An investigation into Skype Technologies S.A.

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.

Signed ………………………..………(student) Date …………………………….

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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.

Yes

If yes please give the appropriate details and attach documentation which con- firms 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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(Student) (Supervisor)

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  An investigation into Skype Technologies SA  

Table of Contents

  Student Declaration  i

  Permission and confidentiality form  ii

Table of Contents iii

Table of Abbreviations vi

Table of Exhibits vii

  Acknowledgements  viii

Chapter I:  Introduction  Introduction

1.1  Skype nature of study  1

1.2  Hypothesis  2

1.3  Aims and Objectives  2

1.4  Limitations to the study  3

Chapter II:  Literature Review  

2.1  VoIP the technology  4

2.2  The future of VoIP  5

2.3  Skype the technology  6

2.4  Characteristics of Skype s technology  6

2.5  The future of Skype  7

Chapter III:  Methodology  

3.1  Case Study Approach  10

3.2  Key Concepts  10

3.2.1  Validity and Reliability  10

3.2.2  Triangulation  11

3.2.3  Generalisability  11

3.3  Research Families Research Techniques  12

3.3.1  Primary data  12

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  An investigation into Skype Technologies SA  

3.3.1.1  Interviews  12

3.3.1.2  Questionnaires  13

3.3.2  Secondary data  14

3.4  Analytical tools  15

Chapter IV:  Findings  

4.1  Structure of the findings and the conclusion  17

4.2  Evaluation of the primary data sources  17

4.2.1  Questionnaire directed to private persons  17

4.2.2  Questionnaire directed to IT experts  24

4.2.3  Interviews with IT professionals  28

4.3  Tariff comparison of SkypeOut v German Telekom  29

4.4  Skype s Vision Mission and competitive strategies  31

4.5  Analysis of the future market opportunities of Skype  32

4.5.1  SWOT  32

4.5.1.1  Strengths  32

4.5.1.2  Weaknesses  33

4.5.1.3  Opportunities  34

4.5.1.4  Threats  34

4.5.2  The Product-Market Growth Matrix by Igor Ansoff  35

4.5.2.1  Market Penetration  35

4.5.2.2  Product Development  36

Chapter V:  Conclusion  

5.1  VoIP s future in Germany  37

5.2  Skype s future in Germany  40

5.3.  Final conclusion  44

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  An investigation into Skype Technologies SA  

Chapter VI  : Recommendations further  investigation

6.1.  Recommendations to Skype  46

6.2.  Further investigation  46

Chapter VIII  : Appendix  

7.1  Bibliography  47

7.2  Ethical issues  54

7.3  Form: Questionnaire directed to private people  55

7.4  Form: Questionnaire directed to VoIP specialists  60

7.5  Framework of the interviews  63

7.6  Abbreviations technical terms and definitions  64

7.7  Skype - history facts  66

7.8  Declining German Telekom  69

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DT Deutsche Telekom

IP Telephony

POTS PSTN RTP SIP

SkypeIn

SkypeOut

Softphone

VoIP/ Voice over IP Voice over Internet Protocol

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  An investigation into Skype Technologies SA  

Table of Exhibits

Table Title  NA  

  Page  

2a  Skype s Technology  6

3a  Triangulation  11

4a  Which Internet Connection do you have  18

4b  Have you heard about VoIP before  18

4c  Have you ever made calls over IP  18

4d  How good or poor is VoIP  19

4e  Do you know Skype  19

4f  When did you start using Skype  20

4g  Which tool do you use most  21

4h  Have you saved costs  21

4i  Has Skype changed your calling behaviour  21

4j  Does VoIP impact the ground-based network  22

4k  Skype s future  22

4l  What is the future of VoIP  23

4m  Do you use Skype internal or external  25

4n  Impact of Skype  26

4o  Prospects of VoIP  27

4p  Tariff comparison  29

4q  Product-Market Growth Matrix  35

4r  Talk for Britain  36

5a  Broadband Penetration  37

5b  VoIP s voice quality  38

5c  VoIP in 5 years  39

5d  Skype s future  41

5e  Worldwide subscribers  42

5f  Skype user numbers  42

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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 15 th of November 2006. Hence, information given in this project is correct until the 15 th 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 infor- mation 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 pro- vided access to information. Especially, she would like to thank respondents of the questionnaires and the interviews.

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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 head- quarters 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 concur- rent Skype user are online. In Germany, 5 million users are registered (Analyst Day, 2006).

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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 conven- tional 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.

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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 15 th . Articles which had been published after this data had not been taken into consideration and predictions are made on data published

before November 15 th .

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

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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 tele- phone 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 pack- ages 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.

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2.2. The future of VoIP

Mager (2004) recognised that the Internet changes the way people communi- cate. 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 compli- cated 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.

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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 technol- ogy (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).

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

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 net- work. The only existing central server is the Skype login server which administrates users and passwords (Baset

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

Due to its peer-to-peer technology, Skype does not connect to other VoIP pro- viders 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 Project J. Stadler - 6 -

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 tele- communications. 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 connect- ing people worldwide on a “scale never seen before” (Field, 2006).

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