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Skype embraces video phones

CEO Niklas Zennström leans on outside development but has begun testing an internally developed version of video telephony.

A correction was made to this story. Read below for details.
PALO ALTO, Calif.--Internet telephony operator Skype has tens of millions of users but envisions attracting billions with the help of video phones, says the man who co-founded the company.

Niklas Zennström, who also serves as the company's CEO, demonstrated a beta video version of Skype during his keynote at the AlwaysOn conference at Stanford University. The application is a plug-in based on Skype's core telecommunications technology and is being tested internally. Speaking from his office in Estonia, the executive did not say when the product would be ready for release.

Flanked by Tim Draper of investment firm Draper Fisher Jurvetson (Skype's largest investor, to the tune of $10 million), Zennström said his goal is to use innovations from developers and outside partners to help build his business to a level that could rival Google and Yahoo.

"We are trying to create an ecosystem and extend our network...and we are focused on developing our products and extending our APIs (application user interfaces) so we can be bigger than we could be by ourselves," Zennström said, declining to respond to speculation that Yahoo is trying to buy his company. Skype's annual revenue has not been disclosed, but analysts suggest the valuation of the company could be in the $6 billion to $10 billion range.

So far, Skype has been successful with an affiliate program that allows companies and small Web site owners to co-brand the Skype service. So far, sites in China, Korea, Japan, Taiwan and some European countries are onboard.

Zennström also noted that his company's partnerships with hardware manufacturers, including Motorola and Siemens, would help increase Skype's user base. So far, Palm OS-based smart phones were not being considered, Zennström said, because the operating system wasn't that great for voice processing.

At one point, Zennström affirmed claims that Skype software uses some of the computing resources and available bandwidth on a connected PC to create super groupings of network identities or nodes without user permission. The executive explained that any such practice helped the software better locate a Skype user on the network.

"If I can share my computer resources and not pay my phone bill, some people think that is a good thing," he said.

Video VoIP still far away
Video telephony has perennially been the "next year" application for leading providers of Internet telephony, meaning they've all said it's coming but have yet to introduce the services. In the U.S., video telephony is available from Packet8, a Silicon Valley-based Net phone operator. Meanwhile, gear makers Cisco Systems, Avaya and others are trying to develop ways to lower the costs of videophones, which are considered too high for most consumers.

Analysts believe businesses will be the first adopters of video telephony, mainly as a way to cut down on travel costs associated with in-person meetings. Consumers are less likely to adopt such a service until the price of phones drops to affordable levels--below $100 each, analysts say.

Considering that Skype's telephony software has been downloaded more than 132 million times, and has up to 3 million simultaneous users at any time of day, Skype's entry into the video phone application game is sure to boost the industry's chances.

But it remains to be seen whether Skype customers are willing to buy video phones or pay for any new videophone software the operator is going to release. That's because Skype's is mostly a free service if the calls are made between Internet-connected PCs, although it does offer premium services such as SkypeOut, which lets users make calls from their PC to traditional phones for about two cents a minute. So far, SkypeOut has about 1.1 million customers, which Skype says allows it to lay claim to the title of largest commercial VoIP operator.

Draper, who helped fund cutting-edge companies such as online e-mail provider Hotmail and Internet advertising software firm Overture, affirmed that he and Zennström would like to keep Skype a private company. The investment banker said that Skype wouldn't even consider being acquired for less than $1 billion.

Correction: This story incorrectly stated analyst estimates of Skype earnings. Analysts estimate Skype's overall valuation could be in the $6 billion to $10 billion range.