Skype Hype

Skype is free, so how do they make money?

The Skype business plan is to:

1. build a huge captive island of users by leveraging the arbitrage value of free calling around the world, and
2. charge users to connect to other islands--PSTN, SMS, IM, email--and for premium services to be determined.

This makes sense from a capitalist's viewpoint but has a critical failure. People do not use PCs as always-on, always-available devices like they do with phones. The form factor is all wrong. So the advantage Skype gains by utilizing the highly programmable, rich user interface and connected PC is lost due to its bulky, slow starting and stationary nature. People will simply not have Skype near them for enough of the day to create enough value.

The problem solver in you says, "put Skype on a PDA." But, PDAs are not good phones. Take a look at the penetration of PDA phones. The best selling PDA phones have become less like PDAs over time. The design goal of the latest PalmOne Treo was to become more like a phone than its predecessor.

Now you're thinking, "OK, then put it on a mobile phone." This is a great idea. However, during the timeline that matters for Skype, maybe the next 2-3 years, even 3G data networks will not have the capacity or quality necessary to allow Skype to arbitrage the cellular voice networks using VoIP.

Skype has proven again that there is unmet demand for talking at lower prices. To their credit, they have made a system that overcomes many of the hurdles to adoption of VoIP software. Their advances in firewall traversal and use of adaptive codecs are worth noting. They have, as others before them, shown that the integration of IM, presence and voice is valuable. However, Skype is not a "killer" telephony application. They need to think clearly about where they bring value to users, and where not.