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Skype's mobile dreams

While it makes sense for Skype to be on mobile phones, it may be years before the free peer-to-peer software makes its way into the mobile market in a big way.

A correction was made to this story. Read below for details.

Internet-calling software provider Skype sees the mobile market as the next frontier for its service, but economic realities in the voice market--coupled with mobile operators who feel threatened by Skype--could put the kibosh on large-scale adoption for some time to come.

Skype, a peer-to-peer software application that allows people to make free phone calls to other Skype users over the Internet, has become an easy and inexpensive way for people all over the world to stay in touch.

In addition to allowing voice calling and instant messaging to other registered Skype users, the service offers premium services, such as Skypeout, which allows cheap calls from Skype to landlines or mobile phones worldwide. Another paid service, Skypeln, provides a personal and portable number that people can use to accept calls anywhere in the world.

Now the company is focusing its efforts on the mobile market.

"Our users aren't always at a computer," said Tony Saigh, business development manager for mobile at Skype. "But 96 percent of the time people have their cell phones within 1 meter of them, so it makes sense for us to extend our application to users on mobile devices. I think it also opens the market up for us to people who want the freedom of using Skype but don't want to be tied to a computer."

At the Consumer Electronics Show in Las Vegas this week, Skype made several mobile-service announcements, including one touting its plans to work with chipmaker Intel to put Skype software on Intel-powered mobile Internet devices, or MIDs, and on portable PC-like devices that use Intel's low-power processors. Skype also said that it will work with Sony to put its software on the PSP 2000 portable gaming device. Skype also announced its software will be embedded on the new version of Sony's Mylo personal communicator, the Mylo COM-2, which is a small, portable, PC-like handheld device. Skype software had already been available on the original Mylo personal communicator that was launched in 2006.

While these devices will all connect to the Internet via Wi-Fi or, eventually, the WiMax broadband wireless technology, Skype has also struck a deal with a major wireless carrier to embed its application on cell phones that will use the carrier's 3G cellular network. In October, the company announced the new Skype phone in collaboration with the U.K.-based mobile operator Hutchison 3 UK. The phone, which is being demonstrated at CES, is already available over 3's network in seven countries, including the U.K., Australia, Austria, Denmark, Ireland, Italy, Sweden, and soon Hong Kong.

There's no question Skype's downloadable software application has struck a chord with traditional broadband Internet users. The service, which was bought by eBay for $2.6 billion in 2005, has been viewed as a model of success for voice over Internet Protocol, or VoIP, services, with more than 246 million users worldwide as of September. Now the question is whether the application can become a hit in the mobile market.

"When you look at adoption of VoIP on the PC, it was all about cost avoidance," said Charles Golvin, an analyst with Forrester Research. "Skype offers some clear feature benefits, but I'm not sure that is going to be enough to entice people to download the service or even encourage carriers to partner with them."

The hurdles
On the one hand, mobile is the most natural extension for Skype's application, because phones are designed for voice communication whereas PCs are not. Skype says that its stripped-down, mobile version of its software, which has been available for Windows Mobile since 2004, has been downloaded more than 7 million times. But there are still several hurdles facing Skype that could keep its mobile application from reaching the same level of success Skype enjoys in the broadband world.

Some of the barriers are technical. For example, the 3G networks that are used to provide data services are not designed to carry voice. These networks offer far less bandwidth than wired broadband networks, which means data packets are often delayed on their way to their destination. This may not be a problem for data such as e-mail, but for voice this latency can make calls sound choppy. At this point, most experts agree that voice-call quality is far superior using the old circuit-switched voice networks rather than the 3G data network.

"Initially, people thought they could shrink down a VoIP client, put it on a phone, and run it over a 3G data channel," said Mark Jacobstein, CEO of iSkoot, the company that partnered with Skype to help it run its application on 3's network. "But 3G offers a much smaller pipe, so it just doesn't work that well."

High-speed Wi-Fi networks provide a good alternative to 3G. But these networks are deployed only in limited areas, and switching between a Wi-Fi and cellular network is still pretty clunky. WiMax and other 4G wireless network technologies like LTE (Long Term Evolution) could provide an even better wireless broadband alternative, but they're still years away from being built.

Economics surrounding voice over IP could also slow adoption. In the broadband market, VoIP services like Skype became popular because they provided a cheap alternative to long distance calling, especially for international calling. While international mobile calls can still be expensive, operators also offer subscribers discounted international calling plans.

AT&T users can subscribe to a $3.99-a-month calling plan that gives them discounted rates on international calls that are comparable with those charged by VoIP services. For example, an AT&T international plan subscriber can call a mobile phone in Austria for as little as 26 cents a minute. This is roughly the same price charged by SkypeOut and Vonage, another popular VoIP service that is not currently available on mobile phones.

Angling for an opening
But Skype's biggest hurdle could be the operators themselves, which in the mobile market determine which applications are tightly integrated into the handsets on their networks and which are not. With carriers still generating about 85 percent of their revenue from voice, according to Forrester's Golvin, most operators view Skype and its VoIP brethren as competitors rather than partners. And as a result, some carriers, such as AT&T, prohibit users from using Skype clients or any other peer-to-peer software on their mobile data networks. There are, however, some signs that these restrictions could be loosened.

"For several months now we've allowed customers to download VoIP clients and to use VoIP services on our network," said Jeffrey Nelson, a spokesman for Verizon Wireless. "So people can use Skype if they want to, but we aren't interested in allowing competitors, including Skype, to advertise to our customers through short codes that go over our network."

Despite all the barriers, Skype sees an opportunity too large to pass up. There are roughly 3 billion cell phone users in the world today, which is about three times the number of people who own computers.

What's more, Skype's functionality dovetails well with what sells in mobile. Despite all the hype around mobile operators offering music downloads, mobile games, streaming video, or even data feeds like those for weather, the biggest revenue generators for mobile operators are voice and SMS text messaging. Skype's service, which offers voice calling, IM messaging, and presence information about potential contacts, addresses the biggest money-making portion of the market.

Skype intends to play up its messaging and IM platform to attract partnerships with mobile operators.

Meanwhile, early Skype phone users on Hutchison 3's network are using the presence feature to see if friends are online or not before making a call, said Skype's Saigh.

"Conversations that we enable on 3's network are incremental," he said. "These are conversations that otherwise wouldn't have happened. People can see if their friend is available and then just click to call. So while cheap international calling is part of the story, it's not the main driver for using the service."

It should be noted that the Skype phone on 3 allows calls only to other Skype users, and the SkypeOut and SkypeIn services are not available, which limits the usefulness of the application as a cheap calling alternative. But Saigh still emphasizes that Skype's larger opportunity is in becoming the application that aggregates all communications--voice, IM, and presence information--on a PC and mobile phone.

Of course, Skype is not alone in trying to become the dominant player here. Not only could the carriers themselves try to build more-sophisticated applications that address this market, but other players like Google, Microsoft, and Yahoo are also pushing into the mobile market with their own communication tools. The advantage Skype has is its existing 246 million registered users, which could easily migrate to mobile too.

"Skype's move into the mobile market is a strategic one at this point," said Golvin. "It could be three to four years before these applications are really useful, given today's networks. But it's very important for them to try to emerge as the default for how people communicate, whether it's on their PC or on their mobile phone."

Correction: This story initially misstated Skype's CES announcement about the Sony Mylo. Its software will be embedded on the new version of the Mylo COM-2. Skype software had already been available on the Mylo that was launched in 2006.