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Mr. Watson, Come Here! It's Free

October 26, 2003|David S. Bennahum

The Internet is famous -- and infamous -- for disrupting traditional businesses with unexpected innovations. Hardly a season goes by without some new Internet-based technology upending people's expectations of how things are supposed to be.

The latest breakthrough is a piece of software called Skype. It promises to do to the telephone business what file sharing did to the music business: turn it upside down.

Skype lets you "call" other Skype users free, over the Internet. Unlike previous programs that let you do this kind of thing, Skype is the first one to connect you directly to the PC of the person you are calling, without having to first send the call through a centralized system of computers. By cutting out the electronic middleman, it costs Skype virtually nothing to route your call.

Since it was first made available on Aug. 29, Skype has been downloaded 1.8 million times. Those are big numbers, and they reflect the pent-up enthusiasm that people have to try new things and, especially, to save money on phone calls. The company's goal is to have 200 million registered users within a year, with the capacity to accommodate 10 million users at a time.

It was reported recently that Daiwa Securities called Skype "something to be scared of," and said it was "probably set to become the biggest story of the year" in the telecom sector. "We think the Skype offering is akin to a giant meteor hurtling on a collision course toward Earth," said the report.

Considering the track record of the company's executives -- Skype is run by the two Swedes who invented Kazaa, the file-sharing program that's swept the world and allegedly cost the music industry $7 billion in lost music sales worldwide -- they're likely to have a big effect. This time around, though, unlike with Kazaa, no one can charge that using Skype is tantamount to stealing.

Skype merely unlocks the Internet's capability to route phone calls at an extraordinarily low cost, passing on those savings to the consumer. The core service -- letting Skype users call other Skype users -- will stay free. Skype plans to make money by charging for extra features, like voicemail and conference calling.

Although for now you can call only other people who have Skype installed on their computers, the company claims that by this winter the service will let you call people who have Skype on their regular phones. Calling them won't be free, but it should be very cheap -- so cheap that it poses the very real threat of a radical price war in the telephone business.

Predictably, the big phone companies are dismissing Skype and its users as, in the words of Verizon's media relations chief, "a couple of million techno-geeks" that pose no threat. Yet the reality is that "voice over Internet protocol" (VoIP) providers like Skype are rapidly crossing the threshold from geekdom to the mainstream.

Take, as a more mature example, the experiment that Time Warner Cable is doing in Maine. There, some 5,000 households are sending and receiving phone calls through Time Warner's broadband cable system; they use their existing telephones and pay $39.95 a month for unlimited local and long-distance calling in the United States. That's a staggering difference in price relative to the traditional alternative.

Another VoIP provider, Vonage, offers a similar service for $34.99 a month. Those prices, as low as they may be, are bound to drop even further as companies like Skype offer consumers even bigger savings. Within three years, it's possible that some people will be paying $10 or less per month for unlimited local and long-distance in the U.S.

Although this is a boon for consumers, it is a frightening development for traditional phone companies. The telecommunications industry is facing more and more competition in every area of its business -- from local service to broadband Internet (cable companies are now signing up more high-speed Internet users than phone companies are), and now wireless service.

On Nov. 24, an FCC mandate will permit Americans to switch cellphone companies while keeping their existing wireless number. Predictably, this means that the cost of wireless calls will collapse over the next year, as the big-six wireless companies pull out all the stops to poach each other's customers and keep the ones they already have.

Meanwhile, Skype is fast on the way to becoming the most downloaded program in the history of such things. Much like Instant Messenger, Skype could become de rigueur on the PC desktop, forever altering how we speak to one another.

When it comes to telecommunications, this is a good time to be a consumer. Seven years of telecom deregulation is turning wireless and wired communication into a super-cheap commodity, differentiated by price and little else. As the arrival of Skype indicates, the next few years should prove to be some of the most exciting, and disruptive, in the short history of the telecommunications industry.

David S. Bennahum is a media and technology columnist with Slate.com.

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