Skype's Net calling service reaches beyond the PC

Skype Technologies, a company that offers free software for making phone calls over the Internet, introduced a new version of its application on Tuesday that includes a prepay service for making calls to any fixed line or mobile phone around the world at local rates.

Skype for Windows Version 1.0 is an updated version of the Luxembourg-based company's flagship offering, which lets broadband Internet users make free phone calls and chat with other Skype users over a peer-to-peer (P-to-P) application. The new software adds a service called SkypeOut, that lets users call mobile and fixed-line phones worldwide at discounted rates because the calls travel through the Internet and only connect with the public phone system at the last mile.

"We have a very different offering -- a software application that uses the Internet as a carrier for the voice," said Skype Chief Executive Officer and co-founder Niklas Zennstrom. "The impact is that you cannot charge for phone calls the same way, just as you can't charge for an e-mail or visiting a Web page."

Skype announced that it had sealed routing and termination agreements with four carriers on Friday, allowing it to offer the service.

The company is touting global calls at local rates and users who sign up for the service are automatically on the SkypeOut Global Rate plan, which allows them to call 25 countries for Euro 0.012 (US$0.014) a minute.

"We aim to make everything very simple and my experience is that phone companies try to make their pricing very complicated so you never really know how much you are paying ... our plan is simple and transparent. We are trying to make the world very small," Zennstrom said.

Global Rate plan countries include Russia, China, Hong Kong, the U.S., New Zealand and Norway. Calls to other destinations cost varied prices: Users can call the island nation of Vanuatu for Euro 0.48 a minute, for example, or a mobile phone in Argentina for Euro 0.09 a minute. European Union residents are subject to Value Added Tax on all calls, however, and the service has a prepay minimum of Euro 10.

Users can visit Skype's Web site to credit their account, or log in and view their phone record. Zennstrom pointed out that SkypeOut is a value-added service, however, and that free calls between Skype users are the company's core offering.

"The majority of our users just want to make free phone calls to their Skype friends and family. Their core contacts use the service and SkypeOut is just a value-added offering for calling other people (outside the Skype network)," Zennstrom said.

Skype's P-to-P application not only offers instant messaging (IM) between users, it also looks a lot like a traditional IM service, with a contact list, call list and customization tools that let users add image display, ring tones and call alerts.

Zennstrom, who helped create the Kazaa P-to-P software, said he doesn't fear competition from stalwart IM players. This is because phone calls made over traditional IM services get dragged down when traffic has to be routed through client servers. Only a certain amount of bandwidth can be dedicated to the traffic and there are incremental costs involved, he said. The difference with Skype is that it is a P-to-P application and the traffic goes directly to end users.

"That's a huge difference," Zennstrom said.

Skype's offering represents a fundamental shift in how telecom services are offered, said Jon Arnold, voice over Internet Protocol (VOIP) program leader for Frost & Sullivan.

"In the big picture this is very threatening (to traditional telecom providers) because it works. They've demonstrated that they can make end-to-end phone calls and cut the phone companies out of the equation" Arnold said.

The analyst noted that VOIP is only one part of a new communication model that incorporates data, video and voice.

"Voice is just the beginning. Once you are in the IP environment and you bring in video and data, it's all about who can create the best application ... it's about interactive multimedia," Arnold said.

Skype's Version 1.0 for Windows also offers free features such as conference calling, a global directory of Skype contacts, call and message tracking, and file transfers. Beta versions of Skype for Linux and for Pocket PC, which allows for mobile Skype calls, are also being released Tuesday.

The Internet calling application has been getting quick pick-up in countries with high broadband penetration rates, Zennstrom said, and is currently seeing strong growth in Europe and Asia, with Poland, China, Taiwan and Japan leading the pack. The company claims over 7.5 million users so far, and has recorded over 17 million downloads.

Zennstrom believes that Skype could change the landscape of the telecom industry.

"By having telephony as a Net application, we can develop new features faster ... it takes a long time for traditional telephone companies to develop new switches," he said.

The company plans to continue to roll out new value-added services, such as voicemail, which is slated for later this year, and to expand its offering to allow incoming calls from non-Skype users.

Arnold believes that this two-way functionality of being able to make and receive non-Skype calls will increase the company's base of application users because people will realize that they can make the calls for free via Skype.

"And once they grow their user base for the free software, there's no end to the services and applications. They can pioneer a whole new business model. There are no rules," Arnold said.

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