Skype’s Year One

The New York Times has an article by James Fallows which has some good things to say about Skype:

Skype, for now at least, it is the easiest, fastest and cheapest way for individual customers to begin using VoIP.

Skype works best from a fully connected computer, which runs counter to the whole trend of ever more mobile communication. At the end of Skype’s first year in business, I spoke with its co-founder, Niklas Zennstrom – via SkypeOut, on his cellphone in London – about his ambitions for the second year. High on his list were partnerships with manufacturers of cellphones and personal digital assistants, to build in compatibility with Skype. The company will also sustain its push to sign up new users. Skype says it has about 10 million users in 212 countries, with an average of more than 600,000 logged on at any given time.

Skype illustrates network economics in the purest form: free connections within the network become more valuable to each user as more users sign up. Because of the system’s peer-to-peer design, loosely related to the Kazaa file-sharing program that Mr. Zennstrom and Skype’s other co-founder, Janus Friis, invented four years ago, the system scales well – that is, it doesn’t bog down as more users join. The peer-to-peer design also allows it to work behind most Internet firewalls.

Skype’s own economics, including its promise that it will never impose a charge for Skype-to-Skype connections, depend on maintaining its rock-bottom cost structure and slowly adding revenue, through services like SkypeOut and future voice-mail and video-call services. The drive to hold down costs is also what originally took Mr. Zennstrom, a Swede, and Mr. Friis, a Dane, to Estonia. As Mr. Zennstrom sees it, during the “bubble years” in Sweden, programmers lost some of the hungriness and hustle he could still find in the Baltics.

The risks make it hard to predict the company’s future. The world’s existing telecom companies, battered for more than a decade by technical, regulatory and marketing changes, will presumably want to answer this latest challenge. Mr. Zennstrom says the telecoms should view Skype as healthily “disruptive technology” and respond by reinventing their business – as I.B.M. has done since the rise of the personal computer – instead of pouting their way into decline.

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Rajesh Jain

An Entrepreneur based in Mumbai, India.