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Skype Goes Mobile

Long seen as a threat to cellular carriers’ revenues, Internet phone calling will be the basis of a new service from 3 Mobile.
October 22, 2007

For all its popularity among computer users, Skype, a service that lets users place cheap phone calls over the Internet, has been a virtual no-show in the fast-growing world of Net-connected mobile phones.

Possible preview?: The interface of the new Skype White Phone remains under wraps. But the device’s developers are collaborating with iSkoot, which already offers Skype support for some cell phones, as pictured here.

That may be about to change. Britain’s Hutchison 3G U.K., better known as 3 Mobile, is creating a new, custom Skype phone aimed, as one partner in the project says, at making cheap Internet calls on a cell phone as easy as sending e-mails on a BlackBerry.

What’s so radical about making calls on a phone? Skype offers free calls between its subscribers, or bargain-basement prices for international calls that ordinarily bring cell-phone operators big bucks. For this reason, most cell-phone companies have been leery of letting Skype or other Internet calling services onto their phones or networks, fearing that they might undermine revenues.

But the release of a new phone built specifically around Skype would for the first time cast the Net calling service as one of the mobile Internet’s main attractions, and potentially help weaken other cellular operators’ resistance to it.

“This has real potential for getting cheaper calls,” says analyst James Myring, whose U.K.-based firm, Continental Research, has recently documented consumers’ lukewarm response to mobile content offerings. “That’s something people really want, and people will do it, as long as it is easy to use.”

As yet, technical and pricing details on the new device, initially dubbed the White Phone, remain scarce. A Skype spokesman said only that the company is working with the Britain-based mobile-phone operator to create a “new product to make Skype completely mobile,” while 3 Mobile entirely declined to comment.

A top executive for iSkoot, a partner company providing some of the networking technology supporting the phone, confirmed that it is in development but declined to provide specifics. A recent BusinessWeek report describes a customized cell phone with a button automatically activating the Skype application.

Putting this cost-cutting voice-over-Internet-protocol (VoIP) service at cell-phone subscribers’ fingertips could be an attractive way to hold on to customers, particularly 3 Mobile’s core demographic of young, Net-savvy consumers, analysts say. But it’s risky, too.

Like their landline counterparts, cell-phone companies are struggling to protect voice-calling revenues, even as they push their consumers toward high-margin Internet features.

“Undoubtedly, mobile operators see VoIP as a threat, particularly to boundary-crossing revenues, which have been healthy,” says Geoff Blaber, senior analyst at British telecommunications research firm CCS Insight.

Whether mobile Internet telephony will prove financially viable depends on carriers’ customer bases and revenue goals. International calls, while often bruisingly expensive, are typically avoided by mobile customers unless absolutely necessary. Similarly, high cross-border roaming fees are already falling, in part because of new regulations imposed by the European Union.

Meanwhile, carriers around the world are pointing to data services as their fastest-growing business units. Three Mobile, whose business is focused on third-generation, or 3G, data services, is particularly attuned to this market and therefore may have less to lose from Skype than do some of its peers, analysts say.

Skype access is already facilitated by iSkoot software packages available to 3 Mobile users today, and the way it’s handled there may further help lessen carriers’ trepidation.

For instance, although Skype application features such as contact lists and chat windows appear on the phone, the actual network connection isn’t entirely VoIP, explains iSkoot CEO Jacob Guedalia. Instead, a traditional circuit-switched connection is made to the mobile operator’s network, where a call reaches a VoIP gateway to be relayed across the Internet. This configuration keeps customers using traditional network airtime, an issue of deep concern to mobile operators.

Three Mobile’s tightening relationship with Skype seems to be evidence that it has learned two of the wired Net’s most critical lessons for stimulating user growth: make it flat rate, and make it easy.

In consumer surveys, much of the resistance to mobile data services in recent years has stemmed from their complicated pricing, with fees often assessed per feature or per megabyte of data transferred. Only recently have carriers begun moving toward the flat-rate pricing common for PC Internet services (although most carriers still impose a data-transfer cap).

Three Mobile’s existing Skype services offer a look at how the company may treat the new Skype phone. The lowest level of service charges about $10 a month on top of basic voice subscription fees for flat-rate “unlimited” Internet use–which in fact offers about one gigabyte of data transfer and 5,000 Skype-to-Skype minutes, still enough to eliminate most fears of extra charges.

Ease of use may be the trickier part. The tools on Apple’s iPhone aside, many ordinary Web applications have had a rough transition to the mobile phone, and VoIP is no exception, despite 3 Mobile’s earlier work with Skype.

We need to see a big increase in usability on the device,” says CCS Insight’s Blaber. “So far, it’s still been very cumbersome, with a large degree of know-how and configuration required.”

ISkoot’s Guedalia predicts that the Skype device will assuage these concerns, however. “You can expect it will be a really seamless experience on the White Phone,” he says. “Think about how well e-mail works on the BlackBerry. That’s how well it should work.”

Analysts say it’s too early to predict whether Skype on cell phones will have any genuinely disruptive effect on mobile voice revenues, or further erode landline use already under pressure by Vonage and other Net calling services. Much will depend on whether other operators follow 3 Mobile’s lead, and how the services are priced.

But for Skype, the new market comes at a critical time. Early this month, the service’s parent company, eBay, announced that it would take a $1.4 billion charge against its third-quarter earnings, with about $900 million of that related to lowered revenue expectations for Skype. Essentially, eBay is conceding that it overpaid in its $2.6 billion acquisition of the Net phone service.

With service areas concentrated in Europe and Asia, 3 Mobile is well placed to appeal to Skype’s core paying audience. According to its latest financial statements, fully 83 percent of the Net phone company’s revenues come from non-U.S. sources.

A Skype spokesman said that the new product would mark a “radical step forward in mobilizing Internet calls for a mass market.” Bringing Skype to the market of mobile-phone subscribers, who, according to research firm Informa, number 2.7 billion worldwide, could be a radical improvement in the company’s prospects indeed.

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