An investigation into Skype Technologies S.A.

Table of Contents

Student Declaration

Permission and confidentiality form

Table of Contents

Table of Abbreviations

Table of Exhibits

Acknowledgements

Chapter I: Introduction 1.1 Skype – nature of study
1.2 Hypothesis
1.3 Aims and Objectives
1.4 Limitations to the study

Chapter II: Literature Review
2.1 VoIP – the technology
2.2 The future of VoIP
2.3 Skype – the technology
2.4 Characteristics of Skype’s technology
2.5 The future of Skype

Chapter III: Methodology
3.1 Case Study Approach
3.2 Key Concepts
3.2.1 Validity and Reliability
3.2.2 Triangulation
3.2.3 Generalisability
3.3 Research Families/ Research Techniques
3.3.1 Primary data
3.3.1.1 Interviews
3.3.1.2 Questionnaires
3.3.2 Secondary data
3.4 Analytical tools

Chapter IV: Findings
4.1 Structure of the findings and the conclusion
4.2 Evaluation of the primary data sources
4.2.1 Questionnaire directed to private persons
4.2.2 Questionnaire directed to IT experts
4.2.3 Interviews with IT professionals
4.3 Tariff comparison of SkypeOut v. German Telekom
4.4 Skype’s Vision, Mission and competitive strategies
4.5 Analysis of the future market opportunities of Skype
4.5.1 SWOT
4.5.1.1 Strengths
4.5.1.2 Weaknesses
4.5.1.3 Opportunities
4.5.1.4 Threats
4.5.2 The Product-Market Growth Matrix by Igor Ansoff
4.5.2.1 Market Penetration
4.5.2.2 Product Development

Chapter V: Conclusion
5.1 VoIP’s future in Germany
5.2 Skype’s future in Germany
5.3. Final conclusion

Chapter VI: Recommendations & further investigation
6.1. Recommendations to Skype
6.2. Further investigation

Chapter VIII: Appendix
7.1 Bibliography
7.2 Ethical issues
7.3 Form: Questionnaire directed to private people
7.4 Form: Questionnaire directed to VoIP specialists
7.5 Framework of the interviews
7.6 Abbreviations, technical terms and definitions
7.7 Skype - history & facts
7.8 Declining German Telekom

Student Declaration

BA (HONS) management, business and administration

I hereby declare that:

This project is my own work. I have acknowledged material from the work of other people and I have clearly marked and given references to all quotations; and I permit the lodging of a copy of this project to the College Library, which shall be made available for the academic use of staff and students.

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Permission and confidentiality form

Is permission required from any relevant authority for the research to be carried out? Please tick the appropriate box.

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If yes please give the appropriate details and attach documentation which con­firms you have permission.

It is normally expected that a copy of the completed project will be held in the Library for public reference. If you feel there may be issues of confidentiality in your project these should be noted in your research methods assignment (see component four of the task). You need to discuss these with your research meth­ods and project supervisor tutor when you begin you project and before you sign this form. Please give details.

Signed

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Table of Abbreviations

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Table of Exhibits

Table Title Page

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Acknowledgements

The world of telecommunications and VoIP is awfully fast-moving and innovations are made every day. Skype launches new products continuously. The author collected information until the 15th of November 2006. Hence, information given in this project is correct until the 15th of November and predictions are made ac­cording to this data.

The author is no studied IT expert. She presents technical information about Skype’s and VoIP to the best of her knowledge and she always backed up infor­mation with IT specialists. In the following, the words “VoIP”, “Voice over IP”, “IP Telephony” and “Voice over Internet Protocol” do all stand for making calls over the Internet. They can be used interchangeable.

The investigator does hereby express her thanks to all those people who pro­vided access to information. Especially, she would like to thank respondents of the questionnaires and the interviews.

Chapter I: Introduction

1.1. Skype – nature of study

Skype. The whole world can talk for free. This is Skype’s slogan. “Voice over Internet Protocol is predicted to be the next revolution in telecommunications.” (BBC News, 2005)

Skype is quite a new software enabling free calls over the Internet (Shaver, 2006). Users save money, because Skype charges nothing for telephone calls between Skype users. Only calling a land­line or a mobile phone (SkypeOut) and receiving incoming calls from a con­ventional phone or mobile phone (SkypeIn) are charged (Skype Fast Facts, 2005). This idea is supposed to revolu­tionize the whole phone market (Powell, 2005).

IP Telephony is getting more and more lucrative for private users, as only a standard PC with soundcard, headset and Internet access is needed. Most households have these prerequisites. Private users state they switched in order to save costs (VOIP IN­FORMATION, 2005c). Due to the fact that Skype users do not have to pay monthly charges or telephone rates, they are only charged for the Internet connection. The best is having a flatrate with a fixed monthly charge (VOIP INFORMATION, 2005d).

In September 2003, Skype Technologies SA was founded by Niklas Zennström, co-founder and CEO, and Janus Friis, SVP, Strategy and co-founder. Its head­quarters are in Luxembourg (Shaver, 2006). However eBay acquired Skype in October 2005 and Skype became a 100% subsidiary of eBay, Skype’s brand and product act inde­pendently in the market (Skype, 2006a). In the second semester 2006, Skype regis­tered 113 million users worldwide and covers more than 7% of the global interna­tional long distance calls (Company Update, 2006). Every second, 6 new users register at Skype and between 6 to 8 million concur­rent Skype user are online. In Germany, 5 million users are registered (Analyst Day, 2006).

1.2. Hypothesis/ Research Question

Skype is the best-known VoIP provider (FAZ.NET, 2005). Although many people know VoIP and Skype, very few think about the impact of Skype on the conven­tional German phone market. According to a survey, carried out in early 2006 by the German foundation Stiftung Warentest, 10% of the German population use VoIP. This demonstrates a high demand for IP Telephony and a need to analyse the future of VoIP in general and of Skype in particular and the impact on the con­ventional German telephone market. Predictions state that in 10 years, every­body will use VoIP technologies, instead of landlines (FAZ.NET, 2005). On the other hand, Blau (2005) stated that “over the next five to 10 years, most phone customers will remain with their traditional telephone”. Due to this controversy, it is important to in­vestigate the future of VoIP in general and of Skype in particular and its economic impact on the German telecommunications market. The researcher developed the following hypothesis and research question:

VoIP is the future telecommunications media in Germany. What is Skype’s future in Germany and will it be able to impact the telecommunications market in Germany?

1.3. Aims and Objectives

The researcher’s overall goal was to analyse Skype’s future within Germany and to consider its impact. This overall goal has led to the following specific research objec­tives:

- Collate the technology behind VoIP and critically analyse its advantages.
- Evaluate the future of VoIP.
- Critically analyse Skype’s technology and its implied pros and cons.
- Explore Skype’s strategy.
- Predict Skype’s future in Germany.
- Discover Skype’s strengths, weaknesses, opportunities and threats.
- Evaluate German’s attitude towards Skype and its future.

1.4. Limitations to the study

The whole VoIP market is a very vast area and hence the depth and the breadth of the project is limited. The project focuses on the VoIP provider Skype and is directed to Germany. Analysing the whole world is no small-scale project.

Due to a limited word count, time and money, the topic could not be ex­tended. Although comparing Skype to other VoIP offering companies to con­clude on a future of all businesses were interesting, this definitely goes beyond the scope of this study.

Furthermore, the researcher will not concentrate on Skype’s marketing, as Skype uses word-of-mouth propaganda and advertises especially on the website of Ebay which is the parent company of Skype (Hills&Sale, 2004). Investigating Skype’s branding would be a very interesting topic, but as well as the previously indicated limitations to this study, this would go beyond the scope of this project.

Additionally, the author will not research the influence on the mobile sector or inter­actions of VoIP with the mobile phone industry. The investigator did not compare Skype’s fees to fees of call-by-call providers.

The world of VoIP and Skype is extremely fast-moving. The media is constantly pub­lishing new articles, figures or evaluations. The author stopped collecting data at November 15th. Articles which had been published after this data had not been taken into consideration and predictions are made on data pub­lished before November 15th.

The researcher contacted Skype to obtain information and financial figures which have not been published. However, Skype was not willing to cooperate.

Chapter II: Literature Review

2.1. VoIP – the technology

VoIP, short for Voice over Internet Protocol, refers “to the use of the Internet to trans­port voice to another caller“ (Field, 2006). The Internet is used for tele­phone conver­sations. Kelly (2005) recognised that “VoIP is not just another form of connectivity, (…) it enables the merging of voice and data applications”.

The first call made over the Internet from PC to PC was made in 1996, 10 years ago. In comparison to the conventional telephone POTS (Plain Old Telephone System) which runs over PSTN (Public Switched Telephone Network), VoIP runs packet switched. In case of POTS a fixed connection is switched, whereas VoIP transforms voice into digital data. Voice signals are divided into data packages. Over the net­work, these packages are sent from the caller to the recipient where digital data is converted into voice again (Kelly, 2005). All pack­ages travel on different ways to their destination (Engel, 2005). VoIP uses protocols and codecs to dispatch voice packets. Important for the author’s further investigation is the session protocol, which establishes and maintains the communication channel. SIP is the standard of most VoIP providers, except Skype. After initiating the connection, a transport protocol called RTP carries the voice packets from the caller to the called person (Field, 2006). Data is transmitted at lightning speed (Kelly, 2005). Field (2006) mentions three different devices in order to do VoIP:

- Softphones: Softphone refers to the use of a software which runs on a computer enabling VoIP. Softphones have a dialling pad on the screen. A headset is normally used for communication. Quality depends on three things: the net­work, the quality of the software and the type and quality of the PC. Skype is a Softphone provider. It is the easiest and cheapest way of doing VoIP.
- SIP phones: look like normal telephones but they contain VoIP circuitry.
- Telephone adapter: The traditional telephone is used, but a VoIP adapter is switched between the telephone and the Internet connection to convert the analog signals into digital data.

2.2. The future of VoIP

Mager (2004) recognised that the Internet changes the way people communi­cate. In future, VoIP will dominate the communications market. Increasing numbers of broad­band users drive VoIP forward, as a high bandwidth is according to Field (2006) the “holy grail of Internet communications and insufficient bandwidths affects VoIP communications by starving your codecs and impeding signalling protocol functions”. Due to the fact that only a PC with soundcard, headset and Internet access is required, VoIP is getting more and more lucrative and desirable for private users and bears lots of advantages (VOIP INFORMATION, 2005c). A voice adapter enables running telephone, fax and PC simultaneously (Thelwell, 2006). No monthly charges and phone rates are to be paid as everything works over one broadband connection. “One of the big benefits is that it makes the POTS-PSTN model, together with its compli­cated billing structure (…) just go away”. (Kelly, 2005) Customers with a flatrate can therefore make telephone calls for free, as Internet is charged at a lump sum (Engel, 2005). Thelwell (2006) recognised that “the only costs to the user is the broadband line rental and the initial cost of the headset (…) as long as both parties have the same VoIP provider”. Mackenzie (2005) stressed that a phone call can be carried on while both participants are exchanging information, s. a. dispatching files. This increases flexibility and mobility. Travelling with VoIP means availability under the same number worldwide. The big ad­vantage is that more features are enabled in VoIP and it is the first step to communi­cations conver­gence. (Ledford, 2006)

On the other hand, disadvantages are embedded in VoIP. Only a few providers enable emergency calls and the quality of voice depends on bandwidth and the soundcard’s quality of both PCs (Thelwell, 2006). Mager (2004) explained that several problems were linked to VoIP in general e.g. packet-loss, voice delay, voice distortion, echoes and jitter. Explanations are given in the appendix, pp.64.

2.3. Skype – the technology

Skype is a softphone provider. As mentioned above, softphones run on PCs leading to dependence on this media.

Skype differs from the rest of VoIP applications due to its peer-to-peer technol­ogy (p2p) and its proprietary protocol. Skype is a VoIP software enabling free calls between Skype users and favourable priced calls to landlines and mobile phones. It is the only VoIP provider which uses peer-to-peer technology what is characterised by the fact that the service is not administered by a central server (Thomann, 2006).

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Tehrani (2005) defined pure peer-to-peer technology (p2p) as the following:

A system in which two or more network nodes or processes can initiate communication with each other. p2p usually describes a network in which all nodes have the capability to share resources with other nodes so that a dedicated server can be implemented but is not required.

Exhibit 2a: Skype’s technology (Baset et al, 2004)

The call is directly routed between two computers. Voice is not transmitted by a central server, but Skype clients seek out and find other Skype users to establish a net­work. The only existing central server is the Skype login server which administrates users and passwords (Baset et al, 2004).

2.4. Characteristics, pros and cons of Skype’s technology

Due to its peer-to-peer technology, Skype does not connect to other VoIP pro­viders for free. On the one hand this seems to be a threat to Skype, but on the other hand p2p is said to “becoming the industry standard” (Grannell, 2006). Evalueserve (2005) even went one step further. They predicted that “VoIP players that do not use p2p (…) might not be able to survive (…) since p2p has an inherent cost advantage and is likely to retain a quality advantage as well”. As mentioned above, Skype is not working on a pure p2p basis, but on a combina­tion of p2p and a central server system. Garfinkel (2005) detected this contro­versy as well and stated that Skype does not work with a pure p2p technology, as SkypeIn and SkypeOut need a central server.

Having read articles about Skype’s security, the author has to admit that nobody, except of Skype, knows their protocols and hence their security status. “Skype refuses to explain details of their protocol”. (Garfinkel, 2005) Skype, of course, states that their software is secure (Skype, 2006b). Garfinkel (2005) kept on explaining that Skype was more secure than conven­tional phone lines due to the fact that every landline can be monitored by persons who have access to the line. But no data is stored in the conventional telephone, but huge amounts of other – maybe confidential - data is saved on PCs. Hence, security is a awfully important topic of VoIP, as nobody will switch to VoIP or Skype, if it is not secure.

Both Skype’s software as well as the use of the network are free of charge. With the help of SkypeOut and SkypeIn, Skype connects to landlines and mobile phones. These services are charged. Due to p2p almost no administration costs occur to Skype and the company is theoretically able to expand at almost no costs. According to the Business Week, as quoted by Graham and Ure (2005) “it costs Skype less than 1 cent to add a new user versus hundreds of dollars for a tradi­tional VoIP provider”. Skype is not only characterised by cost advantages, but also by its easiness to use, as no configuration is required in order to use it (Garfinkel, 2005).

2.5. The future of Skype

When launching Skype, Niklas Zennström said “we are launching Skype as the telecoms company of the future” and Janus Friis added “we hope that one day, instead of saying I’ll call you, people will say I’ll skype you” (Thomann, 2006). These statements show the founders’ hopes of Skype’s impact on global tele­communica­tions. Skype is a free software and it “has become the de facto internet telephony system” (Telegraph, 2004). It is very easy to set up and to use and attracts lots of customers. Grannell (2006) found out that people already use Skype as a verb and ask friends Let’s Skype. Softphone providers are connect­ing people worldwide on a “scale never seen before” (Field, 2006).

According to Baset and Schulzrinne (2004) Skype’s popularity is due to three factors: better voice quality than others; it can work behind firewalls and it is very easy to install and to use.

The business research company Evalueserve (2005) recognised that Skype will have a major impact on the entire Telecom industry. They figure out that Skype has the power to reach between 140 and 245 million users by the end of 2008, excluding business users. Now, Skype has 113 million users (Company Update, 2006). The business research company predicts that long distance revenues of European Tele­coms will decrease by 41% due to Skype’s impact. In fact, they analysed that VoIP offering companies which do not use p2p will experience a 94% decline in revenues until 2008, as customers prefer Skype’s peer-to-peer technology which results in huge cost advantages for both users and Skype.

On the other hand, Espiner and Kaufmann (2006) mentioned that Skype loses market shares due to competition of broadband providers, offering bundled services of broadband and VoIP. In 2005, 45% of VoIP was realised by Skype. However, in 2004, Skype had a share of about 90%. They realise that broadband providers are the winner of VoIP as they can offer broadband and VoIP at once. Skype offers its software but no Internet connection. However, Wilson (2005) found out that Skype “is helping to drive accep­tance of VoIP” which can be considered as an impact on the economy.

The Deutsche Telekom (DT) is said to be one of the main competitors of Skype (Shaver, 2006). VoIP in general and hence also Skype influence the Deutsche Telekom which is reacting with a new medium called Triple Play. Until 2012, the DT plans to change all its phone lines to high-speed Internet connections to offer a combination of DSL Internet access, VoIP and TV. In summer 2006 the DT started equipping the 10 biggest cities in Germany with high speed optical fibre cable in order to lay founda­tions for Triple Play (Deutsche Telekom, 2006). One year ago, the German news agency N24 published an article about Skype’s impact on the Deutsche Telekom and predicted that the Telekom does not have to be afraid of Skype. According to the analyst Hellgren, Skype is no competition for DT and Skype will have difficulties to expand in Germany as the Telekom has control over broadband. In Germany, broadband is strictly linked to the purchase of a landline. This is a restraining factor for Skype. Skype has a higher potential in France or in the UK, where Internet connections are sold without a telephone connection (Hellgren, 2005).

The researcher decided to mention the analysing tools in the methodology due to the fact that the applied frameworks are rather applied methods than features that are to be analysed. To give a short overview of the tools applied, the author only lists them here and explains them in the methodology on p.15 in more detail to apply them in the main body. The author applied and considered the following analysis tools and economic basics:

- Skype’s Vision, Mission and Competitive Strategies
- The Product-Market Growth Matrix by Igor Ansoff
- SWOT Analysis, based on secondary data, questionnaires and interviews

Chapter III: Methodology

To prove the author’s hypothesis “VoIP is the future telecommunications media in Germany.” and to answer the research question “What is Skype’s future in Germany and will it be able to impact the telecommunications market in Germany” appropriate research methods and approaches are to be used.

3.1. Case Study Approach

The author had to choose between different research approaches: Experiments, Surveys, Actions Research, Case Study. Investigating the influence of Skype on the conventional phone market is complex in nature. The researcher decided to use the Case Study Approach. A case study is an in-depth study, which is “expected to catch the complexity of a single case” (Stake, R. 1995, lecture notes RM). The researcher carried out a case study to get insights in Skype and to study interrelations, influ­ences and the nature of this technology in detail. Case study approaches allow to triangulate findings, as the use of multiple research methods and sources of data is one characteristic of them.

3.2. Key Concepts

The author has to be aware of the following Key Concepts:

3.2.1. Validity & Reliability

According to Blaxter (2002) “Validity has to do with whether your methods, approaches and techniques actually relate to, or measure, the issues you have been exploring.” It is about the right use of methods, which results in correct data gathered.

Reliability is the degree of consistency of research instruments. Blaxter (2002) defines it as the following: “(…) reliability has to do with how well you have carried out your research project. (…) if another researcher were to look into the same questions in the same setting, they would come up with essentially the same results (…) then your work might be judged reliable.” The author cross-checked all results and inves­tigated the credibility of the sources. Validity and reliability have been checked by triangulation.

3.2.2. Triangulation

Triangulation is the use of two or more independent sources of data or data collection methods within one study in order to help ensure that the data are telling you what you think they are telling you. (Saunders, 2003, p.492)

To overcome intrinsic bias, arising from using only one research method, the researcher used several data sources to cross-check findings. A combi­nation of primary and secondary data was used to enable triangulation within the study. The researcher carried out qualitative interviews, sent out both quantitative and qualitative questionnaires and used secondary data, such as books and news­paper articles.

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Exhibit 3a: Triangulation

3.2.3. Generalisability

Generalisability is according to Remenyi (1998) “The characteristic of research find­ings that allow them to be applied to other situations and other populations”. Findings had been confirmed by interviews with IT experts. Researchers intending to analyse another VoIP company, may be interested in findings and may use them for their own investigation. As the study concentrates on Germany, results cannot be taken for other populations.

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