With Three deal, is Skype killing voice revenues for carriers? Not yet

With Three deal, is Skype killing voice revenues for carriers? Not yet

by Ingrid Lunden and Matt Marshall

Late last week, the Internet phone service Skype announced that the UK carrier Three UK had become the first 3G carrier to embrace Skype and offer it freely without restriction.

You may ask: Who in their right mind will continue to use their regular carrier voice service when they can make free Skype-to-Skype calls, or free IM via Skype?

Good question. This is a big development because the Ebay-owned Skype has so far been shunned by most other carriers — for example, it has been restricted by AT&T, and banned by T-Mobile. The Three UK has naturally begs the question whether this is a watershed moment, the beginning of the end for carriers’ ability to make money from voice services.

Well, not really.

Three UK — which is actually a distant fourth operator in the country with around 3 million customers — clearly hopes the offer will drive more users to its network. However, the deal may end up losing Three more revenue in the longer term, says Steven Hartley, a senior analyst with Ovum in London.

Starting in May, the service will run on either a Three network phone, or for that matter, any unlocked 3G device. Three says the “bulk” of these phone models will be supported. It will offer a pre-paid Three SIM card for £1.99. Once the SIM card is installed in the phone, the user will get a free text offering a download for the Skype client appropriate for the device.

“Three is caught in something of no-win situation in the UK,” Hartley writes in a research note. “If this gambit succeeds, then Three will have disrupted the market, but only in as far as forcing the other operators to respond. As [the other operators] are far larger and have far deeper pockets, the likelihood is that Three will come off worst in the long-term. And if it fails, Three can only try something even more desperate to attract customers.”
Keep in mind that the number of calls that are valid in this free scheme is pretty limited. If you want to make video calls or Skype-out domestic or international calls, you have to pay.

Because there is nothing in the way of details on the financial deal between Skype, Three and other partners in the ecosystem — such as iSkoot, which is apparently is helping provide the service — it’s unclear how much of a hit Three and Skype are willing to take by offering free Skype-to-Skype calls for the sake of growing their user bases.

Three claims that Skype pre-pay users give the operator 20 percent higher margins than ordinary pre-pay users; and that it is driving user uptake, with 79 percent of all of Three’s Skype users new to the network. (The higher margins may well come down to the ue of iSkoot, which routes Skype on to the voice circuit-switch rather than the more expensive data network. This, argues the company, makes the service less of a data cannibalizer than operators traditionally fear VoIP to be.)
Three projects it will carry a billion Skype voice minutes in 2009 — or only 1 percent of Skype’s traffic currently.

Skype says that its iPhone/iPod Touch app was downloaded 2.5 million times in the first 14 days it was available. That meant that in less than a month it was downloaded enough times to penetrate into 10 percent of the entire iPhone/iPod market.