TCS Daily

Tune In, Turn On, Skype Out

By Kevin Werbach - July 1, 2004 12:00 AM

Somewhere between Sweden, Estonia, and London, a small band of software developers is fomenting a revolution. Their product, Skype, has been downloaded fifteen million times worldwide in less than a year, without any marketing budget. It is provoking consternation among government officials. And it has large incumbents worried.

If that sounds like the profile of peer-to-peer (p2p) file-sharing programs like Napster and Kazaa, it should. Not only is Skype a product of the same team that launched Kazaa, the most popular p2p file-sharing application, Skype is a p2p tool itself. Only, with a twist. Instead of sharing files, Skype shares voices. It is a voice over IP application. And in mid-June, with no fanfare, it blew a hole in the Federal Communications Commission's halting efforts to micro-manage the transition to a VOIP world.

Skype's great step forward is called SkypeOut. A Skype user can now call any telephone subscriber in more than a hundred countries. Fees throughout the US and most of Europe and Asia are .012 Euros per minute, or about 1.5 cents. And Skype is global. There is no difference between domestic and international service: a call to New York from Japan is the same price as one from Philadelphia. Calls to other Skype users still cost exactly zero.

SkypeOut's low rates for global dialing are a boon for users. SkypeOut also shows how quickly a company can innovate when it leverages the open Internet data platform. There is perhaps no clearer proof that voice telephony, which generates hundreds of billions of dollars a year for carriers, will eventually be seen as a feature of the Internet, rather than the reverse.

Yet, there's a catch. SkypeOut creates new fissures in the FCC's shaky VOIP regulatory edifice.

Until now, Skype was a private service. A Skype user could only call another Skype user. Skype also requires a user to plug a microphone and headset into a PC, rather than calling through an ordinary telephone. These aspects, combined with the fact that Skype was free, appeared to bring it squarely within the confines of the FCC's Free World Dialup order. In that decision, the Commission held that a free, private, software-based VOIP service should be treated as an unregulated information service. Three months later, it reached the opposite conclusion with regard to AT&T's VOIP backbone transport offering, holding it subject to legacy access charges as a form of regulated telecommunications.

The FCC, in essence, set up two goalposts. On one end, full regulation, and on the other, complete freedom. Unfortunately, the playing field in the middle has no yard markers. The FCC's distinctions are of little value when a Hail Mary like SkypeOut can take the form of a transparent software update. Skype is also partnering with handset vendors to embed its software, freeing the service from dependence on a PC. In other words, it no longer fits neatly into the FCC's framework.

FCC Chairman Michael Powell recognizes the challenge Skype and similar services represent. Speaking to a conference at UC San Diego in January, he acknowledged that the regulatory approach the FCC had followed for seventy years was dead. Finished. Kaput. Or, in his words, "I knew it was over when I downloaded Skype. When the inventors of Kazaa are distributing for free a little program that you can use to talk to anybody else, and the quality is fantastic, and it's free - it's over. The world will change now inevitably." Powell wasn't just talking about the free, PC-based Skype. He clearly understood that it was a matter of time before Skype bridged the gap to the more than one billion existing phone users. And he understood that it was as much an opportunity as a threat to the FCC's underlying public policy goals.

In such an environment, the FCC should devote itself to facilitating the transition from circuit to packet networks for voice. If it tries to fight Skype, it will face the same war of attrition that has bedeviled the music industry. That would benefit no one, least of all the American people.

As voice telephony becomes a software application, its evolution will accelerate. The bridge from curiosity to mainstream may be short. Regulators should pave the way, or they will find themselves left behind.


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