Skype 'to seriously cut into telcos' profitability'

Skype creates software that makes voice calls to other people using the software at no charge. Its Skype Out service allows the Skype software to call standard telephones anywhere in the world for reduced rates.

European telcos are particularly vulnerable to Skype's threat, says the Evalueserve study, because calling and roaming rates -- and the share of roaming rates -- are high compared to the rest of the world and local calls are charged by the minute, as opposed to the US where most people pay a fixed monthly fee.

Both fixed and mobile telcos will see profitability fall 22 to 26 percent and revenues drop 5 to 10 percent by 2008, Evalueserve predicts.

These losses will come as a result of fixed-line consumer and business customers migrating to Skype, Skype Out and any future Skype business offerings; reduced pricing to compete with VoIP providers; and lowered wholesale revenues because of less overall voice traffic.

Mobile operators will see roaming fees and voice traffic drop as people make greater use of Skype on mobile devices connected to Wi-Fi networks. If Skype comes up with 3G/GPRS offering, says the study, mobile voice traffic will decline even further.

In the end, though, fixed-line operators are more at risk than their mobile counterparts, according to Evalueserve, as customers in the future choose to use only a mobile phone and Skype -- and not have a fixed line at all.

Evalueserve predicts there will be 140 million to 245 million Skype users by 2008, compared to about 15 million total today. Those numbers exclude enterprise users who might switch to future Skype business offerings, which could reduce telcos' revenues even further.

Skype CEO Niklas Zennström has said the company plans to unveil Skype for Business sometime this year. The idea is to create a package similar to the free Skype but with extra features -- such as videoconferencing, user groupings and company directories -- that business customers would be willing to pay for.

Though many incumbents offer or are planning to offer VoIP services to their customers, these will not offset losses and instead will further accelerate profit reductions, according to the study.

The ultimate effect of the Skype revolution could be telecoms following the VoIP upstart's business model -- offering voice services for free with revenues coming from added services, says Evalueserve.

The report, Impact of Skype on Telecom Service Providers, is available through the Evalueserve Website.