3's Skype plunge

The CEOs of 3 UK and Skype have jointly announced the Skype Phone. The new phone, exclusive to 3 and sporting the Skype brand, is optimised for making VoIP calls using Skype over cellular. It will be available to both prepaid and postpaid customers. The phone will retail at £49.99 ($72) each, or £89.99 for a pair. Chinese ODM Amoi is manufacturing the 3/Skype phone.

The bigger operators, such as Vodafone, T-Mobile and Orange, have all taken flak recently for alleged hostility towards customers using VoIP on their networks. Now here comes 3, not only encouraging its customers to use VoIP, but bending over backwards to make it easy for them. That this initiative is being taken by 3 is no coincidence, of course. As the smallest and newest of the UK mobile operators, 3's best hope for growth is to disrupt the status quo wherever it can.

We think 3 might have something of a hit with the Skype Phone - albeit within a niche, unless (1) it expands the range of handsets available and (2) it makes Skype In/Out available - at present only Skype-to-Skype is supported. The package is attractive, and the cost of acquiring it is low. The phone is cheap at £50 but, crucially, it doesn't look or feel cheap: it has a slim, elegant design, it's nicely finished and has a pretty good spec for its price point, including a 2 megapixel camera. In combination with the promise of "free phone calls", it's likely to get at least a second look from customers who haven't necessarily set their hearts on the latest from Nokia or Samsung.

The phone has been set up to make Skype calling as easy and intuitive as possible. There's a button in the middle with the Skype logo on it (gasp!), and when you press it you see your list of contacts. You choose one, and set up a call. It looks and feels similar to making an ordinary mobile phone call. Skype calls will likely be subject to variable quality, and perhaps not even possible at all sometimes. But then again, they will be free, (data charges notwithstanding)- and if your call is an important one, there's always the option to make it in the conventional way.

To get the Skype phone off the ground, 3 will have to do a lot more marketing follow-up than it did with the X-Series. X-Series was launched with some serious hoo-hah almost a year ago, but it hasn't been promoted very effectively since then. However, the Skype phone has two advantages over X-Series as a market proposition: it's simpler and more focused; and its target market is wider, encompassing people who just want to make phone calls, and can't/don't want to spend a lot of money on their phone.

In the short term, 3 may be able to use the Skype phone effectively to boost its subscriber numbers. In the long term, though, if 3 is successful with the Skype phone, the X-Series and similar projects, it might end up creating its own strategic problems. Imagine the scenario: on your mobile phone you use Skype for phone calls, Hotmail for messaging, Google for search and directions, YouTube for TV and music. What do you need your mobile operator for‾ The answer could turn out to be: subsidising phones, carrying data packets, and dealing with problems & complaints. Does that add up to an attractive business‾

John Delaney, principal analyst at Ovum

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