Yannick Laclau

Conventional teaching of WWII history would say that
Hitler’s greatest mistake was to start a "two-front" war, fighting
simultaneously the Allies in the West and the Soviets in the East.

Skype is fighting its own two-front war: on one side are the
Internet players, and on the other, the telcos.

Nothing new so far, but having observed their actions so far this year, I’m
starting to get worried.

That’s because it seems to me that Skype has decided to focus
on fighting the telcos. The premium services they’ve introduced are essentially
telecom services (calling phones, getting a phone number, voicemail, now call
forwarding).

And what kind of people are they hiring? PhD engineers to
out-Google Google? Media types to out-Yahoo Yahoo? Nope. From what I hear,
they’ve bulked up on people with telco-type backgrounds. That, to me, sounds
like a strategy to out-telco the telcos.

Which is all fine and good, except for the following: as has
been amply written about in many places, voice minutes and telco value-added
services are dying businesses- they suffer from commoditization, declining
revenues, and low margins.

Take a step back for a minute and compare that to the
revenues of the Internet players- primarily advertising, commerce enabling, and
media services. Revenues from these services, particularly advertising, are
booming. The margins are enormous. The operating model is highly scalable.

So you have a platform. Which market would you rather enter:
the low-margin business that is dying at accelerating rates? Or the booming,
high-margin business that is understood to still be at just the beginning of
its potential development?

Doesn’t sound like Skype is attacking the right markets,
does it?

But actually, it gets worse.

This is because the telcos are increasingly adopting a scorched-earth
strategy to survive (could they be the Soviets in my WWII analogy?). What this
means is that they see the trends in voice minutes usage and pricing, and are
increasingly turning into access-driven businesses where voice is just a
freebie thrown into a broadband subscription.

Almost everywhere I look this is starting to become the
standard model- you pay a monthly fee for your broadband, and get the free
local/national phone calls for free (in Europe, this is growing like wildfire- all kicked off by these French upstarts).

The telcos are making the most of a bad situation by hanging
onto access subscriptions, and giving away the voice to help drive broadband
take-up and sustain a price floor.

Which is great for them, but deadly to Skype.

Why? Because well over 90% of voice traffic is local and
national. And if those calls now come totally free of charge with your
broadband subscription, what’s the point of using SkypeOut?

Reality check: picture your *common citizen*, not some tech-gadget junkie. That’s the mass market, and that’s the group that is most likely *not* to adopt Skype when much of Skype’s offer is bundled for free, and in the way that they’re already used to using. Right?

The unpleasant effect of this is to shove Skype into the rather ugly business of being a glorified online calling card for making
international calls (which ominously is what Jeffrey Citron of Vonage said it
would become).

Let’s add to these disturbing ideas the fact that telcoland
is a mess of regulatory and political barriers to new entrants. Loss of momentum can be fatal to a startup, and that is unfortunately one skill that telcos have finely developed: witness the suspect issue of imposing emergency 911 obiligations for VoIP providers; observe the glacial pace of expansion of available SkypeIn numbers; consider the countries in which Skype has been outright blocked and banned.

And if the scorched earth tactics of telcos aren’t scary
enough, Skype faces the danger of having its main revenue-generating services
being eroded from the other side, by Internet players.

Since the asset of internet players is audience, and their
revenues mostly built on advertising, they will give away for free the very
services that Skype is hoping to earn its revenues from, in order to attract
and retain that audience.

Can you imagine Google or MSN or Yahoo charging end users for voicemail or
video? Some are even speculating that Google could profitably give away
VoIP to regular phones to capture user data.

Again, very bad news considering the product mix that Skype has
chosen to develop.

So what should they do? I used to think that Skype should be
the ARM of voice- just get it’s proprietary “stuff” embedded everywhere. Now I
think that role is clearly going to Global IP Sound. In any case, this is too much of a Microsoft-in-disguise strategy, where you sort of sneak into a monopoly position offering essential proprietary software. My intuition tells me this just won’t work anymore in the Google era.

Rather, I think Skype should out-Google Google on
application development and out-Amazon Amazon in user interface excellence. Skype
has shown it is world-class in these two areas.

And from that sweet spot it should find ample opportunity to
make plenty of money in growing markets for interactive commerce, media
distribution, and advertising. Or, as Martin Geddes would say, "develop up".

Great opportunities abound: James Enck has written about
possibilities for Skype in video content distribution; Martin Geddes has posted fabulous
ideas about new opportunities in directory services, presence management, and transaction security and more (a real gem, this post); Stuart Henshall has given lots of great ideas for innovation that more ‘net-centred
than telco-centred; I just blogged about the hot opportunities in pay-per-call
advertising.

*Those* are the jet-fueled, future-embracing businesses that
will justify multi-billion dollar valuations. Of course, POTS is still so big
that even notwithstanding its terminal decline as an industry, Skype could
still build a short-term success. But it would be a much smaller success than
what it might have been.

And that would be a shame.