Operators embrace Skype, but on own terms

Verizon Wireless’ old enemies are quickly becoming its closest friends. Skype and Verizon Wireless recently announced plans to offer Skype’s service to all VZW smartphone customers, leveraging Skype’s traditional business model of free or cheap voice calling and messaging but using Verizon’s near-ubiquitous CDMA 1X network rather than a voice-over-IP connection. The two even hinted at bigger plans for the future, as VZW’s 4G long-term evolution network is deployed and its FiOS network opens up to new applications.

Using an application co-developed by Skype and Verizon, smartphone customers will be able to make and receive unlimited Skype-to-Skype calls and dial out to local and international landlines or wireless numbers using regular SkypeOut calling rates. The calls, however, will traverse VZW’s 1X voice network, where they’ll be switched as normal phone calls in the core and handed off to the Skype VoIP network. Verizon, however, will still require all Skype users to have a data plan, which will be used for IM and presence features also being introduced at launch.

In 2007, Skype and Verizon were at odds over open access, with Skype and Google lobbying hard for it to become a requirement on VZW’s 700 MHz spectrum. Though Verizon lost that battle, it played the gracious loser, promising to work closely with its former opponents on open network development. Verizon Wireless didn’t just make nice with Google; last year it announced a partnership with the Internet giant to work on services and platform development, a direct result of which was the Droid phone. Now it appears to be taking the same path with Skype. Rather than merely cooperating with the VoIP calling provider, Verizon is partnering with it, though the two wouldn’t reveal any additional details of their business relationship.

Josh Silverman, CEO of Skype, said he felt the partnership with Verizon was perfectly natural, given Skype’s recent strategy of pushing further and further into operators’ networks. “By working with Verizon we can offer a service that is second to none,” Silverman said. By embedding it in the mobile network proper, the use cases for Skype balloon, as the user is no longer dependent on a PC or a Wi-Fi connection. “Suddenly, inbound calling becomes very possible because I’m not tethered to a PC anymore,” Silverman added.

As for where the partnership will eventually lead, John Stratton, executive vice president for VZW, told the crowd at a recent press conference to “close your eyes and imagine.” Fielding questions about whether an all-VoIP version of Skype would be used on long-term evolution devices before VZW launches its own VoIP service or whether Skype could be integrated with FiOS IPTV for in-home videoconferencing, Stratton refused to offer specifics, but he said there would definitely be much more to the partnership than what was announced.

“There will be an array of services we’ll announce at launch, and we hope to have some very exciting things to announce with our partners at Skype at that time,” Stratton said

Considering Skype’s long history of being blocked from mobile networks in the U.S., the company’s partnership with Verizon is certainly a harbinger for change. But a game-changer it is not — yet. The much feared bandwidth-depleting, revenue-eroding, game-changing potential of mobile Skype is ultimately stifled by Verizon’s ownership of the pipe. Verizon gets to set the rules and share the revenues. Skype’s just along for the ride.

Indeed, mobile VoIP is becoming a lot more palatable to wireless operators, and the reason is that Skype is willing to let them call the shots. By requiring a voice and data plan, there’s little risk of revenue cannibalization or a mass exodus of voice subscribers. Embracing this semi-openness could ultimately have upside for carriers.

“As long as Skype is okay with the restrictions, why not do it?” asked Julien Blin, principal analyst and CEO of JBB Research. “Verizon is not taking a huge risk since people have to sign up for voice and data anyway. If it doesn’t appeal to a lot of people, that’s okay, too.”

Openness is something that the U.S. wireless operators have been moving toward anyway, said Dario Talmesio, senior analyst with Informa Telecoms & Media. Internet services focused on the voice market were the last bit of openness missing from the picture, he added. Regulators are helping to accelerate that move, too. All the U.S. carriers have been feeling the squeeze from the Federal Communications Commission to open their networks, so Verizon could just be embracing Skype before it’s forced to do so anyway.

Skype has more than 500 million users worldwide, making it particularly attractive to operators easing into alternative voice services. According to Russ Shaw, general manager of mobile for Skype, operators are recognizing the benefits of the mobile Internet, and mobile VoIP in particular is an app consumers are demanding on their phones. Therefore, operators can use it as a differentiator and a customer acquisition tool, he said. It’s a strategy that has worked for Hutchison 3, Skype’s first partner in the U.K., which also offers a Skype-centric phone. Of its consumers using Skype, 79% were new to the operator. Shaw said that these consumers have also proven to be higher spenders, driving more average revenue per user (ARPU) for the operator.

Skype has also shown that if people use the cheap calling service on mobile, they use more of everything else as well, said Jeremy Green, mobile practice leader for analyst firm Ovum. Verizon’s average customer currently spends $51 per month. If they want Skype, they’ll have to spend at least $70. These users are nice to have.

“The more data revenues are growing and taking the lion’s share of the total service revenues, the less mobile operators will be bothered about the risk over voice,” Informa's Talmesio added. Furthermore, Skype’s most active users are those calling internationally and, according to TeleGeography, Skype is currently the largest cross-border communications provider around. It carried nearly  54 billion minutes of international long-distance traffic in 2009 alone. Wireless operators, on the other hand, have yet to really tap this market.  

“Carriers just want to boost wireless data ARPU and revenue,” JBB Research’s Blin added. “Any data services that can help them do that, like Skype, they should do it.”

For the consumer, the value of close integration with an operator stems from the subsequent close integration with the phone’s dialer, contacts and native voice capabilities. Wireless operators also have the ability to prioritize VoIP calls, even guarantee their quality of service (or disable or degrade it, but Blin notes this wouldn’t be a wise move now that operators want to be considered viable mobile Internet players).

“We aren’t able to go into the specifics of each possible partnership, but we are open to different models for how to deliver a compelling user experience that maintains the core Skype values of free and low-cost international calling,” Shaw said regarding the company's plans to work with mobile operators.

This integration with a carrier’s wireless network also enables consumers to use Skype as an always-on service. They don’t have to plan to make a Skype call, coordinate it with the call’s recipient and schedule a time for it, which was often the case on the PC. If they have a data plan, they can leave the service running in the background, and their long-distance recipient would only have to log into Skype — perhaps through an app on a Nokia smartphone, Shaw suggested — to see when that person is ready to take a call.

It Verizon and Skype are successful together, it’s a safe bet that other operators will follow suit. In that sense, Verizon is acting as the litmus test for the U.S. wireless industry, just as 3 in the U.K. has helped make VoIP more palatable to operators abroad. It’s not, however, a sure thing — poor service quality on Verizon’s 3G network would reflect poorly on the carrier, not just on Skype. Still, wireless operators are rapidly approaching the day when they won’t need to decide whether they’ll welcome mobile VoIP on 3G, just how they will do it.