Eriksen Translations Inc. is a small business with a big footprint. The
Brooklyn company relies on 5,000 freelancers scattered around the world to help
translate business documents into 75 languages for US clients. That means phone
bills of about $1,000 a month. So when business development manager Claudia
Waitman heard about a new company called Skype Technologies that offers free
voice calls over the Internet to other Skype users anywhere in the world, she
jumped. Six months after signing up, Eriksen's phone costs already have fallen
10%. Even better, its employees and freelancers confer more often, allowing them
to work faster and more efficiently. "It has changed the whole way we
work," Waitman says.
Stories like this are popping up all over these days. More than 12 million
Web surfers have downloaded the free Skype software and registered as users
since the program appeared 14 months ago. The software turns a PC equipped with
a microphone, speakers, and broadband connection into a 21st century telephone.
Placing a call to another Skype user is as easy as clicking on a name in a
pop-up window. Up to five people can pile into a free conference call, and the
sound quality is often better than that of conventional phones. Skype's growth
is accelerating as subscribers urge their friends to come aboard. The number of
new registered users is now 70,000 a day, up from 30,000 in May. "Skype is
leading the charge into Internet telephony," says analyst Katja Ruud of
market researcher Gartner.
Word of Mouth
Skype is the brainchild of two notorious iconoclasts. It was invented by Niklas
ZennstrÃ¶m, a 39-year-old Swede, and Janus Friis, a 28-year-old Dane - the
same duo who infuriated the recording industry when they created the popular
KaZaA music-downloading service in 2000. Now they're doing it again.
With operations in London and Tallinn, Estonia, Skype is such a radical
departure from any previous phone company that it threatens the very foundations
of the trillion-dollar-a-year telecom industry. It has no phone lines or pricey
switching equipment of its own, instead using subscribers' PCs and the public
Internet to run its network. And rather than spending millions on marketing, the
70-employee company relies entirely on word-of-mouth. The result is a cost
structure major phone companies can't touch.
While many outsiders think of Skype as a gimmicky way to get free calls, the
Scandinavian pair are serious about turning it into a real business. The
strategy: Accumulate as many subscribers as possible and then start selling them
services such as voice mail, call waiting, and follow-me calls. ZennstrÃ¶m
compares Skype to Yahoo and Google, which also started out free and now rake in
money by marketing to millions of loyal customers. The company won't say how
much SkypeOut is pulling in, but 230,000 people have signed up, buying a minimum
of 10 euros, or $12.40, in prepaid calling time. That's at least $2.8 million
Next up is a push to attract more corporate customers. On October 6,
ZennstrÃ¶m announced plans to roll out services next year aimed at small
businesses, such as larger conference calls, group billing, and software tools
to tie Skype user lists into company phone directories.
To fuel its ambitions, Skype has raised $20 million in venture funding. Among
its backers: Draper Fisher Jurvetson, the firm that funded the free e-mail
service Hotmail and then sold it to Microsoft Corp. for $395 million. The
explosive success of Hotmail made venture capitalist Timothy C. Draper a
believer in so-called "viral marketing," where word of mouth can turn
startups into major players virtually overnight. He sees the same principle
working for Skype in Net telephony. "There's no question in my mind that
Skype will become a $1 billion company," Draper says.
The impact on the Old Guard could get worse. Gartner figures the number of
minutes of voice calls on conventional fixed-line networks will fall 10% this
year worldwide. The majority of that is due to a shift from fixed to mobile
calls and replacement of dial-up Net connections with broadband. But 15% of the
decline is from calls sent over the Net. All told, London researcher Ovum
forecasts that worldwide local and long-distance revenues will plunge by $15
billion, to $94.4 billion, by 2007. At the same time, revenues from Internet
phone calls will top $8.9 billion.
To be sure, Skype isn't the only company offering phone calls over the Net.
The first such services emerged a decade ago amidst much hoopla, but they
foundered because the technology was immature. Now, thanks to growing
penetration of broadband connections that boost the quality of Net telephony,
startups such as US-based Vonage Holdings Corp. are signing up hundreds of
thousands of users for so-called Voice-over-Internet Protocol service. Some
telecom giants, such as AT&T and Britain's BT Group PLC, have jumped into
the field. And cable companies such as Comcast are offering VoIP services over
their networks to compete with local phone companies.
What sets Skype apart from rivals is its unique technology. ZennstrÃ¶m and
Friis are apostles of so-called peer-to-peer networking, which does away with
expensive centralized computers. Instead, Skype weaves together a distributed
network from millions of connected PCs, radically lowering its costs. In
essence, the company has reduced telephony to a piece of PC software that
operates just like e-mail or chat. That means the network can expand
indefinitely -at almost no cost to Skype. It costs Skype less than 1 cents to
add a new user, vs. hundreds of dollars for a traditional VoIP provider.
Although ZennstrÃ¶m won't discuss Skype's profitability, the company's
low costs mean that, with a large enough base of customers, it ought to be able
to make money even if only a small fraction of them pay for extras. The most
compelling question, though, is how quickly Skype's technology and business
model will begin to reshape the rest of the telecom business. It won't happen
overnight, but an inexorable shift away from the old way has already begun. Just
ask the folks at Eriksen Translations.
By Andy Reinhardt in Paris in BusinessWeek. Copyright 2004
by The McGraw-Hill Companies, Inc