The sneak attack of P2P voice: Skype's new VOIP model borrows from instant messaging

America's Network, Dec 1, 2003 by Kirk Laughlin

If you thought peer-to-peer applications died with the demise of Napster, think again. The latest twist on IP telephony is a kind of cross between P2P and instant messaging.

The key purveyor of P2P telephony is Skype, a Dutch-based company that offers its service worldwide and that was founded by the same man--Niklas Zennstrom--who launched the music file sharing service Kazaa.

Skype has gained notoriety in the last two months for attracting 1.3 million registered users in 170 countries. Users have downloaded a beta version of the company's VoIP software. The company plans to go commercial in the first quarter of 2004 by continuing to offer free VoIP calls, while charging for premium services like voice mail and conferencing.

RAPID RISE

Although Skype is still developing its business model, telcos around the world are certain to be measuring the implications of a free, global IP voice service. For starters, the solution appears to work well. Voice quality is generally excellent and configuration of software on one's PC (it doesn't yet work for Macintoshes) is uncomplicated.

"This has come out of nowhere," says James Enck, a global telecom strategist at Daiwa Securities, who has followed Skype's dramatic rise. "We all have to sit up and take notice that this has all happened in only the last two months."

One of the most intriguing qualities of the Skype service is the fact that it lacks a central network. Skype craftily can penetrate most firewalls and Network Address Translation (NAT), unlike its close cousins in the instant messaging world, such as ICQ, AIM and MSN. Audio is a part of many IM services, yet those features have failed to catch on in the same way as Skype.

"Skype already has more active users than all of the VoIP subscribers in the US and Europe combined," says Enck. By comparison, VoIP upstart Vonage expects to provide service to 250,000 subscribers by the end of next year.

Skype maintains a "Global Decentralized User Directory", which manages the status and IP addresses of connected participants. The directory is a multi-tiered network where supernodes communicate in such a way that every node in the network has full knowledge of all available users and resources, minimizing latency.

"We have the scalability that most VoIP technologies lack," says Zennstrom. "Everything that is required, from call set up to call routing, goes right into the P2P network. The only centralized thing is registration."

COMMUNITY

The future success of Skype is inextricably linked to two key trends--user loyalty and broadband penetration. At least in the initial uptake phase, Skype users are generally seen as part of a niche demographic, defined both by a willingness to embrace disruptive technologies and an interest in being part of an identifiable community.

"This is all about the network of users, the community," says Zennstrom. "It's not about making the cheapest call."

On the broadband issue, Zennstrom believes Skype will change the perception of what a high-speed connection enables. "If people have a broadband network, why should they also have a telephony network when they can make free calls?" Enck, however, anticipates that European operators may have more to lose during the dawning era of Skype-like providers, due to reliance on rate structures that charge for per-minute usage. The average subscriber pays the equivalent of $16 a month for a PSTN line, and an additional $25 a month for per-minute voice usage in Europe.

"It is the larger portion of the revenue pie that could be vulnerable to this attack," says Enck, who notes that in the US, it is the IXCs that are most at risk. "It's difficult to see how SBC's in-region revenues, for instances, would be hurt."