Skype getting nearer the big time

Looking forward to payday
Skype's tests for new paid services throw a spotlight on the company's audacious plans to transform itself from a largely free service into a commercial dynamo. The company, which claims to be among the fastest-growing services on the Web with some 155,000 new registered users each day, may nevertheless be hearing some footsteps coming up behind. Web giant AOL recently jumped into the VoIP race, joining cable powerhouses such as Cablevision, long-distance provider AT&T and a slew of start-ups bent on transforming the once stodgy telephone industry, seemingly overnight.

In an interview with ZDNet UK sister site CNET News.com, Skype co-founder Niklas Zennström said the company does not plan to charge for its Skype software. Rather, he said, Skype's costs are so low that the company can afford to give its core product away to hundreds of millions of people and still make money selling ancillary services, such as SkypeOut, SkypeIn and voice mail.

"Our business model relies on providing Skype for free, and then upgrading a fraction of our users to some sort of paid service or product," said Zennstrom, speaking from London using Skype over a wireless LAN connection that cut out from time to time. "Once we get a lot of people using Skype for free, some will buy value-added services, some will buy value-added products — cordless phones, headsets and so on. We don't count on all our users being paying customers, we count on only a few being paying customers."

SkypeOut's one million paying customers represent a bit less than 4 percent of current registered users for its free Skype service. Customers buy SkypeOut accounts up front, and are assessed per-minute usage charges — generally pennies for most calls. The company does not disclose its take on these deals.

SkypeIn reverses the equation. Customers pay a flat fee for phone numbers chosen among available area codes. A 12-month subscription costs €30 (£20), and 3 months is €10, with a free voice mail account thrown in, according to information posted on Skype's Web site. Normal charges apply, but calls are free for people who call in from the same area code. Subscribers can choose any area code, regardless of where they live, potentially eliminating some long-distance charges.

Skype has acquired only 10,000 phone numbers so far for test purposes, in the United States, Hong Kong, France and the United Kingdom. Once SkypeIn is ready for prime time, Skype promises to greatly expand its number pool, and eventually offer choices from every area code around the globe.

Rival VoIP providers such as Vonage and Packet8 charge flat monthly fees for unlimited calling within limited geographical regions, and a per-minute charge for most international calls. Rates run from about $15 (£7.80) and up, depending on the plan. That can make them significantly cheaper than some traditional phone plans. But they are still more expensive than Skype.

Skype's voice mail beta is also offered at a flat rate, with 12 months costing €15 and 3 months at €5. If no one is available to answer the phone, callers can record a message that is stored on Skype's servers and then downloaded when the subscriber logs in, much like email.

Although rates are low, Zennström said he's confident Skype will generate huge profits, given its low cost structure and massive user base.

"Typical customer acquisition costs in the phone industry is several hundred dollars," he said. "We believe in zero."