Skypephone: a new, disruptive technology? or just another mobile "anti-churn" trick?

by Guy J Kewney | posted on 30 October 2007

At yesterday's launch of the Skypephone, "3" was pretty excited about all the things  you can do with a mobile that talks to computer users across the Internet. What it didn't seem to be so clear about, was "What's in it for 3 itself?"

The answer seems to be, mostly, that if people get the Skypephone, they won't want to move from 3 to another network.

It's not, for sure, a ploy to double the company's profits. The best that can be said for it, right now, is that with the 3 network severely under-used, there's no extra cost associated with it - and, as VoIP pioneer James Tagg told NewsWireless.Net "in that situation, all incremental revenue is incremental profit."

But it also risks being cannibalistic. Technically, each Skype call placed over the network costs 3 resources which, in a fully used network would mean money.

Normal Skype calls are peer-to-peer connections. The data stream generated by my computer microphone is managed, but not by a Skype server. The Internet itself becomes the server, and its broadband lines the carrier network, which is how Skype can offer the service for no charge.

For 3 it isn't so easy.

Yes, the 3 phone is a computer, and yes, it is connected to the Internet. But the connection isn't a flat rate broadband link; and the computer isn't connected to the mains. In short, it's not a peer to peer Internet link with free bauds and free cpu cycles. Instead, 3 itself has to provide a world wide server network which acts as the peer to peer node for each Skypephone.

If I sit at my computer and place a Skype call to your Skypephone, the 3 network server has to know where your phone is, and whether it's switched on; and then it has to place a perfectly normal phone call, using the 3 backhaul and the 3 air link - in other words, using absolutely standard, paid-for bandwidth. It's only free if the 3 network is free. If it gets congested, then it's stealing resources from other users.

The only money saved compared with an ordinary mobile phone call (for 3) is the termination charge it would normally have to pay to the network operator if the call came from another network like BT or Vodafone.

The other potential increase in revenue, comes from the need to keep Pay As You Go (PAYG) phones "topped up" with a minimum of ten pounds a month - but this isn't likely to change things much, either. Of course, for Skypephone owners on PAYG, the whole purpose of having the phone would be to have Skype access, so getting cut off from Skype would indeed be a severe penalty! - but would that actually change their habits?

Contrary to popular perception, there are relatively few cash subscribers for the 3 network, compared with its UK rivals. The "top up or lose it" clause would bar the vast majority of those users, who probably spend around two or three pounds a year on calls. That, of course, is why 3 started its "we pay you to answer the phone" service a couple of years ago - it makes money if you answer a call from another network. Most of those phones, even now, are still "kept in a drawer, switched off" as a 3 executive conceded yesterday.

The rest of the PAYG phones on the network probably spend well over ten pounds a month anyway.

There's the "instant message" feature of the phone, too. For a hardline Skype user, that's a big attraction; but from the point of the 3 network, all it does is reduce (very profitable) SMS traffic. And you get ten thousand free Skype IM posts per month!

So that leaves the purchase of the phone, and the acquisition of new customers. And that, certainly, will work. There are supposedly over two million Skype users in the UK, and if only one per cent of them buy a Skypephone, it means ten thousand new subscribers for 3. Exactly how many ordinary phone calls they place, is impossible to guess, but even if it's minimal, it means at least ten pounds a month per PAYG user, and quite a lot more for new contract users.

And the main attraction (as was made clear at the launch) of these new customers is that they won't go away from the network. They won't churn. If they abandon the Skypephone, they lose the access to that contact list in their handset, and access to all their IM archive. And one thing is clear: nobody else - yet - has the option to offer customers a Skype mobile that will work out in the streets, or on the move.

So yes, the other operators will be watching this move carefully, and trying very hard to find out whether it is capturing new subscribers, and whether they are actually addicted to the Skype experience, and whether it's worth their going to Skype and asking for a similar deal.

Will they get it if they ask?

From the response of Michael van Swaaij, acting CEO at Skype to this question, it seems clear that he's counting on this generating interest from other networks.

The lesson, as usual, is that anti-churn tactics are effective in the way that giving Green Shield stamps is effective. It does, indeed, give a brief boost to the business. And then, when everybody else follows suit (as they must) every business involved finds itself stuck with a discount which reduces overall profits, and the only real beneficiary is the Green Shield company itself.

What shareholders should be looking for in a mobile network, is a strategy which improves the profits of the enterprise, rather than "disruptive" tactics which generate fire and steam, but reduce margins. In the short term, the Skypephone initiative makes sense if (and only if) the 3 network has enough spare data capacity to give away all these Skype connections.

Otherwise, in the long term, it's probably just a gimmick.

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