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Skype & Verizon’s Fear of the iPhone

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After complaining, cursing and trying to destroy Skype for the past few years, today the big daddy of the U.S. telecom industry, Verizon (s vz), decided to embrace the upstart. And it did so in good style — by hosting a heavily attended press event announcing their partnership at mobile industry’s biggest boondoggle, the Mobile World Congress in Barcelona. If you just simply scanned the headlines, you’d see an old-school telco finally getting the religion. But then you’d also miss the full story: The degree to which fear of the iPhone (s aapl) was behind this Verizon decision.

First let’s get the basics of the Skype-Verizon news announcement out of the way:

* Skype and Verizon have built a new client especially for use on Verizon Wireless’s smartphones.
* The client allows unlimited Skype-to-Skype voice calls without cutting into your Verizon minutes.
* You can use Skype Out calling rates for international calls also without cutting into your Verizon minute bundles.
* You can also use it to send and receive instant messages to other Skype users.
* As reported earlier, the service is available on 3G smartphones with data plans, including the BlackBerry (s rimm) Storm, Storm2, Curve, Curve2, 8830 World Edition and Tour smartphones, as well as DROID by Motorola, DROID ERIS by HTC and Motorola (s mot) DEVOUR.

Now here are a few things they didn’t tell you:

* The Skype mobile client won’t work over any WiFi-enabled smartphones. And that includes DROID devices. To me, that’s bogus.
* You cannot use the Skype client to make any calls to U.S. PSTN numbers. Those calls are routed over Verizon’s network, and thus in the process help generate the company more money. In other words, a leopard doesn’t really change its spots.
* Despite the company’s boasting, there are a lot of places where Verizon’s 3G network doesn’t quite work, especially as you start moving away from urban areas. In the words of Dr. Gregory House (of “House”): Everybody lies. (Especially phone companies, if I may add.)

What I like about it:

As Skype CEO Josh Silverman said, with this new client, your Verizon phone address book becomes more useful and makes inbound Skype calls easier. It makes using Skype IM and Skype Status messages more useful. I especially like this because it gives Skype a new opportunity to grow its revenues and bump up its profits. “I think we have seen an attitude change amongst operators and they are open to forming more relationships,” said Silverman, noting that his company was talking to other operators as well.

Which bring me to the elephant in the room: Why exactly is Verizon singing the Skype song? The answer is simple: the iPhone.

During the press conference and later in a conversation with the Verizon executives, I asked why they suddenly embraced Skype. They gave me some PR-sanitized answers about smartphone penetration, demand from consumers and whatnot. The real answer is the iPhone.

Ever since the iPhone launched, Verizon has gone on the defensive. It’s seen AT&T (s T) with its frail little network gain and then retain market share. Today, despite all the problems with Ma Bell’s network, customers are still signing up for the iPhone. Verizon needed a countermove. It thought the BlackBerry Storm would be the answer, but that’s like fighting a bazooka attack with a peashooter. And the company controlled access to its devices and network like the former Soviet Union embraced perestroika, aka Android. I’m not sure if even that has had the desired effect.

Which brings us to the Skype deal. I’ve been reporting on Skype for some six years, during which not at a single day passed when I didn’t hear some kind of anti-Skype remark from an operator, Verizon included. There was a visceral hatred for the Internet calling service, which essentially started eating the insides of their business. And when you have so much hate for a particular entity, you just don’t get up an embrace it — unless you’re scared of something. In the case of Verizon, that something is the iPhone.

The two companies started talking about working on something together roughly a year ago. At that time, the iPhone mania was at its peak and it’s fair to say that Verizon was a little spooked. When I asked one of its executives about the iPhone, he denied that the talks were a direct response to the device. But he did acknowledge that the competitive landscape had changed and that customers were making decisions based on applications. Skype is one such application — one of the most powerful and popular applications available for the iPhone. The growing popularity of Skype — 300,000 downloads a day — is a good reason for Verizon to team up with the company. If it can convince even a handful of those downloaders to use it via Verizon, it’s preventing them from using another phone.

The final proof of the fear of the iPhone: Neither Skype nor Verizon would not respond to my question of whether this deal between the two companies was an exclusive one. In other words, when I asked Skype CEO Josh Silverman if another carrier, say, T-Mobile USA, said it wanted his company to build a Skype Mobile client just for its service, would he do it, his non-answer pretty much said: Verizon is using Skype to fight off competition. Not that there’s anything wrong with that.

Related content from GigaOM Pro (sub req’d):

AT&T, Verizon Grudgingly Move Toward Openness

57 Responses to “Skype & Verizon’s Fear of the iPhone”

  1. Excellent post, and the lack of an update for Skype on the iPhone to use 3G is just a big proof of all that. Verizon is aggressive and I can see why, too bad Skype made a deal limiting what we have on the iPhone, after all we consumers are the ones paying for Skype to grow.

  2. Seriously who uses Skype except for penny pinching nerds. Perhaps for international, but when my web designer calls me via skype, I immediately have him call me back via a land line or cell phone because Skype quality is horrible. I hate Skype and anyone who uses it.

    • SFTitan, I have had complete opposite experiences. Using Skype I have found call quality which is at times better than regular cellular calls. I can very clearly hear even the faintest of background noises on a skype call. Not sure why you have had bad experiences. Maybe your web designer doesn’t have enought bandwidth at his end

  3. Hi Om,

    Interesting post – I think your reasoning on the Verizon perspective is clear and plausible.

    Could you expand on the post’s title: “Skype & Verizon’s fear of the Iphone” – What, exactly, is Skype’s fear? Isn’t this yet another example of Skype winning ground, adding distribution and platform availability to millions of customers? With the 3G VoIP ban removed, and the fact that Skype has an excellent free Skype app – Skype just keeps on truckin’ – also on the IPhone.

  4. I am not sure the Verizon doesn’t care about the iPhone, I highly doubt that is the case. The exclusivity that at&t had on the Razor and then the iPhone has been one of the main things that kept them strong. I stick with Verizon because I need the strong coverage everywhere. Since I am in the auto transport industry we are all over the place. I really hope Verizon gets the rights for iPhone this summer.

  5. Om, I am curious if you had anyone verify that the Skype VZW client would prohibit you from doing a VoWiFi version? I think the VZW vs. ATT implementation is a great comparison of over the top VoLGA compared to 3G One Voice architectures. I can’t wait to do a taste comparison.

  6. Hi Om,

    You wrote, “Despite the company’s boasting, there are a lot of places where Verizon’s 3G network doesn’t quite work…”

    I wouldn’t be surprised if the calls were routed over the voice channel, rather than the data channel. That’s how Hutchison 3’s “Skypephone” works.

  7. I don’t know why wifi enabled handsets have been left out. Is it that the application is being launched on various handsets in phases and we shall soon see one for advanced handsets? I cannot think of any logic for Skype/Verizon to not allow calls over wifi.

    Secondly, this is’nt something new. This offering has been tried by 3 UK & Skype before and I am not sure if it helped 3 UK compete against O2’s iPhone or even made it win a considerable number of customers. Infact, with Verizon they still want you to buy Voice & data plans whereas 3 UK was giving this for free- you could buy a prepaid SIM and use skype for life without topping up. Not sure what verizon thinks will be different for them.

      • I wouldn’t recommend it!!

        You’ll spend big roaming abroad using VoIP over a 3G data network. Voice roaming rates are a big gouge by carriers, and data roaming is even worse.

        Figure that an average US carrier charges about $0.08/min for cellular in the USA. They charge about $1.30/min in Western Europe. That’s a 16x multiple.

        Now figure that the average US carrier has a 5GB data plan for phones at about $30. That’s about $0.006/MB for domestic data use. Typical data roaming rates are $0.02/Kb, or about $20/MB. That’s a 3413x multiple. Yep, go ahead and check my numbers.

        People have complained for years about the high prices of international voice roaming. European Telecoms regulator Vivianne Redding famously imposed caps for European carriers limiting the price they could charge visitors (which sadly, only applies to EU travelers, not US-based visitors). The complaints and regulations stem from a 16x multiple, a 1600% markup. So what do carriers do with data? They institute a 341,300% markup on data for travelers.

        Seriously, this goes far, far beyond the pale.

      • If I’m roaming on a 3G network in Europe and have Verizon’s unlimited international data plan, wouldn’t my calls made over Skype Mobile be covered without additional charges (apart from whatever rates Skype charges for the calls in question)?

  8. chico sajovic

    Skype should be afraid too. Imagine iChat with a VOIP phone number pre loaded on your iPhone without any stupid verizon limitations. Maybe ATT goes all in with the idea that they are just a dumb pipe and iPhone customers use VOIP for 100% of their calls. Now that would be a value proposition that would put Verizon at a competitive disadvantage.

  9. activeinspiration

    I can’t help but consider another reason would be to keep control over this service Skype provides at a ridiculously lower price also. For around $12.00 a month with a wifi phone you can call unlimited in the US. Although I have no experience with it, my son uses it and the only drawback is he must have a good wifi connection and remain stationary.

    So maybe Verizon keeps it on their network because of a quality of service issue. As long as it is unlimited and doesn’t effect your cellular minutes well then that’s OK.

    It would be something if skype improved the quality of their service enough to work well in a wifi blanketed zone for example. That would upset all of the mobile guys. Maybe they are pulling a Google from back in the day when they were yahoo search.

    • When you coin a phrase like “wifi blanketed zone” (I googled it, and got one hit – this page) you need to explain what you mean.

      Cellular networks automagically transfer your connection as you move from one zone to another. Wi-Fi doesn’t do that.

      You can’t receive a wi-fi call until you log on to a wi-fi network. If you move out of range of the network, you have to find and log in to another network and sign on to Skype again. In the meanwhile, your call will be disconnected. Even if the switch from one wi-fi network to another were seamless, your call would still be disconnected, because your IP address changed.

      MOBILE calls (as opposed to WIRELESS calls) require cellular technology. There is no way around that.

      • on the 3 skypephone system calls to skypein (DID) numbers do not reach handsets, only calls originating from other skype clients. this is significant because it could mean free inbound calls from the PSTN or not.

      • Tom. Good point. Bear in mind, though, that the way the service is offered will differ significantly between the UK (Hutchison Whampoa’s “3” network) and Verizon wireless.

        The reason is that the UK has Calling Party Pays, and wireless carriers make money off the Calling Party by terminating their calls to mobile, while the US has “mobile party pays” for wireless Minutes of Use.

        Thus, Hutch has a very big incentive NOT to terminate PSTN calls to Skype on the mobile, where VZW does not.

  10. deloreanfox

    iphone was a big advance in todays phone and that no phone can nearly match as close but only copy it but the droid is kinda like da iphone because google software is in the iphone if you noticed

  11. Wow Tim, you’re pretty out of touch with the state of the US cellular industry. It’s well known that iPhone subscribers bring in a higher revenue than most other subscribers. Verizon would be foolish not to want seek that crowd.

    Fashionistas? Please, it’s 2010, not 2007.

  12. While the comment on that VzW’s 3G network doesn’t work everywhere is correct – for this Skype Mobile it isn’t that important. They only use it for the basic presence and IM capabilities – which will do fine over their 2G network as well. They use their robust cellular voice radio network (at least until it hits the Skype box in their core) for the actual voice. So the limitations on coverage of their 3G is not going to effect it. I’ve got more on my blog

  13. Your last paragraph is a little confusing, what with the double negative and all. To clarify, did Skype or Verizona answer you at all when you asked them if this arrangment was exclusive? Did they say, “no comment” or give some other “non-answer” or simply shut up? What exactly happened?

    • AS

      Sorry for the confusion, though I am not sure how I could be more clearer.

      Just to explain: No Skype isn’t answering the question about its deal with Verizon. In fact I asked them the question about the deal many different ways and they would only say no-comment.

      • Om,

        You could have been “more clear(er)” by using decent grammar in the last paragraph of your article. To quote:

        “Neither Skype nor Verizon would not respond to my question…”

        In that sentence you are saying Verizon and Skype each declined (“Neither Skype nor Verizon”) to stay silent (“would not respond”) in response to your question.

        In case I’m not clear, your sentence reads as ‘Skype and Verizon would not not respond’. That is confusing as all hell. I’m not at all surprised that their only response was “No comment”.

      • Guys,

        Om’s writing (one extra ‘not’ excepted) seems pretty clear to me. The operative part is:

        “Verizon is using Skype to fight off competition.”

        Does a company fight off competition by offering an exclusive, or by not having exclusives?

        Om suspects there IS an exclusive.

  14. This may explain why 3G support for Skype has not been enabled on iPhone. VZW may have required Skype to hold back on the upgrade because it would have upstaged this announcement if AT&T already offered Skype 3G. For all we know there may even be an exclusivity clause that could keep Skype 3G off iPhone for a period of time.

    • Actually, there are at least 2 VOIP that works on the iPhone over 3g already. I’ve written an article on February 3 about that.

      I have no need for VOIP, so I didn’t really check, but I believe one of the iPhone apps allowed can already connect to skype.

      • Yes, Fring can be used to make skype calls over 3g (infact I have also used it over 2g/2.5g and the voice quality was not too bad.
        I think Peter may have a point here. When Apple relaxed their VOIP norms, Skype said they are optimizing their app to get a better quality over 3g networks and they suddenly come and launch the app over verizon network

  15. Verizon Wireless isn’t bothered by the iPhone. No point in having some whiny fashionistas who use too much of the whole network, the same bunch who keeps begging to get on the Verizon Wireless. Verizon Wireless sees these whiners as too much trouble for their worth. And it isn’t exactly falling over all itself to try to get the Apple’s has-been iToy in its network. It’s focusing on building up hot Android phones. Verizon Wireless kicked Steve Jobs to the curb when he tried to get the iPhone in its network before; when Jobs comes around again, he’s better be frog-hopping as he begs.

    • Tim,
      Just emerged from a coma? Your comment has got to be the dumbest reply I’ve seen in awhile.

      I’m surprised the Verizon board or shareholders haven’t sacked the CEO for refusing Apple in the first place. But then again, Verizon’s anti-wifi, anti-skype, anti-anything that will reduce pay-for-minute services on their network is antithetical to the iPhone model anyway. I can see why the two companies have not come to an agreement.

      AT&T, on the other hand, signed up, “product unseen” — can’t beat faith. Frankly, probably a hail Mary on AT&T’s part.

      • Hamstah,

        You make some great points. Actually Denny Strigl who was Verizon’s President, COO, and former CEO of Verizon Wireless suddenly “retired” at the end of 2009. Denny was blamed for the loss of the iPhone.
        One thing to keep in mind is Verizon’s roots are in old school POTS service. The company has not been able to market, leverage, or deploy any new technologies since the 60’s. The company is still run by 1960’s style Bell-heads.
        One can point to VZW size as success but VZW customer base has not been grown organically. Verizon’s churn is up and the first 3 quarters of 2009 the net adds were spotty. VZW is running scared of the iPhone but the company is not nimble enough, have the vision, or leadership to best ATT and the iphone.

    • Tim,

      Wow! “No point in having some whiny fashionistas”???

      How about the point of having new subscriber adds, with low Subscriber Acquisition Cost (since Apple is doing lots of the marketing spend). That kind of thing appeals to carriers.

      How about the point of having a bunch of subscribers whose ARPUs are in the $90 zone? I’ve heard it said that mobile carriers like that kind of revenue.

      So maybe you’re right, VZW is not “falling all over itself” to get the iPhone. But it most certainly IS falling all over itself to get a viable competitor to the iPhone. It is working with trusted partners (RIM Storm) until that fails, then working with the hated Google, which is working a bit, and now working with the hated Skype. What part of that doesn’t seem like a company falling all over itself?

      Yes, VZW sent Apple packing years ago. Do you really think they are patting themselves on the back for that one? They brushed-off Apple because an Apple phone threatened to break established carrier control in content and customer ownership. I mean, through an iPhone, companies like Skype and Google could offer their services to the consumer outside the walled garden, with no toll-booth or controls put in place by the carrier! They had to stop that, so they turned down Mr. Jobs.

      And then what happened? Despite their rebuke, an Apple phone broke established carrier control in content and customer ownership. Only problem for VZW is, AT&T is the only US carrier getting the boost from the iPhone.

      I’ve noted of late that the anti-fanboi screeds are less informed than even the fanboi rants. You two groups deserve each other. Like and acid and a base, maybe if we mixed the two sides together, we’d neutralize the “fail” and have some hope at a rational, cogent argument – but for now we get posts like yours.

      RE: the VZW/Skype hookup; Gosh! I love competition. The iPhone has been making the industry scramble for three great years. Citizens, whether you own one or not, you are benefiting greatly from its presence.

      Derek Kerton

      PS: I use a WinMo phone. That is worthy of some derision. But if you’re going to try to make fun of me for foolish loyalty to a shiny brand, you’ll need to make it WinMo with an SPB UI.