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Summary:

Skype is killing long-distance phone calls, minutes at a time. In fact, the growing popularity of the service has seen it steal minutes away from the phone companies. And for consumers that is good news. What’s more, the idea of free voice is only gaining traction.

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The Internet is a great deflator, squeezing out the middlemen and lowering prices. The shifting fortunes of Wall Street brokers and travel agents are good examples. However, the Internet’s deflationary impact is on full display in the international long-distance market, where Skype has started to take away any and all growth from the phone companies.

Skype (now a division of Microsoft), which at its very basic level is a people-to-people connectivity service, has become everything the phone companies feared it for. The latest data from research firm TeleGeography shows that international voice traffic — typically the most lucrative part of a phone company’s business — is declining sharply. The declines are coming at a time when the prices of long-distance calls are heading south. From the TeleGeography press release (emphasis added):

International long-distance traffic growth is slowing rapidly. According to new data from TeleGeography, international long-distance traffic grew four percent in 2011, to 438 billion minutes. This growth rate was less than one-third of the industry’s long-run historical average of 13 percent annual growth.

In contrast to international phone traffic, Skype’s cross-border traffic has continued to soar. TeleGeography estimates that cross-border Skype-to-Skype calls (including video calls) grew 48 percent in 2011, to 145 billion minutes. Although the volume of international traffic routed via telephone companies remains more than three times greater than Skype’s cross-border volumes, their growth rates differ dramatically.

TeleGeography estimates that Skype added 47 billion minutes of international traffic in 2011 — more than twice as much as all the telephone companies in the world, combined.

TeleGeography analyst Stephan Beckert said: “If all of Skype’s on-net traffic had been routed via phone companies, global cross-border telephone traffic would have grown 13 percent in 2011, remaining in line with historical growth rates.”

Phone companies need to grow traffic in order to compensate for the falling prices of long-distance minutes, but Skype isn’t helping matters. And it is not just Skype. There are several others. Take me, for instance: Back in the early 1990s, when I had to call my family in India, I would sign up for plans from AT&T or MCI and pay as much as 99 cents per minute to make those calls.

That pattern of overpaying continued till Skype came around in the middle of the last decade. At the same time, companies like Vonage popped up and lowered my phone bills. Today most of my international calls are made via Skype, Apple’s FaceTime, and when those two don’t work, Nimbuzz, which I use for calls to landlines. Of course, the shift in phone calling behavior means that what used to be a megabillion-dollar business is being reduced to a fraction of that.

Xavier Niel of French broadband and mobile services provider Free.fr thinks the idea of charging per minute for voice calls is preposterous and crazy. Such thinking is not new to us or to our readers.  In our smartphone world, voice is an app. Skype just happens to be the most popular one: It is on our computers, our phones, our television screens and soon other devices. There will hardly be a need for someone to call long-distance!

  1. Love it! The beauty of the free market. When something is outdated, something better for the consumer comes along. The outdated company needs to adapt, or look 5-10 years ahead in order to be ready for the next wave to ride. Fighting it only prolongs a painful death. Lobbying for gov’t regulations kills innovation…. And they don’t want to be innovation killers… or do they?

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    1. Just like the music and movie corporations want to control every single artist on the planet, and want to shut down the internet in order to do so. Try to convince them that SOPA kills innovation and they’ll laugh in your face and counter with “piracy kills jobs” (which is only true if you consider it a job to feed off other people’s creativity).

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  2. Several years ago I cut off MCI because it was increasing the charges on phone ‘service’ at a ridiculous rate- double what it was 3 years earlier. Who did they think they were to raise prices at a time when cell phone usage was increasing? Now the same companies are trying to generate the same revenue by other means

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    1. It’s a paradox. Cell phones are eating their lunch, so to keep their income they have to charge more for less usage which in turn just intensifies the decline

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  3. Benedict Evans Tuesday, January 10, 2012

    International calls are typically a low single digit percentage of a telecoms operator’s revenue. So yes, it is (or was) very profitable, but it’s also pretty niche in proportion to the overall business. There are business people and migrants, sure, but most people don’t actually know anyone abroad and don’t make overseas calls.

    Skype has done a great job of unlocking that business (though it charges well over the going rate for a lot of routes), and creating a new demand for free international calls, but this was never a ‘mega-billion dollar’ business.

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  4. It looks as if the oldtimer “bricks & mortar” type of telcom behemoth is one of those industry sectors destined to disappear sometime soon. And other’s may follow; apart from all other possible problems looming at the horizon a dearth of funding sources adds to the pressure.

    Other funding sources need to be procured. Fortunately, there are a few options out there. A starting point: the specialized funding firm of eSolve Capital (http://esocap.com; CEO Manfred Haldenwang). They helped us very well.

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  5. And, speaking of free calling on PC’s, let’s not forget Google Voice and GMail’s Voice and Video Chat, which allow free calls from PC’s to US/Canada landlines and mobiles (free, as in no money at all). And, the BYOD/DIY low cost VoIP providers who offer more features at lower rates than even Vonage.

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  6. And, speaking of free calling on PC’s, let’s not forget Google Voice and GMail’s Voice and Video Chat, which allow free calls from PC’s to US/Canada landlines and mobiles (free, as in no money at all). And, the BYOD/DIY low cost VoIP providers who offer more features at lower rates than even Vonage.

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  7. Skype represents the beauty in convergence of technology. The data is spot on with what I believe many were assuming in that cheaper, better technology always replaces the status quo. – @MrRyanConnors

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  8. “Phone companies need to grow traffic in order to compensate for the falling prices of long-distance minutes” – I would argue that the phone companies need to be prepared to pay the piper for all those years they charged ridiculous amounts for long distance. Nothing made me happier than the day I threw my old land line phone in the trash and FIRED THE PHONE COMPANY.

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  9. I’d be curious to know how the vonage unlimited international calling plans and similar cheap international calling services (example Reliance Global call) compare with skype usage. Slightly more expensive than Skype (which is free) but with much benefit because you dont need to switch your machine on.

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