Is the phone from Skype just hype?

Is the phone from Skype just hype?
3’s recent decision to introduce the Skypephone and promise ‘free minutes’ has been heralded as a landmark in changing the business model in the mobile phone industry.

3 has brought the service to mobile devices and, it hopes, into the mass market. The network claims that its main motivation is to ‘attract and retain new customers’, particularly in the prepay space. However, whether the Skypephone will succeed with a business model based on giving away airtime is another matter. Especially since 3 is giving away voice minutes, not data packets. How popular will it be and how does it stack up commercially?

The Skypephone capitalises on the popularity of free internet telephony calls – in this case, those made to others using Skype’s proprietary system. Until now, most Skype calls could only be made directly from a computer with internet access. With the Skypephone, 3’s customers can talk to any other Skype user worldwide for free with a limit of 5,000 minutes per month. There are currently around 2.5 million Skype users in the UK, although worldwide there are around 70 million active users.

The Skypephone is a relatively high-specification handset for a low retail price (£49.99 on prepay). The phone is made for 3 by Chinese manufacturer Amoi and comes with a two-megapixel camera, an MP3 player and a 256MB memory card.

Most coverage of the Skypephone has failed to mention that, two weeks before the handset’s launch, 3 had already begun to give away free Skype minutes. Those with X-Series handsets could update the built-in software and make free Skype calls; however, they don’t have the facility to send free texts via Skype Chat, which the Skypephone offers.

A quick poll of potential Skypephone customers revealed that the attraction of ‘free’ minutes might not be as great as 3 hopes. One potential customer pointed out that she never manages to use all the free minutes her contract provides anyway and rival operator O2 has taken this viewpoint too.

‘In today’s highly competitive mobile market, where tariffs come with generous bundles of inclusive minutes and an extensive range of handsets, there is little reason for customers to seek potential alternatives like mobile internet telephony,’ an O2 spokesman says.

How does 3 make money?
Asked how 3 intends to make money out of the Skypephone, a spokesman replied: ‘We expect to make money by attracting and retaining active customers. With prepay, churn is a big problem. Our objective is to attract and retain new customers with the new handset.’

At the Skypephone launch, 3 UK CEO Kevin Russell reinforced this point by explaining that the operator was perhaps unique in the UK by having an aggressive, acquisitive strategy, whereas its rivals were defensive and seeking to protect their existing revenue streams. ‘Our rivals are tempted to “bunker down”, whereas we intend to grow,’ says Russell. ‘We want to ensure we’re ahead of the curve and achieve incremental customer acquisitions.’ 3 also claims that, although there might be a degree of cannibalisation of revenues – especially with text – the company sees the two types of telephony as complementary. Especially as few of 3’s existing 4.1 million subscribers will possess a Skypephone from day one.

A positive view is that 3 doesn’t have legacy business to protect. A harsher perspective is that it is desperate to turn a decent profit, and is more desperate to come up with an idea to do that.

In order to get Skype onto the handset, 3 employed the services of specialist software house iSkoot. CEO Jacob Guedalia explains that ‘the Skypephone uses the handset’s voice channel to create the first leg of the Skype call’. Only when the handset connects to iSkoot’s servers does the call become a true internet telephone call. Which is why the Skypephone is supplied as standard with no data tariff – prepay customers are expected to purchase internet time with add-ons, for example. 3 argues: ‘What [the Skypephone] does is take the promise of the X-Series and turns it into a mass market offering. We’re putting the best of internet communications in your pocket.’

At rival internet telephony supplier AQL, Dr Adam Beaumont, CEO, claims: ‘It’s an important and bold step by 3 and appears to be a move towards promoting handsets as a rich internet experience.’ He thinks the Skypephone ‘will undoubtedly drive up data usage and make the cost of data become the influencing factor when buying your mobile package’.

Walled garden
Of course, once you have a data package you can then bolt on a call package from any internet telephony provider, not just Skype. Beaumont points out that within 3’s walled garden approach to Skype, Skypephone users can’t use the service to call regular telephone users (a facility called SkypeOut). Nor can ordinary phone users dial up the Skypephone as if it were a regular mobile phone (SkypeIn). ‘So, the consumer will have to wait until those services are available before the opportunity for truly unbundled voice calling is a reality,’ he says.

When it comes to the relationship between the two companies, 3 has to pay a licence fee to Skype for each handset. However, Russell maintains that it was 3 that made the initial approach. ‘We were talking to all the big names on the internet like Google,’ he claims.

Russell was unwilling to commit to exact numbers for 3’s expectations of the business the Skypephone will bring in, although he concedes 3 is thinking in terms of hundreds of thousands of handsets.

What Russell feels is more critical is discovering how fast demand for the Skypephone would build up before Christmas. He also admits that other models might follow the initial Skypephone.

Intriguingly, Skype’s CEO, Michael van Swaaij, hints that the Skypehone might appear in territories where 3 has no presence, but he doesn’t give any indication of a timescale. One of the benefits of 3’s close co-operation with Skype is that the handset is being heavily promoted and sold via Skype’s website as well as in 3’s own retail stores.

An interesting dimension to this is the target market 3 is gunning for. It has a famously geeky brand and the Skypephone fits neatly into that bracket.

But will this rather basic handset – in terms of looks and capability – be attractive to those consumers?

‘3 definitely wants to keep control of things,’ says Paulo Pescatore, director for operator strategy with analysts CCS Insight. ‘Which is why it’s keeping distribution only to 3 stores. With no SkypeOut, it really does restrict it to Skype-to-Skype calls.’ Pescatore isn’t impressed with the Skypephone’s ‘pulling power’, either: ‘I don’t know how compelling a proposition [the Skypephone] really is. It’s not a “must have” service. Both the N73 and the N95 are a lot more compelling. Its main feature is the fact that it’s good value for money as a 3G phone for just £50.’

For youngsters who don’t find the technology too much of a foreign territory and are looking to call each other at a low cost, it could be ideal.

Essentially, the Skypephone is all about stickiness and the handset’s ability to bind customers to the 3 network. As Pescatore says: ‘It’s compact and does exactly what it says on the tin.’ He says it should be remembered that there are some cheap deals already on the market, which can be obtained with desirable handsets for free.

‘I wouldn’t want to be one of the first ones’
A quarter of consumers in a survey of 20 said they had seen or heard of the Skypephone. Among our small survey, the same number had used Skype at some point.

All of the respondents who had seen or heard about the handset said they would consider buying one and all of those who said they had a Skype account said they too would be interested in purchasing
Written by Mobile Today
Mobile Today


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