Skype is killing long distance, one minute at a time

22 Comments

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 (s MSFT) 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 (s 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, (s AAPL) 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!

22 Comments

John

A few years ago the only problem was that not everyone had a good webcam, or chat headset, and broadband adoption in some countries was still quite low. The voice quality on a Skype call to someone on dialup, or on a capped dsl plan when they hit their cap and were speed limited was terrible.
My big change came with cable modem Internet and a 12Mb/sec connection.
I’ve dropped the phone line and use a VoIP provider, soft phones on my computers, a client on my iPhone, and a gateway adapter for he last physical phone in the house. Skype is just the phone app I use now for international, and you get video! My son has a friend that moved to Holland last year, and at age 8 is still keeping in touch with skype. They had a Skype play-date just a couple of days ago, they spent 2 hrs building Lego together, half a world apart.

Chelle

I knew that this would be happening; why on Earth would you pay crazy high prices when you can easily talk for free?

It’s almost like how there are apps that offer free texting. The only thing with those apps are you are given a separate number, which is why they are less popular than something as easy as Skype to use.

VoIP DIY

It amazes me as to how often I hear people refer to Skype phone calling as free….. it’s not. It’s relatively cheap, compared to the TelCo’s, but it’s not free…. to landlines or mobile PSTN numbers.

It is free PC-to-PC, but not PC-to-PSTN landline or mobile. And, there are dozens of other free PC-PC calling services out there, just like Skype… they just haven’t received the marketing (and viral) promotions that Skype (and Vonage) have received.

I rarely hear anyone mention Google Voice, previously known as GrandCentral, (or even Google Talk) and GMail’s Voice and Video Chat services that not only provide free PC-PC calling, but free PC-to-PSTN landline and mobile calling (in USA/Canada). And, for no money (not prepaid, or post-paid). And, the quality is reasonably good, considering the price.

I applaud the fact that Skype (and Vonage) is getting the lions share of press for taking on the TelCo’s and giving the masses viable low-cost long distance calling options. I’ve been a VoIP advocate for the past 10 years trying to spread the word that there are better options to the greedy incumbent Telco monopolies… and now, it is really catching on, thanks to Skype, Google, and the numerous other VoIP providers popping up around the world.

All that said, the incumbent TelCo’s and Cable operators will most likely always be the big winners. Why? Because they control the pipe’s we have to use to access the Internet. And, if they lose on phone call fees…. then they just charge us more for Internet access, which we need to make those Skype, Google, Vonage, and other VoIP calls…

mrdave

And don’t forget VOIP services like Nettalk that are unlimited US & Canada for 30 bucks a year!!!

techuntangled

Carriers have been charging big $$ for cross-border long distance calls… in comes skype with free skype-to-skype calls and inexpensive skype-to-phone, and over the last decade have disrupted the long distance calling market. Kudos to Skype (and even to other calling card providers) for bringing more reasonable rates and for taking away the oligopolistic control away from the carriers.

Perhaps one day, Skype can help disrupt the high international roaming fees as well…

Jigar Budhdev

Thanks for being our patron. We appreciate your feedback. Apps like ours are a crucial tool for users who have a constant need to communicate worldwide and in my view, the telcos have lost the plot and it will be nothing short of a miracle if they manage to come back in the game :) Waiting too see how Free.fr

Angry Voter

Imagine a world where all the roads were privately owned.

That’s the sort of world where a bunch of rich coke heads can sit around and agree that a fee to pay your fee is a reasonable idea.

They are parasites and deserve to starve.

Md Imran

yeah
its true
i use skype
but this service is very nice
technolynch.blogspot.com

Chris@Indiald

Guys,

International long distance is still a viable business and growth area for some companies. Calling to India in particular is still a very vibrant business. Yes margins are gone, but that’s a good thing because it enables NRIs to keep in touch with everyone back home.

Indians at home and abroad are a mobile society. Over 80% of international calls to India go to a mobile phone. Airtel just started rolling out 3G this year and is seeing a slow uptake on their data plans. Even when mobile data takes off, it will be years before you get to speeds that can support decent quality calling over data to an Indian mobile.

You are going to see innovation on the originating end of the call outpace the terminating end for at least another 3 to 5 years. The cost in the business is almost exclusively on the terminating end. As long as you need to deliver a call over voice to the end user, you will have an international long distance business.

Today, a billion minutes a month go from the US to India. I would expect that number to increase over the next few years as terminating costs fall. Ultimately data will replace voice, but that day is still a long ways off.

Vish

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.

The_Patriot

“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.

Tim Rosa

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

VoIP DIY

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.

Jeff - VoIP DIY

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.

Milton Jankin

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.

Benedict Evans

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.

don

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

Marat

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

Kevin

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?

Tor Valåmo

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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