The Hype over Skype: Can It Go the Distance?

Although Skype, which provides Voice over Internet Protocol (VoIP) telephony services and PC-to-PC calling, turns two years old on August 29, it remains unclear what kind of business this relative newcomer will turn out to be. Skype could remain a mere fad for techies, become a next-generation communications platform or evolve into the next eBay or Google, say Wharton experts.

By No Analyst or Consultant

August 15, 2005 — CSO —

Although Skype, which provides Voice over Internet Protocol (VoIP) telephony services and PC-to-PC calling, turns two years old on August 29, it remains unclear what kind of business this relative newcomer will turn out to be. Skype could remain a mere fad for techies, become a next-generation communications platform or evolve into the next eBay or Google, say Wharton experts.

What's certain, however, is that Skype, which has offices in Estonia, London, San Francisco, Korea and Japan, is worth watching. The company touches on a handful of key trendspeer-to-peer technology (using the computing power of a distributed network of PCs), the commoditization of telephone service and the viral nature of Internet marketing.

Here's how Skype works. It's a software application that allows people to talk and instant message for free using PC-to-PC connections. Usersidentified through names instead of numberstalk through a headset and microphone attached to their computers (although the connections require someone else to have Skype). But, unlike most other most other VoIP services, Skype uses peer-to-peer technology to combine the computing resources of all of its usersnot surprising considering that Skype CEO Niklas Zennström also created the Kazaa software that enables people to swap music files easily. Zennström says Skype is more than just a cheap way to have a conversation and notes that the company will be offering video and a host of other yet-to-be-created communication services in the future.

Meanwhile, it's hard to argue with Skype's numbers. Skype's software had been downloaded nearly 145 million times as of Aug. 4, and the company claims to have 47 million people using its services. More than 1.8 million people use SkypeOut, a pay service that allows users to call traditional phones from their PCs for low minute rates. Skype also charges for voice mail. "It's funny the way things grow," says Barbara Kahn, a Wharton marketing professor and Skype user. "Skype just crept along and then there's this explosion."

The Network Effect

According to Kahn, Skype has gone from 100,000 users to 47 million in less than two years, largely because of viral marketing. Since starting to use Skype a few weeks ago, Kahn has already encouraged six friends to download the software. Wharton marketing professor Xavier Dreze uses Skype to make calls from his PC when traveling abroad to places like Singapore. At this point, Dreze isn't sure if Skype is a short-term phenomenon or the beginnings of the world's largest communications service, but he predicts that it will keep growing as long as users keep encouraging friends to sign on. "Skype now has a cult following, but the challenge is going to be making it mainstream," says Dreze. Wharton public policy and business professor Gerald Faulhaber agrees, adding that while Skype has gotten significant press coverage, it still remains "a techie delight that makes PC-to-PC calls. Whether it can make the leap to the big leagues will depend on shedding its image as primarily a geek thing," he says.

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