Skype’s Love-Hate Relationship with Enterprises

| November 1, 2006 | Business Telecom Services - Europe | Advisory Report |
| Client Access

Analysts: Dustin Kehoe, Sandra O'Boyle

Issue

Within just three years, Skype has become a powerful global brand with a customer base that spans over a quarter of the EU25’s population (current estimates are around 120 million). eBay was so impressed with Skype’s potential, in September 2005, it paid $4 billion for a company on track to make $200 million in 2006. Since March 2006, Skype has extended its influence by offering new products targeting business customers; according to Skype 25% of its users are business users. Despite this momentum, it has made little headway as an official communications tool within the corporate market.

The EVUA, an end-user organisation of 70-plus MNC customers representing an ICT spend of EUR 3 billion, found that 69% of its member corporations do not support Skype and users are prohibited to install it. Only 6% said they would be ‘likely’ to support Skype in the near future. In Skype’s favour is that employees like its ease of use and instant messaging and presence features. One EVUA multinational company found out that 15,000 employees were using Skype although it was officially outlawed by IT. In this particular case, the employees most likely to embrace Skype were those in R&D that were using Skype to collaborate with their virtual teams. So why if employees so readily accept Skype are IT managers so reluctant to embrace Skype?

Current Perspective

Skype Makes it with Free Calls

Within the course of three years, Skype has achieved a base of 120 million users with zero acquisition costs. In contrast, US-based VoIP operators, such as Vonage, paid between EUR 100 to 150 per subscriber (according to estimates). While Skype can boast 200,000 new customers on a good day, a major VoIP carrier would be lucky to add 20,000 in one week. Skype has also paralleled Google in its success as both companies have almost become new words in the English language. Skype is a popular global brand offering support in 27 languages and has over 100 certified partners (e.g., hardware and software vendors, fixed and mobile operators, hotspot aggregators, retail chains and online payment providers).

Skype Is to Carriers what Napster was to the Music Industry

Skype uses a design called a ‘supernode P2P architecture,’ over which all Skype communications are handled. Rather than rely on a single central server to handle bandwidth, storage, and performance capabilities, the network resources are divided between multiple users and shared across the entire network. Unlike TDM calls which require hierarchal switching, Skype has developed what it calls a Global Index distributed directory where users can locate and contact each other without using a central server. With these processes fully distributed, there is less of a need for capital expenditures. It is also more scalable as the amount of capacity is proportionate to number of users that are signed on. It is also argued that P2P has no single point of failure. If there is ever an outage, there is a captive network of supernode users which can dynamically re-route calls to maintain higher availability levels.

In contrast to many VoIP operators, the Skype P2P model has allowed the company to provide free on-net calls between users from a lower cost-base. Because it is software-based, it is more versatile and can be downloaded to a PC, PDA or any device. It has also undercut many fixed operators with low-priced off-net calling using a VoIP backbone. Skype’s business model took the market by surprise and caught the attention of some industry giants. It has been able to use this momentum and develop a range of partnerships with mobile operators, such as E-Plus, and WiFi aggregators, such as Boingo. Its partnership with Polycom, a provider of voice conferencing products, has improved its offering to the enterprise segment. Yet this momentum has not been enough to convince corporate customers – at least they key IT and telecom procurement managers.

Skype Has Yet to Win Over Enterprises

Many of the features Skype offers (e.g., IM, presence, integration with MS Outlook and mobile devices) are in demand, however the appetite for Skype is not. Skype has a closed architecture with its own proprietary standards and protocols. For the same reasons that have been highlighted many times over in the past, the lack of open-standards and vendor interoperability is a major issue for enterprise customers in adopting a new technology. Skype is no exception. At the same time, customers are also concerned about the level of security. While Skype has made security a very high priority (and communicates very openly and regularly on the issue), there is no visibility from the outside. Potential customers can only take them at their word. While there have been independent audits, customers feel they are still unable to verify that Skype’s security does work. A recent end-user study published by Webtorials found that security is the number-one impediment to deploying VoIP.

When Skype was developed in 2003, one of the challenges was to offer software that can to overcome the unreliable transversal of network address translation (NAT) and firewalls. By designing its own proprietary signalling protocol, it has been able to overcome this obstacle making downloading relatively easy for most users – even in heavily guarded IT environment. This has been an irritant for some network managers that have more stringent policies. There is also reluctance among some users to be used as a ‘supernode.’ While Skype claims that PCs behind NAT and firewalls will not be impacted, IT managers – again – have to take the company at their word.

Carriers Missed the Boat with Skype

While Skype is a disruptive technology, for now it appears to be far more disruptive to carriers in the consumer and small business markets rather than the large enterprise space. In its current minimalist suite VoIP, IM, off-net calling and basic PBX features, such as forwarding, it does not go far enough in supporting demanding enterprise customers and the features they demand. But does that view still hold? Skype’s appeal to employees has caused enterprises to realise that perhaps they don’t need all those expensive PBX features, especially since employees hardly use any of them. Several of the EVUA’s multinational customers are investigating end-to-end SIP infrastructure with open standards and simplified and easy to use calling, IM and collaboration features and Outlook integration.

While enthusiasts proclaim Skype as having TDM-quality to their calls, Skype cannot make any SLA-backed guarantees on voice quality, it is a best-effort service as the P2P architecture was never intended to support such metrics. Arguably, the mobile operators do not give SLA guarantees on voice quality and employees seem prepared to put up with a lower quality on their mobiles. Above all, security issues are the most prevalent reason why corporates continue to snub Skype. Accepting inconsistency of both call quality and security for the sake of price will not be palatable for most telecom and IT managers.

Skype has given IM, presence and collaboration to employees ahead of their IT managers and left the carriers scrambling to understand and deliver a secure SIP version of Skype to enterprise customers. In the meantime, Skype has moved on to mobile devices, but with its foot in the door at enterprises, even if it is the back door, a cosier relationship with a Microsoft or another enterprise heavy hitter could revive its efforts within the enterprise and cause the carriers further pain.

Recommended Vendor Actions

• Service providers should see the success of Skype as a wake up call to improve their own VoIP product and Unified Communication capabilities. Such initiatives should concentrate on introducing new SIP soft clients on the PC and mobile devices. They should also work on improving VoIP with the integration with other applications, such as Microsoft Outlook. They must also continue to work with vendors in supporting features such as IM, video calling and presence-based services. While Skype does not have a strong appeal to the corporate segment, there is a considerable demand for its service features.

• Carriers should also be ready to communicate how they intend to continue to support their respective VoIP offerings with security guarantees. Among the top concerns are viruses and DDOS, hacking, VoIP being used as a back door to gain access to the corporate network, and Spam over IP Telephony (SPIT). VoIP providers should also showcase their respective online management and monitoring tools to give the IT Manager total control and visibility into the network.

• As Skype continues to grow as an overnight success, so to does the expectation that VoIP calls should be free. Service providers will need to move the discussion beyond price and differentiate their offer by offering higher service quality and SLA-backed guarantees.

Recommended User Actions

• Corporate customers should be aware that Skype has actually developed a very strong ecosystem of partners (e.g., hardware and software vendors, fixed and mobile operators, hotspot aggregators, retail chains and online payment providers). It has also made a few key partnerships, with companies like Saleforce.com, Polycom, voxeo and Fibrelink to improve its offering to business customers. It is also beginning to work with companies, such as Symbian and Microsoft, to offer Skype software across mobile operating systems and devices. The potential of Skype may have yet to be realised.

• Enterprise customers should be mindful of Skype’s of the P2P model as it relies on hosts, or super-nodes, to transport VoIP packets across its network. As capacity increases, it could put more strain on individual hosts that may experience a degradation of computing and networking performance to support other users across the network. If burden of becoming a ‘super-node’ outweighs the benefits of being a member, the model could fail. There are also complexities such as end-to-end performance that are also dependent on the quality of connection each user has with their respective service provider.

Top

Business Telecom Services - Europe

• Module Description
• Latest Intelligence Report Summaries
• Company Advisors
• Product Advisors
• Market Advisors