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Money brings Skype closer to mainstream

A $19 million investment and new partnerships with handset and headset makers could help the Net-phoning provider offer its customers access to the traditional telephone network.

Skype, a free Net-phoning service, announced on Monday a $19 million investment that sources said will "go a long way" toward letting Skype's users connect to the traditional phone network.

For now, the company's customers are limited to calling only other computers and laptops that are linked to the Net and can run the Skype software. Home or office phones use the traditional phone network and are thus off limits. Most can't use the software yet, either.

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Skype, a start-up founded by the creators of the Kazaa file-swapping software, needs cash to buy hundreds of thousands of minutes a month from major telephone carriers and make those minutes available to its own customers--one of several premium services Skype says it wants to create and launch. But for now, the company's main product--its peer-to-peer software--is free, and sales of its headsets don't generate enough money to fund a jump onto the traditional phone network.

"This (funding) goes a long way to getting Skype onto the public switched telephone network," said a source familiar with Skype's plans.

It's not in the best interest of carriers to open up their networks to VoIP providers, but they have to, under the current regulatory regime.

Skype is also expected to announce this week, at CeBit 2004, that a major European home phone maker will integrate Skype's peer-to-peer software into a new line of cordless phones the European company plans to sell. Although final designs aren't yet set, it's likely that the phone will have one-button access to the Skype service, plus a screen to display Skype's instant messaging-like interface.

Skype will also announce later this week a partnership with Plantronics, a major maker of headsets for office and home phones, according to a Plantronics source.

A Skype representative acknowledged that connecting to the traditional phone network was "one of the company's highest priorities" but said no final plans have been made.

The potential to connect to the public switched telephone network is what has many in the investment community excited about Skype and other providers of what's known as voice over Internet Protocol (VoIP), a technology for making calls more cheaply by using the Internet rather than the heavily taxed traditional phone network.

VoIP systems could soon become liable for some of the same taxes traditional carriers pay. Nonetheless, VoIP providers, including Voiceglo, Vonage and Net2Phone, which already connect to most phones, have also drawn recent investments.

"Skype is a major event," said Tim Draper, managing director at Draper Fisher Jurvetson. "We think this is really going to be a major revolution in communications."

Draper Fisher Jurvetson contributed about $9 million to the $19 million in funding Skype announced Monday. Also contributing, with an undisclosed sum, was Index Ventures.