Skype deal ensures Verizon won't become a dumb pipe

Lynnette LunaMy, how things change in a year. Verizon Wireless last week announced what is believed to be an exclusive joint smartphone application with Skype that will be free starting next month and available to certain smartphone users who already subscribe to a Verizon voice and data plan.

It's a remarkable about-face, considering that during last year's CTIA show, someone stood up during a press conference to ask Verizon Wireless CEO Lowell McAdam whether Skype will ever be allowed on the operator's data network. In a round about way, he said no. "The excitement in an unlimited environment (for Skype) means one thing, but in an environment where you are paying for every byte, it is a different environment," McAdam said last April. That position aligned with most operators worried about Skype eroding their voice revenues and cutting into their data capacity.

So what gives now?

The way Verizon Wireless has constructed its partnership with Skype (there has to be revenue sharing in the undisclosed terms of the deal) and how it plans to use it should keep Verizon from becoming that dumb pipe. First, the Skype application isn't wireless VoIP at all. It runs over Verizon's circuit-switched network and then becomes an Internet call once its reaches Skype's infrastructure. That's why Skype on Verizon smartphones won't work in WiFi.

Skype, eager to increase its presence in the mobile world by working closely with mobile operators, has been amiable to such arrangements in the past. Last year 3UK introduced a new service that offers anyone with a 3SIM and an unlocked 3G handset to access unlimited Skype-to-Skype calls and IMs with no data charges. That Skype traffic also runs over the circuit-switched network.

It appears that Verizon is willing to take somewhat of a revenue hit on the voice calling side, especially in terms of international calling, banking on the fact that subscribers and new customers will be willing to buy better phones and subscribe to a higher-priced voice and data plan, which are the requirements to use the service. Essentially, if customers never use any of their voice minutes and opt to use Skype, they still have to pay for a voice and data plan.

It's clear that customers want to replicate their PC Skype experience on their mobile phones. Just two days after the Skype app showed up in the Apple App Store, the company reported that the app was downloaded more than 1 million times. And that was just to use the app over WiFi (AT&T recently opened VoIP calling via iPhone to its 3G network). In short, Skype is synonymous with cheap calling.

Mobile operators have long defended their resistance to mobile VoIP by claiming that high-bandwidth requirements of VoIP negatively impacts the performance of their networks. That is what kept Skype off of AT&T's 3G connections. Moreover, operators have been unable to guarantee the quality of voice calling over wireless VoIP. By using a circuit-switched connection, Verizon is appears to be circumventing those concerns, although analyst firm Current Analysis points out that a poor connection on behalf of Skype could sour attitudes toward Verizon. But Verizon could very well change the competitive landscape, prompting competitors to scramble to look for an answer.

It makes me wonder: Could Verizon eventually attack the quality of Skype on the iPhone since it runs over a data connection rather than the good old reliable circuit-switched connection? --Lynnette