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Internet-Based Computer-to-Computer Phone Service Attracts Millions of Users

Posted on: Thursday, 13 November 2003, 06:00 CST

Nov. 14--Forget low-cost phone service. Michael Cohen and Robert La Ferla are going for no-cost phone service.

Cohen, a Chestnut Hill native now attending law school in Toronto, and La Ferla, a software engineer from Cambridge, are among Greater Boston natives who have flocked to an explosively popular free service called Skype that allows users to make totally free computer-to-computer phone calls carried over the Internet.

Unlike some Net-based services, Skype -- which rhymes with "hype" -- requires no extra devices beyond the speakers and microphone built in to most newer computers. Just 10 weeks after it was launched, Skype has attracted nearly 2.6 million users.

Skype, developed by the same Swedish team that pioneered the online music-piracy service Kazaa, is already perceived as a major new threat to the reeling Baby Bells, AT&T, and MCI, who have seen their industry implode over the last three years as more and more phone communications move to wireless and Internet services or are replaced by e-mail and instant messaging. Daiwa Securities stock analysts recently described Skype as "a giant meteor hurtling on a collision course" toward the incumbent phone giants.

"The sound quality is amazing, like the person you're speaking with is sitting right next to you," said Cohen, 25, a second-year student at the University of Toronto law school who got his father in Chestnut Hill to download Skype so he could cut his cost per minute for calling home from 5 cents to nothing. "You can hear so much more than you can get through a phone," Cohen said.

La Ferla, 36, said he started using Skype about two weeks ago to talk with his wife, who works in Japan. "The sound quality is very good," he said. "It's better than a standard wired telephone. However, the connections have not been very reliable" and have required them to reboot their computers when they fail. But as an alternative to paying 12 to 35 cents a minute to call Tokyo, "The savings for us could be substantial," La Ferla said.

Services such as Skype, Vonage, Net2Phone, and Packet8 carry calls over the Net by breaking them down into the kinds of small data packets that form an e-mail or Web page, then reassembling them in milliseconds to create continuous Bell System-like sound. Phone companies such as Verizon and AT&T also are transmitting more of their long-distance and international calls as "voice over Internet protocol" to slash network operating costs.

Time Warner Cable has attracted thousands of customers in Portland, Maine, with an Internet voice calling offer, which Comcast Corp. expects to roll out in Greater Boston by 2006. Most industry analysts estimate that only about 1 million Americans now regularly use all-Internet voice calling services, although In-Stat/MDR, an Arizona research firm, forecasts that 5 million will by 2007.

The key difference between Skype and other so-called VOIP services is that Skype does not rely on -- and therefore does not have to charge for -- any of its own computers to complete calls. Rather, calls are made and received using so-called peer-to-peer software that sends bits back and forth between two Skype users' computers, in the same way a Kazaa user would download a digital song from another Kazaa user's PC. Also, Skype does not require a high-speed broadband Internet connection, as several other services do, although the company acknowledges broadband makes Skype work better.

The major limitation of Skype today is that users can make calls only to other people who have downloaded Skype, and then only from computer to computer. However, the company says it is months away from developing a paid service that would complete calls to conventional phones.

Skype does not make money now, but the company is hoping that enhanced services, like the ability to call people on regular phones, will eventually bring in enough revenues to sustain a business. In the future, Skype for-pay "premium services" may grow to include voice mail, call waiting, and multiple lines.

Today, however, setting up a call on Skype is similar to instant messaging. First, a user checks to see whether the person he wants to call is online; then the caller clicks a button that starts a call, triggering the sound of a ringing phone on the PC at the other end of the call.

"If I were running an incumbent carrier, I don't think I would be terribly concerned about Skype at the moment, but I'd have it on my radar screen," said Nancy Kaplan, a vice president with Adventis, a Boston telecom consulting firm. "Having it be strictly computer-to-computer is somewhat limiting, but I think anybody who has to make a significant amount of international calls will find this interesting."

Even if Skype is not a silver bullet aimed at the heart of conventional phone companies, Kaplan and other analysts expect it can be one more factor accelerating the erosion of their business. Skype could make deep inroads in certain now-lucrative markets, such as college students who make long phone calls or people who call family and friends overseas.

Verizon Communications Inc., for example, has already seen domestic telecom revenues steadily drop, to $9.9 billion in the quarter ended Sept. 30 compared to $10.9 billion in the same quarter of 2000.

AT&T's revenue collapse has been even more dramatic. Overall telecom revenues fell to $8.6 billion in the last quarter compared to $10.7 billion in the third quarter of 2001. Within AT&T's consumer division, which includes the largest US long distance carrier, revenues have plunged by nearly half over the last three years.

Verizon spokesman Jack Hoey said, "We think Skype's business model is questionable. Without question, the application -- computer to computer -- is far more limited than our vision and business model" of selling bundles of conventional phone service, wireless, and high-speed Internet access. "We take Vonage and cable more seriously than Skype," Hoey said, because they offer services that closely resemble conventional phone-to-phone calling.

Robert Carp, president of Galaxy Internet Services in Newton, New England's largest privately-held Internet access provider, said, "Frankly, I'm not impressed." Carp said using Skype on a dial-up connection makes it hard or impossible to surf the 'Net at the same time, and he found that half the computers he tested it on required some "tweaking" of settings to make it work.

Vonage spokeswoman Brooke Schulz said, "We think Skype is interesting and helping to educate the marketplace about the virtues of VOIP. That said, it is a walled garden, and until the traditional phone network becomes completely obsolete in 20 years, you're still going to need to call Grandma on Sundays and chances are she's not on Skype."

But Cohen, the Toronto law student, said besides his family he already has several Canadian friends signed up for Skype. "It's so free, and it's accessible to everyone," Cohen said, adding that once enough key people in his life were signed on, "I would choose Skype over using my telephone."

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(c) 2003, The Boston Globe. Distributed by Knight Ridder/Tribune Business News.

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