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Wednesday, May 17, 2006

Free PSTN calling from Skype - marketing gimmick with a punch ?

On May 15 2006, I received an email from Skype (as millions more would also have) which said:

"Starting from today it doesn't matter if it's a Skype-to-Skype call or a call to landline or mobile phone - it's free as long as you're calling from within the US or Canada to US or Canadian phone number."
I must admit, I was ecstatic. And not because it would save me from some marginal cash from my cell phone bill, but because this was what I considered to be the next "gutsy" step needed after Vonage.

I shot out an email to several of my colleagues and clients saying:
(This is a public email list with non-confidential information)

"For those who use Skype, I received an email (its on their website too) that Skype is now offering Skype-PSTN outbound calling free. This is not a trial or a 'special run' - but supposedly a permanent feature.

In other words, 'SkypeOut' which was a charged service is now essentially free.

The catch, however, is that this is only free for US and Canada right now (local calls).
One way to look at it is that with the Skype acquisition for $4b by Ebay, they have a lot of money to try new things. Skype believes that by making basic calling free, they will attract more people to sign-up and 'buy-in' for value added services (like skypeIn and voice mail).

For the skeptics, who have been through the bubble burst, this is reminiscent of the 'get market share first, money will follow' mantra that resulted in the demise of several hundred startups.

However, at another level, it needs a gutsy step forward like this to focus on the real 'value proposition' of voip. Is it 'cheaper voice calls' or is it 'value added services' ? Skype seems to think the latter.

Gmail was an example of a 'next step' for email systems, where disk space
was commoditized, throwing mud at the face of email providers that charged more for more space. Instead, Google converted their email system into a massive ad-generated revenue scheme as well as 'value added services' (like automatic ups tracking for an email that contained a ups number, asynchronous UI for faster response time, google maps integration etc.)

So whether this effort bombs for Skype or not, I think it will have a similar effect of what Vonage did to VoIP - perk up and scare the other providers enough to concentrate on Value added services.
If this effort bombs, I guess Skype will still have a few billion to lick its wounds on. But if it succeeds, and like Vonage did for basic VoIP, Skype can prove that by a combination of volumes, value-added services and targetting advertising (perfect time for them to insert audio advertisements as replacements to ringtones - hey if its free, you will bear it) they have a workable business model, it’s the next step of action to all the talk and hype folks !
I wish Skype the best of luck, but somehow, I think the 'second-buyers' as they are called,profit the most. Either way, the landscape-is-a-changing."

Within a few hours, I noticed that this was a staged marketing effort by Skpe who changed their implicitly stated "indefinite free" period to an explicit:

Skype is a little program for making free calls within the US and Canada to all phones until the end of the year
To be honest, I was a little cheesed. I dislike marketing gimmicks that don't project the complete image in its first shot. I just think it is 'not cricket', as the brits would say.

Even so, I think a 6 months freebie effort by Skype to increase their North American share of a dismal 20% packs a punch in 'shaking up the charge for basic calling' concept. There is a big difference in charging "0.01c" a minute vs charging "0.00c" a minute. The former associates a 'value' with the scheme, implying that the provider thinks that there is money to be earned, maybe by volumes. The latter de-values the scheme completely and states "There is no money to be made in basic calling. Move on, and do something better to earn money"

And that is why I was initially very excited. It's not about the money. It's about a breakthrough in thinking. The 6 months staged marketing cap dissapointed me, but not completely. It is still a 'statement' which bears impact.

I did a bit of calculation on how much it may cost Skype to offer this service, based on assumptions that may be incorrect. But it does give a general idea.

Number of skype users: 100 million (source)
North American penetration 20%
However, number of skype users actually active every day: 5 million (source
Number of skype users in USA+Canada active every day: approx 1 million
(actually I think it is more, there are more broadband connections in US, so chunk of active skype users should be more - I am being conservative)
Current promotion: It seems only US/Canada residents can call US/Canada. The Rest of the World cannot call US/Canada for free.
Discounted termination fee from VoIP/PSTN providers in bulk: 0.01c per minute
Duration of call: 3 mins
# PSTN of calls per user per day: 3

% of US&Canada users who will start using Skype
Termination cost ONLY to Skype (does not include management/infrastructure cost)


  1. I wonder how Skype turn to profitable. i mean they have to make enough money to break even, right? Even they have cash to burn at this moment, Ebay bought this company for profit. I am just curious how it is going to happen.

  2. Idea, Execution, Profit!May 19, 2006 at 4:08 AM

    Nice fine print analysis. Cheese to you!
    PS: We dont spell check our comments either.

  3. Anurag BhatnagarJune 8, 2006 at 8:33 AM

    I see Skype getting into Intl free calling soon , that is where the meat and cheese is.. The calculation that you did can be extrapolated to see the intl circuit costs and other licences may not take them far

  4. Great post.
    Robert :)
    (link deleted)