Do mobile operators fear a Skype out?

8 Nov 2007

If there’s one word that is used a lot in the technology world it’s ‘disruptive’. Every time a new product or service arrives on the scene, the aim is to have a disruptive effect on the marketplace.

This means shaking things up and winning market share. And for third-generation mobile operator 3, which currently has less than a 3pc revenue share of the Irish mobile market, the company’s alliance with internet voice telephony player Skype may or may not be the breakthrough it fervently wishes for.

In recent weeks Skype forged a global pact with 3, which is owned by Hong Kong-based conglomerate Hutchison Whampoa, to introduce free voice over internet (VoIP) calls on specially manufactured 3 mobile phones.

For Dutchman Michael van Swaaij (pictured), CEO of Skype, it is also a breakthrough of sorts. “A lot of mobile operators have been extremely reluctant to allow Skype near phones because of all the obvious fears.”

The obvious fear van Swaaij is talking about is revenue. Across the world, traditional mobile operators are witnessing declining levels of ARPU (average revenue per user) and are looking for ways to replace falling revenue with new services such as mobile broadband.

Skype was acquired by online auction giant eBay in 2005 for US$2.6bn, which raised a few eyebrows at the time. eBay’s recent third-quarter losses of US$936m stemmed from a massive US$1.4bn write-down it had to take on its acquisition of Skype two years ago.

Skype’s SkypeIn service allows internet users to receive calls on their computers dialled in by regular phone subscribers to a local Skype phone number, while SkypeOut allows users to call traditional phone numbers, including mobiles, for a fixed fee.

While van Swaaij is responsible for Skype’s global business and day-to-day worldwide operations, he is also chief strategy officer for eBay. His job involves defining the strategic direction of eBay and, as CEO of Skype, he reports directly to eBay CEO Meg Whitman.

For 3, which has been active in Ireland for the past three years, the race is on to grow market share and being disruptive is the obvious route. The deal with Skype will see a specially made Skype phone available this year in Ireland, the UK, Australia, Austria, Denmark, Hong Kong, Italy, Macau and Sweden. Skype-to-Skype calls will be free on the 3 Skype phone as long as users are on contract or their pay-as-you-go credit is topped up monthly.

“Skype has been available on mobile before. The big difference is this is the first time a device has been built around Skype rather than as an application on the device. 3 understood where the future is going to be and realised it is affordable handsets and cheap connections. Other operators will be looking closely at this to see what will happen. At Skype we are trying to change the general mindset. Why pay per minute for calls when you can get it for free on the internet?” says van Swaaij.

He also wants to make Skype’s voice and video services ubiquitous across a number of platforms, including television eventually. A good example of the growing spread of Skype is the inking of a deal with Rupert Murdoch’s social networking site to allow users to call and instant message one another using Skype.

Another example is Skype’s move into the SME business world. It has brought out specific SME phone devices and products such as a business control panel that allows firms to buy Skype credit for in-company usage. “A lot of businesses have taken up Skype without our trying to sell it to them. Over time, we will be developing more and more business-oriented services, particularly for SMEs. We currently have more than 10 million people online and they do about six billion call minutes in a quarter. Of course, a lot of those calls are free but it also generates revenues if they use SkypeOut. Across our various business divisions we generated US$98m in the past quarter and we’re growing our revenues at a rate of 100pc year on year.”

Van Swaaij is confident that the deal with 3 will result in a disruption of the mobile telecoms market, but will influence the market rather than rip it apart. O2 Ireland commercial director Gerry McQuaid is not concerned and believes the quality of free internet calls will be a decisive factor. “Until the experience of mobile VoIP calls improves, there is little reason for customers to seek such potential alternatives to familiar switched mobile services, particularly as prices fall in today’s highly competitive mobile phone market. This means that mobile VoIP is still far from being a service with mass appeal.”

John Delaney, principal analyst with telecoms research firm Ovum, says in the short term 3 will use the Skype phone to boost its subscriber numbers. But in the long term if it is successful with the new phone it could also create its own strategic problems. “Imagine the scenario: on your mobile phone you use Skype for phone calls, Hotmail for messaging, Google for search and directions and YouTube for TV and music,” says Delaney. “What do you need your mobile operator for? The answer could turn out to be subsidising phones, carrying data packets and dealing with problems and complaints. Does that add up to an attractive business? The people who will go for the Skype mobile service will be those who want to save money — people who want to call their home country for less, or for free.”

Delaney says the next strategic step may see 3 launch the SkypeOut service to allow users to ring landline and other mobile numbers, but this will require a strategic leap of faith on 3’s part. “If you got SkypeOut on mobile it’s a completely different ball game. Calls won’t be free but the proposition is cheaper calls. This is all new to both parties and they will wait to see how this goes. 3 is not suicidal — it wants to be disruptive and is desperate to win market share but will not do a kamikaze on it,” Delaney concludes.

3’s the charm for internet phone calls

When 3 launches the Skype phone on to the Irish market in the coming weeks, users will be able to make free Skype-to-Skype calls and send instant messages on the move with the push of a button. This is the first time an operator has offered a mass-market device which is tailor-made for free calling over the internet from a mobile.

3 Ireland chief executive Robert Finnegan believes the move will help in the company’s efforts to acquire new customers. According to the most recent figures from ComReg, 3 has less than a 3pc share of the Irish mobile market in revenue terms. “We think it will be fantastic for people with relatives abroad who want to make free Skype calls, whether on a laptop PC or now on a mobile phone,” he says, pointing out that the main caveat is they top up their account with €10 credit every month. “Ireland will be one of the first markets to have the new device and quality will be the same as normal voice quality.”

Finnegan describes 3 Ireland as a mobile data provider rather than a run-of-the-mill mobile operator and while traditional voice providers see revenues per user decline, he is banking on revenues per user rising. “The market is changing rapidly and traditional operators have been creaming the market for years. We know for a fact other operators are concerned; the rate of change in the market is faster than they had anticipated.”

By John Kennedy