Last updated: March 30, 2009 10:03 pm

Skype dreams

The old way to make free long-distance calls was to stroll into the nearest office and pretend to dial somewhere in the building. Now all you need is an internet connection and VoIP, or voice over internet protocol software. Even the iPhone is about to get an application for Skype, the communications business owned by Ebay.

Free is still a relative concept though, and AT&T will not be quaking in its boots. Skype calls will not be possible over the telecoms operator’s network, for which iPhone users must still pay a minimum of $70 a month. Instead, the caller will have to connect to Skype through a local wireless signal. And it requires advance warning to receive a call, as Skype has to be turned on before it can detect incoming communication.

In fact the economics have always appeared curious for Skype. In 2005 Ebay paid $3.1bn – about 100 times the cost of the underlying technology, estimates consultancy Gartner – largely for the brand and first-mover advantage. However, the more popular it becomes, the less need there is to pay for calls, as talking to a fellow Skype user is free. And, in spite of rapid growth in the number of registered users, to 405m by the end of last year, few appear inclined to part with much cash: each user paid an average of just $1.70 each in 2008.

Ebay aims to double Skype revenues to over $1bn by 2011, but the disruptive effect of Skype so far appears limited to putting downward pressure on international calling rates, particularly in Europe where they were historically high. Telecoms operators are increasingly responding to competition by offering their own “all you can eat” bundled services, threatening Skype’s reason for existence. As with trying to live off advertising, the lesson remains that “free” is a dubious starting point for a business.

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