Skype high: Getting the mobile market in its sights

With much of the Home Counties buried under six inches of snow and London's public transport network at a standstill, it's just as well that Josh Silverman, president of Skype, likes using his own technology.

Instead of meeting in Skype's London offices, just off Tottenham Court Road, the snow forces us to put Silverman's video conferencing to the test."There is no one in the office except myself and an Estonian, and he's not bothered by the snow," quips Silverman. "But you'll agree, the sound quality of this call is actually better than if we were speaking over a phone line."

He's right, it works. For Silverman, phone lines, phone companies and even mobile operators are of another era. Skype is one of a new generation of communications companies that run their services over the internet, rather than over phone wires, and promise a tantalising mix of high quality and low costs.

The quality of a video call, at least using the latest version of Skype's software for Windows PCs, can be very good indeed. And a call, voice or video, between Skype users is free. The company uses broadband connections between people's PCs to carry calls, makings its money by selling add-on services such as calls to landlines and mobile phones, voicemail, and call forwarding for businesses.

So far, 405 million people have signed up for Skype's free service. In the past five years, it has carried 100 billion minutes of free calls between its users and is becoming a thorn in the side of the telecoms industry. Skype, now owned by the online auction service eBay, contributed $145m (£102m) in revenue to its parent for the quarter to 31 December.

Weather permitting, Silverman will be travelling in person to the "Cannes" of the mobile phone industry, the Mobile World Congress in Barcelona. Word is that Skype will use the event to launch an equally sharp shock to mobile operators.

Silverman refuses to be drawn on his specific plans for Barcelona. But industry watchers reckon Skype plans to release a version of its software for Apple's iPhone as it gears up to do to mobile what it has done to landlines.

Under Silverman, Skype has been building steadily on its products for mobile users. It now works with phones based on Microsoft's Windows Mobile operating system, and a slightly more basic version is available for owners of LG, Motorola, Nokia, Samsung and Sony Ericsson handsets. The company also has a partnership with the mobile network 3, with a range of jointly branded phones.

"The arrangement with 3 has been a huge success: the Skype phone is one of the best-selling handsets they have," he claims.

"It has been very successful with very little marketing, so the cost [to the network] per user is very low. The average person uses it for 100 [free] Skype-to- Skype minutes, which is pretty significant. But they also use 3G and data minutes from 3, so the revenues per subscriber are higher than for other handsets. And three- quarters of customers were not 3 customers to start with."

With the mobile-phone industry buffeted by the economic downturn, such a proposition could be a gift to hard-pressed operators scouring Barcelona's Fira fairgrounds for new deals.

As Silverman puts it, Skype is offering a phone that people want to keep and use, needs little or no marketing and sells without an expensive subsidy – and brings new subscribers to the networks to boot.

In practice, Silverman's vision requires several trade-offs, from the mobile operator and from the subscriber.

Mobile subscribers might be put off by the lack of choice of Skype phones: 3, for example, offers only two models in the UK and just one in other key markets such as Australia and Sweden. Skype's software for best-selling handsets from companies such as Samsung or Nokia currently lacks key features, such as free calls to other Skype users.

If this makes the vision less attractive to users, then the idea could be even harder for mobile operators to swallow. By supporting Skype, they risk losing lucrative revenues from international calls. Evidence from countries such as Ireland, where Skype also works with 3, suggests that calling relatives abroad, free, is a key reason for buying the phone.

Business users are increasingly looking at Skype as a way to save money on conference calls and on international roaming, so the emergence of fully functional Skype software for business "smartphones" could cut revenues from operators' highest-spending customers. And instant, and free, messaging could eat into operators' income from their text services. In some cases, far from embracing internet telephone services, mobile operators have gone as far as to remove the functions from subsidised handsets, and to block access to Skype and its rivals from "all inclusive" mobile data bundles.

This does not appear to deter Silverman. "We are working across three fronts," he explains. "The first is a consumer download version of Skype. The second is to pre-load phones with Skype, in markets that are not operator controlled. The third is to work with operators such as 3 to bring an integrated product to market."

In any case, Silverman believes the mobile operators will come to love Skype – and even if they do not, his business model does not depend on them. "It is a great opportunity for the operators," he says. "We are talking with many of them and I am optimistic. If it is good for the consumer, it happens."

Even if it does not, Skype has other options. More tailored services for businesses are in the works, with better integration with computer software and office phone systems. Skype has worked with Taiwanese manufacturer ASUS to develop a simple, "plug and play" Skype video phone that, priced at just over £200, has already sold out. "Our users tell us that 30 per cent of them use Skype primarily or frequently for business. We don't have phone lines in our office; I use it for conferencing and video calling. It works well."

Silverman adds: "The quality and reliability of video is having a real impact. Video calls are now 30 per cent of our traffic. Their power is amazing. My mother doesn't check stocks on her computer, or download music. But she would walk through walls to make a video call happen."

Again, video calling was meant to be a key reason for mobile subscribers to upgrade to 3G handsets, and a justification for the huge sums spent by the operators – £22.5bn in the UK alone – on 3G licences. But, nine years on, video calls represent a tiny percentage of mobile operators' traffic, even though many phones have video cameras.

Silverman, though, believes that where telecoms operators have failed, an outsider can still succeed.

Skype was founded in 2003 by Scandinavian entrepreneurs Niklas Zennstrom, from Sweden, and Janus Friis, a Dane. Zennstrom had previously won fame, and no little infamy, for setting up the peer-to-peer file- sharing service Napster. The pair sold the com-pany to eBay in 2005 for $2.6bn; neither is now involved with the business.

Silverman, born in Ann Arbor, Michigan, was an online entrepreneur who held a number of executive positions at eBay. He co-founded and ran Evite, an early "social networking" website, which he sold to media mogul Barry Diller before joining eBay.

At the auction site, Silverman handled acquisitions in Europe, including the classified advertising site Gumtree, and headed eBay's Netherlands operations. Before moving into technology, he worked for US congressman Bill Bradley, and was a management consultant at Booz Allen Hamilton.

His background gives him – and Skype – a different perspective on the industry. "Skype is a software company," he says. "We are going through a paradigm shift. We are moving from hardware that was primarily about voice to where any computing device can support voice, or video, or chat."

And those iPhone rumours?

"We are working on an iPhone application. We want to make sure it has the quality we expect from Skype. But I have nothing to announce right now."

Watch this space.