Skype getting nearer the big time

On the cheap
Skype's costs are low because it relies on peer-to-peer network architecture to complete calls over the Internet, with no need for expensive equipment or infrastructure on the back end, Zennström said. That contrasts with the business plans of the phone companies, which rely on owning the network. The "Baby Bell" local phone providers, for one, are building out new fibre and high-speed Internet networks at a cost of billions of dollars each in the USA, and BT is to spend millions on its own 21st Century Network project.

Skype's costs are bound up almost entirely in payroll — currently, for about 100 employees — and related expenses such as travel, Zennström said.

Ultimately, Zennström said, there will be only one network — the Internet — making SkypeIn and SkypeOut superfluous. But that could take years to come, giving Skype plenty of time to develop new paid services. He said the company is working on offering a video-calling feature, but declined to comment on when it would be available, or whether it would be a free or paid service.

"One big growth area in future is on mobile phones," he added. "Mobile phones are changing, becoming more powerful computers with open software, and open to more radio networks, including Wi-Fi."

One area where Skype is facing escalating costs is customer service. The company has been hit recently with an unusually high number of complaints over billing and credit-card-related errors, Zennström said. In response, Skype last week ended its contract with an outsourced customer service provider and moved the function in-house.

"Outsourcing was a mistake," Zennström said. "We now have better controls, and tracking to make sure complaints are addressed and followed up... We take customer service very seriously, and I believe we have taken the necessary steps to improve."

Zennström said he does not believe customer service costs will create a major drag on margins, thanks in part to availability of online self-help tools.

Jupiter's Gartenberg said Skype's biggest problem may not be escalating costs or customer service issues, but ease of use.

Skype has released versions of its software for phones running Microsoft's PocketPC software, and has announced a deal to put its software on a Motorola phone. But the vast majority of its users remain tethered to the PC, Gartenberg said. Unless Skype can break onto more familiar telephone devices, it could find itself locked in a niche category, he said.

"The mass market wants to use telephones," Gartenberg said. "VoIP has been around for years, but it wasn't until Vonage plugged it into a regular phone that the service started to take off. The Motorola deal is a good step in the right direction, but the key is continuing that momentum forward to become a mainstream product."