Skype goes mobile

Bit by bit, big names in the computing world are barging into the cell-phone business. First came Apple's (AAPL) game-changing iPhone. Next came word that Google (GOOG) is creating its own software platform for a new breed of cell phones. Now Skype (EBAY), which popularized free and cheap phone calls over the Internet, is set to launch a customized cell phone developed jointly with 3 Mobile, a wireless carrier in Europe, Asia, and Australia.

Code-named the 'white phone,' the Skype handset will be introduced by late October in Britain, Italy, Hong Kong, and Australia, and will reach 3's other five markets later, BusinessWeek has learned. There are no immediate plans to bring the device to North America, though the companies may try to license it to other carriers or sell versions straight to consumers for them to use on other networks.

Connecting with Skype buddies

What may be most striking about the device is that it's being pushed by a mobile carrier at a time when most of the wireless industry is anxiously fighting to preserve its business model against a siege of new technologies and players. The major wireless carriers are fearful of upstart technologies that are slashing once-robust revenue streams from traditional home and office telephones, so they've made it impossible to use Internet phone services on most of their phones.

Indeed, Vonage (VG) and other providers of VoIP technology will have signed up more than 15 million U.S. homes and businesses by yearend, generating nearly $5 billion of revenue for 2007, says research firm TeleGeography. But on cell phones, VoIP is hard to find. 'There are a lot of reasons why mobile VoIP has not yet taken off"”and they differ by region,' says Stephan Beckert, a TeleGeography analyst. 'In the U.S., a key reason is that mobile operators are deliberately trying to keep their customers from being able to use it.'

The Skype cell phone, developed with a software outfit named iSkoot, is equipped with multimedia capabilities and high-speed data for mobile Web browsing. But its most prominent feature is a big button right above the regular keypad to activate Skype's popular service for long-distance and international calls. A press on that button triggers an iSkoot-developed application that brings up a list of a user's Skype 'buddies' and regular phone contacts. A click on any entry in that list dials the call.

Skype's challenge: turning appeal into profits

Skype is betting that easy mobile access to its service could spur more overseas call traffic, a revenue-producing business where growth has slumped sharply. Though Skype boasts 246 million accounts, only about one-quarter to one-third of those customers are thought to be regular users, and the vast majority of their calls are free. Skype has struggled to turn its popularity into profits since it was acquired two years ago by eBay (EBAY), which recently acknowledged it overpaid by $1.4 billion for the business (BusinessWeek, 10/1/07).

Calls on the Skype cell phone will cost the same as on a computer or Skype cordless phone: free when speaking to other Skype users, pennies per minute when users dial regular phone numbers in most countries. 3 Mobile, owned by Hong Kong's Hutchison Whampoa (HUWHY) , won't charge extra to use the Skype feature. But customers will need to spend a certain amount per month for other services, such as regular mobile calls, ringtones, or text messaging.


A cheap international connection could prove to be a potent draw for wireless users. Currently, few mobile phone subscribers are willing to pay the quarters and dollars per minute charged by cellular companies for international calls. That means 3 Mobile is putting little international revenue at risk by moving to the Skype model. Another intriguing twist: Since eBay owns the online payment service PayPal, success with the Skype phone could provide a springboard for using a cell phone or other handheld device to pay for items, as if it's a charge or debit card. That's been an elusive goal for the wireless industry except in a handful of countries such as Japan and Korea.

A tough sell with carriers

But even if it widens the path being carved by Apple and Google, the Skype phone is really more of a back-to-basics concept. The iPhone adds sleek Web browsing and the simplicity of an iPod music player to a phone. The gPhone (BusinessWeek, 9/13/07) seeks to bring Google's expertise, finding information and showing related ads, to a mobile handset. By contrast, the Skype phone is first and foremost about plain old phone calls.

Whatever the nature of these new services and phones, Apple, Skype, and even handset makers like Nokia (NOK) have found that it's difficult to get them into consumers' hands without the aid of mobile carriers"”and their cooperation is rare. In the case of Internet calling, the industry's uneasiness has been especially palpable.

Mobile carriers such as AT&T (ATT) specifically prohibit VoIP on their phones in their terms of service. Verizon (VZ) and Sprint Nextel (S) have battered Vonage with patent infringement suits (BusinessWeek, 9/27/07) that may have as much to do with nudging the Internet phone company toward bankruptcy as protecting their intellectual property. And earlier this year, one of the top U.S. cellular companies put a last-minute kibosh on a plan by iSkoot to announce that its Skype application worked on some of that carrier's handsets. The carrier told iSkoot it was still determining its policy toward not only Skype, but VoIP in general.

The arrival of the Skype phone is but the latest sign of evolution in wireless, and counter measures by the cellular carriers a ready reminder that there won't be a revolution any time soon.

Meyerson is Deputy Technology Editor for

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