Skype and that river

Da Nile is flowing through Bonn and the global T-Mobile headquarters. The German carrier is blocking Skype iPhone use on both its network and also its Wi-Fi hotspots. Skype’s general counsel responded

I find it quite telling that Deutsche Telekom would be so bold as to announce this arbitrary blocking of Skype. They pretend that their action has to do with technical concerns: this is baseless. Skype works perfectly well on iPhone, as hundreds of thousands of people globally can already readily attest. But their announcement also demonstrates that some operators do not fear the customer or regulatory consequences of their bad behaviour. It’s worth noting that even if German consumers wanted to change mobile providers, they could not: like Deutsche Telekom, every other German mobile operator contractually forbids consumers from using VoIP applications. (this is the same in France, actually).

…

Yet, no one can do anything about it: German or EU regulation does not forbid such blatantly unfair practices, and the new EU legislation for telecoms which the European Parliament and European governments are supposed to adopt later this month will not help either, it seems from the latest texts being considered in Brussels: it may even make things worse, by legitimizing restrictions put in place by operators to users’ Internet access, as long as they inform consumers.

AT&T is more open in its criticism as told to USA Today:

Jim Cicconi, AT&T's top public policy executive, says AT&T has "every right" not to promote the services of a wireless rival.

"We absolutely expect our vendors" — Apple, in this case — "not to facilitate the services of our competitors," he says.

"Skype is a competitor, just like Verizon (VZ) or Sprint (S) or T-Mobile," he says, adding, Skype "has no obligation to market AT&T services. Why should the reverse be true?"

Now (self-styled) consumer activists are asking regulators to intervene (in a longstanding regulatory case) on Skype’s behalf and end VoIP blocking once and for all:

"This issue is not new -- it is simply unresolved. Wise voices at the FCC have long said that the Internet Policy Statement applies to wireless," said Ben Scott, policy director of Free Press. "As more and more consumers begin to access the Internet wirelessly, it is critical that the FCC clarifies that online consumer protections that prohibit blocking are the same regardless of how we access the Web."

A similar argument came Monday from Voice on the Net (VON) — a DC-based VoIP lobbying group featuring Google, Microsoft and Intel — which has asked the EU to overturn the T-Mobile decision.

Again, this is an unwinnable fight. I’m guessing that the carriers figure they can get a 0.5-2 years by stalling in the US, and longer in Europe where their status as former government departments (PTTs) will allow them to exploit nationalism against the Luxembourg-based Skype (owned by the big bad American eBay).

Google is in a particularly odd position. It is pro-VoIP, pro-Skype and wildly in favor of “Net Neutrality” in addition to being a co-sponsor of the VON Coalition. However, for its Android-based G1 phone is kowtowing to T-Mobile’s restrictions in the US.

Thus far, Skype has only released the Java-based client “Skype Lite” for various top five phone vendors and specifically for Android. The “Lite” means VoIP-free: it makes calls over the voice network, thus mollifying carriers.

At some point, there will be a real Skype for Android phones. So then what will Google do? Block it? Have the VON Coalition attack T-Mobile while Google knifes Skype from the Android Market?

Skype is the new Carterfone

I’ve been wanting to write all week about Skype’s new iPhone client, which has been long desired, recently rumored, and finally released Tuesday at CTIA to considerable accolade.

Given a chance to mull it over, I believe this will prove to be the watershed in the end of operator control of mobile wireless networks.

A key issue when the iPhone was announced two years ago was AT&T’s ban on VOIP and other IP-based technologies that would use its data network while rendering its voice network obsolete. Apple was put in the odd position of promoting iChat as its ubiquitous peer to peer messenger and videoconference system, but blocked from offering it from day one (and even with the iPhone 3G) by operator restrictions.

Since 2007, Skype has been trying to win a Carterfone-type ruling from the FCC to require open device interconnection over mobile networks. The US operators — particularly Verizon and SBCAT&T — have been fighting it bitterly. There’s no resolution yet, although the carriers seem likely to lose with Democrats in the White House for the next 4+ years.

It’s not just a US issue. Major European cellphone operators like T-Mobile, Orange (France Telecom) and Vodafone kept searching for that river in Egypt in hopes that mobile VoIP will just go away.

However, with the new iPhone app Skype has brilliantly finessed the issue by making it (perhaps temporarily) Wi-Fi only. There’s no legal way for AT&T or Apple to block it — with serious antitrust implications if they try — and the full Skype functionality is available at home, at work and at many public hotspots (including a lot of medium-sized airports).

So if I can’t Skype over AT&T, I’ll Skype over Wi-Fi. Skype (and competing VoIP) clients will be Wi-Fi enabled on all the major smartphone platforms. Skype is already on Windows Mobile, and Skype for BlackBerry is due in May, and presumably Symbian and Android are not far behind. (I'm not sure how they plan to make money beyond fairly weak freemium offerings, but that’s another story).

If the 3G network doesn’t actually provide Skype service, the cost sensitive and technologically savvy (like college students) will just use a phone (or PDA like an iPod Touch) without a data plan and do most of their calling at their local Panera. I also think this will (perversely) further commoditize Wi-Fi hotspots, because coffee shops (etc.) that offer free Wi-Fi will steal traffic from those that do not until free becomes the norm (except maybe in dominant airports where there is little choice.)

Together, this will cannibalize the operator revenue growth the way that mobile has done to landlines and IPTV is starting to do to cable and dish. Skype (with cash from parent eBay) and its knock-offs will put a cap on what people will pay for semi-reliable voice service

This is the beginning of the end of 30 years of mobile phone revenue growth. On the regulatory front, it’s time to tip the king as the outcome is decided. Will the carriers admit that they can’t win and quietly back down, or will they fight to the end?

While Verizon, AT&T and T-Mobile may dig in their heels, this could prove an opportunity for Sprint to embrace the inevitable future as a market opportunity. Perhaps one of Sprint’s smartphones (for now limited to the Pre or a BlackBerry) will come bundled with a VoIP client if (iPhone-style) there’s a mandatory data plan.

Once the leader in shifting mobile phone pricing, Sprint was strangely the laggard when carriers finally offered (overpriced) unlimited use plans. Its current CEO, Dan Hesse, has severe financial pressures but also fewer ties to the old way of doing things than his three major US competitors.

This is one of the few chances Sprint has to control its own destiny. On the other hand — as I teach my strategy students — in a price war, everybody loses, it’s just that the low cost leader loses a lot less.

Web 2.0: most likely to crater

A regular topic on this blog is the problem of Web 2.0 business models, and in particular that these emperors have no clothes.

To this same end, on Friday CNET published a list of 11 Web 2.0 companies most likely to run out of money and die:

• Twitter
• Meebo
• TripIt
• Zillow
• Pandora
• Skype
• Ask
• DailyMotion
• Netvibes
• MySpace

Some of these make sense, as with Pandora, which has one of the top iPhone apps but has publicly said that (due to onerous record label royalties) that its end is near.

Some of the others I don’t get. Why list MySpace (with a rich sugar daddy) but not Facebook (with neither a sugar daddy nor a business model)? Skype and Ask may have troubles, but they each have a sugar daddy.

As with any other prediction, it will be a year or two before we see how prescient columnist Rafe Needleman was.

Skype spyware

Some clever Canadian C.S. researchers noticed that the version of Skype recommended for use in China is actually spyware for the Chinese government. If certain words are typed into the IM client, an encrypted message is sent to a server, which (due to lousy security) displays logs of all the messages intercepted.

It’s not clear why the story broke this week, given that the researchers posted it back in June 2006, and was mentioned in the Financial Times back then. The NY Times version is what is stirring up this week’s attention.

However, the NYT discussion of the political angles obscures the context of the joint venture between Skype (owned by eBay) and Chinese online service provider TOM. One of the researchers involved explains what’s up

What is TOM-Skype and what is the difference between it and Skype?

If you go to www.skype.com from China, you are redirected to skype.tom.com — so that’s version most Chinese people will use.

In 2004 Skype developed a relationship with TOM Online, a leading wireless provider in China, and announced a joint venture in 2005. Skype and TOM Online produced a special version of the Skype software, known as TOM-Skype, for use in China.

China is not the only government that wants to monitor communications within its borders, but it appears to be the only one that appears to have won a custom version of Skype that includes a ContentFilter.exe spyware program.

When asked about the spyware, eBay seemed more concerned about the ability of the CS researchers to see the spyware logs than explaining why it is spying on its customers.

iPhone installed base up 17% in 72 hours

To the installed base of 6 million iPhone 2G phones, in the past three days Apple sold 1 million of its new iPhone 3G. An unknown number of 2G owners have also upgraded to the iPhone 2.0 software, including at least two of my loyal blog readers.

Of course, the big news is that AT&T and Apple created a new activation process that failed miserably under the flood of new users and brought a flurry of bad publicity. (Of course, this utterly predictable problem happened because they changed the activation process to make sure all the iPhones got activated). It’s TBD whether this bad experience will have any lasting impact, although those who waited in line over the weekend were clearly the hard-core true believers.

Between the new and existing iPhone owners, Apple this morning also claimed 10 million downloads of native iPhone applications from the App Store since it was launched Thursday. Since the SDK was released in March, Apple’s iPhone ISVs have created many compelling applications (although not much for business). They don’t specify, but most of the publicity is on the free applications which I suspect account for 90+% of the 10 million downloads.

What I’m finding interesting is what’s not there. Some 17 months ago, I proposed the iChat test. iChat is still not on the iPhone but a (text only) AIM is. (AOL also announced AOL Radio for the iPhone). I’m guessing AOL has noticed that AIM is no longer cool, and thus having the first native IM client on the iPhone might help it with the younger demographic.

But where is the VoIP service via iChat or Skype? Will these applications be funded (authorized) by Apple? It’s not as though there’s a lack of demand or interest. (Some would attribute it to Steve Jobs’ opposition).

No one knows if the gPhone will support VOIP, and it’s safe to assume that the carrier-led LiMo will not. So perhaps Apple has months to worry about this because competing platforms are in no hurry either.

What, me worry?

Two weeks ago, I saw it as a disadvantage that Skype went offline in an unprecedented service failure. Shows how little I know.

Globetrotting Business Week correspondent Stephen Baker has set me straight. Last week he got around to writing a magazine article. (Shows how 20th century I am — I thought that’s what a senior writer for a news magazine normally did.)

But in his article from this week’s dead tree edition, Baker proclaims:

Say you have a crucial conference call in an hour and your phone goes dead. What do you do? A generation ago, this wasn't much of an issue, at least in the U.S. Phones in the days of the Bell monopoly were engineered to be “mission critical.” You picked up one of those heavy receivers back then, and the dial tone was as prompt and reliable as water from the tap. It worked.

Yet these days, even as we pack global multimedia in our pockets, phone service sometimes seems to march backward. …

Are communications getting worse? Not by a long shot. We’re surrounded by miraculous machines and services, most of them calibrated to a level software engineers have long called “good enough.” In the right circumstances, good enough is great for the entire economy. A marketplace that’s not hung up on fail-safe standards is open to risk and innovation, and drives down prices. Ever since the dawn of the PC — the archetype for a good-enough machine — inventors have been freer than ever to piece together and launch their visions. Some are brilliant, some are half-baked, many are a blend of the two. A precious few are up and running 99.999% of the time — Bell's old standard. But they cost far less to build.

Clearly I’ve been worrying about the wrong things all these months, like telecommunications services that are reliable enough for real business use. I guess I should have adopted the adolescent motto: “What, me worry?”

Experimentation is good. Unreliability of mission-critical business infrastructure — whether a PC, cellphone or VoIP phone — is not.

The other alternative is more interesting. Linux used to be much less reliable than Unix — a decade ago, no one would consider using Linux for mission critical applications. That’s no longer true: open source users now enjoy the benefits of the millions that IBM has poured into Linux since 1999 — in addition to the the contributions of Intel and HP and others funded by/through OSDL/LF.

Not controlling the end-to-end Internet infrastructure makes it harder to deliver voice-quality signals across a network entirely controlled by Bellheads. Still, if the Internet was designed to reliably transmit packets in the event of nuclear war, transmitting a simple voice call should be a solvable problem. Although the solution might come long after Business Week has stopped killing trees for Messr. Baker’s observations.

Technorati Tags: commoditization, Skype, VoIP

Disadvantages of commodity telephony

I love Skype. I mean free calls, no up front cost, no obligation? What’s not to like? Skype is the only way I make calls to Europe and make 3-way calls, although I use a regular (phone number-based) VoIP service for calls in “North America.” I even sometimes help support their “freemium” business model.

But today Skype failed me when I most needed it — when I was trying to finalize decisions for the conference minitrack (on IT standards) that I’ve been running for the past 4 years. I needed to confer with my two co-chairs who are in Europe, but all I got was a Skype client that wouldn’t work, and even a website that wouldn’t come up.

Finally, Skype admitted to their problems on their home page:

UPDATED 16 August, 2007 14:02 GMT: Some of you may be having problems logging in to Skype. Our engineering team has determined that it’s a software issue. We expect this to be resolved within 12 to 24 hours. Meanwhile, you can simply leave your Skype client running and as soon as the issue is resolved, you will be logged in. We apologize for the inconvenience.

Reading between the lines, they did a planned maintenance on Wednesday, suggesting that they installed new software yesterday that doesn’t work. I held off posting this waiting for a resolution, but 13 hours after the original posting they are still making excuses

Apologies for the delay, but we can now update you on the Skype sign-on issue. … This problem occurred because of a deficiency in an algorithm within Skype networking software. This controls the interaction between the user’s own Skype client and the rest of the Skype network.

Rest assured that everyone at Skype is working around the clock — from Tallinn to Luxembourg to San Jose — to resume normal service as quickly as possible.

and even more excuses

Everyone at Skype continues to work hard at resolving the current software issue. We are making good progress. We feel that we are on the right track to bring back services to normal.

We thank you for your continued support and are thinking of you every step of the way.

(Updated at 2:15am GMT)

Once upon a time, people in the U.S. paid for telephone service which was probably the most reliable and dependable function of our entire industrial economy. If the power went out, if there was an earthquake or blizzard, the phones would still work. About the only thing it couldn’t handle was the annual flurry of long-distance calls on Mother’s Day.

The disadvantage was that long-distance calls were way overpriced, until 1969 and 1977 when MCI found a way to arbitrage the cross-subsidy to create America’s fastest growing communications company. After that, a railroad subsidiary decided to string fiber optic lines along its right-of-way and SPrint bragged that you could hear a “pin drop.”

Now VoIP is threatening the Baby Bells, because people would rather have unreliable and low-quality service that’s free, than expensive reliable service. Will there be competition that makes “free” service better? Or are we doomed to have mediocre quality in the name of commoditization?

Technorati Tags: commoditization, Skype, VoIP

Skype, the GPL scofflaw

For once, a story about Skype that has nothing to do with its business model, its impact on the telecom industry, pushback by powerful incumbents, or anything else having to with its real business.

This week, the blogs and Linux sites are abuzz because Skype supposedly lost a court case for violating the terms of the GPL (v2). The Inquirer (of Britain) started on Wednesday, then PC World on Thursday, then Linux Devices on Friday. Linux Devices notes that all claims about the case trace to an article in one German magazine, Golem, and can’t be independently verified, and it seems to be the only story with significant original reporting.

The purported case revolves not around Skype’s software, but its distribution of a Linux-based Wi-Fi phone, SMC’s WSKP100; a separate action is also said to be pending against SMC Networks, although Linux Devices could not verify that. This is a typical embedded GPL dispute, ala TiVo or anything else.

If we assume that everything reported is true, there were several interesting things about the case. First, it was about a marginal violation of how the code was distributed, and not something about the core compulsory sharing (some call “viral”) proposition of the GPL: once you put your code with my code, your code has to adhere to my rules. It doesn’t seem like Skype would ever be a good test case, since they already provide their source code under at least some conditions.

Second, that the case was brought by a German gadfly, GPL-Violations.org, and not the Free Software Foundation. Finally, it adds to the many cases we have in Europe, but AFAIK we still don’t have a relevant legal precedent in the U.S., or, even more importantly, in China.

So are there no GPL zealots in the US (unlikely) or China (probably not worth dying for)? Are there no comparable violations in the US (also unlikely) or China (darn near impossible)? Or are the relevant courts not as interested as German courts in enforcing compulsory sharing?

Technorati Tags: compulsory sharing, GPL, open source licenses, Skype

Way to make money off of “freemium”

In my e-mailbox Tuesday night was an e-mail from GrandCentral Communications founders Craig Walker and Vincent Paquet, announcing they had sold their 1½ year-old startup to Google. As Doug told me Friday (during our iPhone outing), the acquisition has been long-rumored.

GrandCentral got the cool name from its VC, Halsey Minor, who had it left over from an earlier venture. You may not know Minor but you probably know his most famous startup, CNet, which once brought him a paper net worth approaching $1 billion. Minor put an estimated $4m into the startup, while the cofounders had money from their turnaround and sale of Dialpad to Yahoo. Although Minor, Walker, Paquet & Co. did not specify their haul from this week’s deal, some speculate they grossed $50 million.

I know Vince casually as our kids go to the same elementary school and we’re working together (indirectly) as Lego Robotics coaches. This is one of the cool sort of social overlaps that I thought would happen when I moved to Silicon Valley, but (frankly) is more the norm for those living in the Peninsula (esp. Palo Alto) than us peons living in (relatively) affordable housing in the South Bay (i.e. South San José).

As with a lot of Web 2.0 companies, I grok the value creation part of GrandCentral’s business model but not the value capture. Still in beta, GrandCentral gives me an incoming phone number (free) that forwards to my other phone numbers (free) and the ability to ring different numbers for calls for different callers (free), as well as voicemail (free) that sends me e-mail when I have a new message (free). This will come in handy, as I want to forward some calls to my cell phone but not others, as well as be able to find out about voicemail when I’m away from the office.

Did I mention the service is free? The value to me as a customer is pretty easy to get. So where’s the value capture? A couple of weeks ago, Vince said that once the free service was done, they had plans to dangle lots of cool features available only in the premium service. He called this the “freemium” business model, a term I’d never heard before. Google’ing around, I was surprised that “freemium” already has a Wikipedia entry (but not surprised to see the quality of the entry). My old friend Tom Evslin apparently used it more than a year ago, at which point it had already caromed around the blogosphere.

To me, Skype is the quintessential freemium service. I’ve used the software (free) to make PC-to-PC calls (free) and even WiFi handset-to-PC calls (free). And last December, when my flight from Eindhoven to London got fogged out, I spent €5.00 to be able to SkypeOut to fix my travel arrangements (and I think I’ve recharged it once). So for several years of free calls I’ve paid for a little bit of local PSTN termination at rates generally cheaper than any non-VoIP alternative.

We’ll never know about how GrandCentral’s freemium business model would have worked. Instead, the GrandCentral revenues, cost and acquisition price will non-material figures (i.e. trade secrets) lost in the wads of cash being gathered and handed out through Google’s ever-expanding tenacles.

GrandCentral (like blogspot) makes Google’s properties more sticky — exactly as with Yahoo and Microsoft’s acquisitions (e.g. eBay buying Skype). It seems that the aggregation value (economies of scope) to Google are more compelling for its mobile phone portal than its PC-based portal. Others speculate that Google will use the GrandCentral infrastructure to more directly challenge Skype.

But I worry about how GrandCentral contains even more private information about social networks that Google can mine: if I say “x family calls always get forwarded to my cell” but “y friends get voicemail if I’m not at my desk,” that is not just linkages between individuals but also very useful tie strength. What will Google do with this information? The GrandCentral and Google privacy policy today seem rather benign — they only want to target ads. I can deal with the prospect of getting more Hawai‘i ads if my wife (or friends) click on Hawai‘i ads. Some of the other prospects I find more unsettling.

Technorati Tags: business models, Google, freemium, Skype, VoIP

Baby Bells come out blasting

Back in February, Skype asked the FCC to open up cellular networks. While some called this a “Cartefone for cellphones,” Skype’s arguments were less about wireline voice and more about the FCC’s 2005 wireline datacomm (i.e. wired broadband) precedent.

If the FCC backed Skype, it would mean that VoIP software, hardware and service providers could bypass carriers’ voice services, a spectre that global carriers just hope will go away. Not surprisingly, the two largest US cellphone operators and their trade association are opposed, and on Monday they filed additional objections.

Over the past week, the CTIA has posted a flurry of reports and memos against the Skype petition at their website. There are objections from the CTIA, their high-profile lobbying firm, Verizon executives, and economic consultants hired by CTIA and Verizon. I suspect the two reports from economic consultants alone cost over $100K. Skype is unlikely to get any manufacturers to openly oppose the big carriers, so they are clearly outgunned unless they can get some nonprofits to take their side.

Interestingly, some of the objections to Skype’s petition are being made on antitrust grounds. But strangely silent in the filings is the company that now calls itself AT&T — really Southwestern Bell and all the parts of old Ma Bell that SBC Ed Whitacre was able to stitch together before he acquiring the AT&T name. As SBC got bigger, the acquisitions got more controversial, particularly when SBC gobbled up BellSouth (and with it the other 40% of Cingular).

The Reagan Administration thought it was a good idea to break up Ma Bell, but now SBC and Verizon (NY Bell) have built most of it back up into a national telecom duopoly. Maybe a company called “AT&T” doesn’t want to be mentioning “antitrust” in front of the Feds right now for fear of waking the ghost of William Baxter (1929-1998).

Technorati Tags: Internet, mobile phones, Skype, VoIP

Carterfone for Cellphones

Sorry I'm behind on the news, but I’m working on two papers to send off to conferences this week. Last week brought a potentially huge development in the communications industry, one that largely went unnoticed. (No, I don’t mean the XM-Sirius merger).

On Tuesday, Skype asked the FCC to prevent cell phone carriers from blocking its VoIP service. Compared to the satellite radio orgy, it barely brought a ripple of coverage. But it did bring the predictable cellphone carriers’ preventive blitz.

Some have likened Skype’s petition to the Carterfone decision, which allowed third party answering machines, fax machines and modems — but most of all allowed Radio Shack to sell everyone a $10 handset. I think it’s more similar to the Execunet decision, in that it allows others to provide services over the telco lines. For those who are not rabid telecom historians (like you know who), below are the key decisions increasing AT&T’s competition, which I compiled for my planned mobile phone dissertation from two excellent books (by Brooke Tunstall and Peter Temin) on the end of the old Ma Bell:

Decision	Title	Applicant	Decided by	Competition Authorized
Jan. 1956	Final Judgment (1956 Consent Decree)		AT&T, Justice Department	AT&T limited to common carrier services and equipment sales to own subsidiaries
July 1959	Above 890 Mc.	Motorola	FCC	Private lines operated by users
June 1968	Carterfone	Carter Electronics	FCC	Third party terminal equipment
Aug. 1969	MCI	MCI	FCC	Private lines for resale
June 1971	Specialized Common Carriers	(none)	FCC	Common carriers providing private line service
July 1977	Execunet	MCI	Circuit Court	Switched long distance service

Beyond the effect on the 2½ remaining Baby Bells, Skype’s petition will have implications far beyond the US. The same action could be brought in the UK and Japan, the two large countries whose telecommunications liberalization during the 1970s and 1980s most closely resembled the US. It’s also possible that one of the smaller markets — Australia, Canada or one of the Scandinavian countries — might take the lead.

This may get wrapped in the larger US debate over “net neutrality,” which has elicited strong pro and con arguments — as with many policy debates, a combination of philosophical and self-interested arguments. Some carriers are hoping this will go away, but that seems merely a bad case of denial.

Compared to fixed line “net neutrality,” there are important practical and philosophical questions raised by mobile VoIP. At least in the US, the landline voice and IP services are separate (usually separate carriers), so voice traffic over the IP network benefits the IP carrier — and (at least with cable modems or fixed wireless) the IP carrier has an incentive to both open the network and support the VoIP effort. On mobile phones, the same carrier controls both the IP network and the voice business that would be cannibalized by it. Smaller carriers (who have more to gain) are embracing the possibilities, but the major carriers fear the downside.

The old Baby Bells were among the nastiest scorched earth lobbyists around, and today the two largest U.S. cellphone carriers are Baby Bells. But eventually MCI won and AT&T lost. The idea that carriers can block traffic because it competes with them seems like an unwinnable battle. Who knows, since the Cato Institute has opposed VoIP regulation, maybe they’ll back Skype.

Photo credit: BradDye.com

Technorati Tags: Internet, mobile phones, Skype, VoIP