10 cents per minute for some calls, says Friedland. Users would no doubt flock to a plan that lets them place international calls placed over mobile phones, which under existing plans can cost more than $1 a minute.

Mobile features could also be critical in helping Skype and its parent gain traction in markets like China, where four times more people use cell phones than use PCs. And eBay's China site has had trouble gaining on homegrown competitors, generating speculation that the auction giant will exit China altogether. Skype must contend with Tencent QQ, an instant-messaging service that already serves hundreds of thousands of consumers and offers mobile features, such as short-text messaging (SMS) between users. While Skype is testing Skype SMS service, many users of Skype-related Internet sites report pesky technical difficulties. Several said messages take days to reach their destination.

Of course, technical difficulties are common to all new technologies, including the Voice over Internet Protocol (VoIP) used by Skype. Over the years, "We have invested considerable time in solving these technical hurdles and the diligence and hard work of our mobile teams are producing tangible benefits," Skype said in a statement. Indeed, certain Skype features already let users receive calls from, and place calls to, mobile phones. The service is available on devices running Microsoft's (MSFT) Windows Mobile operating system and before long will be on phones that use a different operating system called Symbian.


  The trouble is, Windows Mobile and other operating systems make it onto fewer than 10% of all cell phones sold. In theory, Skype for Mobile would enable Skype calling on a much wider range of handsets.

That, in turn, assumes Skype can reach agreements with phone makers and carriers. Some wireless service providers have little incentive to let Skype on their networks. In its PC-to-PC incarnation, Skype is a competitor, luring away landline customers. Skype for Mobile could do the same for cellular operators. But unlike landline companies, mobile-service providers can block Skype on their networks.

To change their thinking, Skype might need to drastically change its business model, says Philip Marshall, an analyst at consultancy Yankee Group. One option: It could let carriers use its social networking features to target users with ads and split ad revenue with the carriers, Marshall says.

Another option: Using a combination of Skype and eBay capabilities to let carriers provide new services, such as convenient bidding on eBay via Skype on cell phones, Marshall suggests. Clearly, middle ground can be reached, as demonstrated by Skype's agreement with Germany's carrier E-Plus (KPN). Since late 2005, the service provider has made Skype available to its customers as part of a data package.

Skype may also need to revamp the way its software works. In its present state, Skype takes up network bandwidth that carriers allot to data applications. As a result, the quality of Skype voice connection suffers. Carriers' data networks aren't designed for voice communication, so they're being used inefficiently. That results in extra costs, says Jacob Guedalia, CEO of iSkoot, which has developed a software that lets users run Skype over a carriers' voice network. The carriers receive per-minute charges.

Meantime, an array of upstarts is hoping to get a head start on Skype for Mobile. One is Jajah, funded by the famed venture-capital firm Sequoia Capital, which previously financed the likes of Apple (AAPL). Another is Europe-based Rebtel. Unlike Skype, which requires software to be downloaded onto phones to function, these startups have figured out ways to provide free or cheap calling on all cell phones.

There are no pesky downloads with Rebtel at all. With Jajah, which released its mobile version on Sept. 26, users sign up through a Web site and then accept a text message to have a software plug-in added to their device. Jajah will support all cell-phone models by year's end (see, 9/26/06, "Jajah's Mobile Ambitions"). "The longer Skype takes with its mobile application, the more it loses ground to those guys," says Friedland.

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