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Last Updated: Tuesday, 24 January 2006, 09:09 GMT
Skype battles to stay ahead
By Alfred Hermida
Technology editor, BBC News website

Woman using Skype at CES
Skype says it is used by 66 million people worldwide
Mention the idea of making phone calls over the internet and one word is bound to come up.

That is Skype, the name of the company that pushed the idea into the public consciousness. It has grown at break-neck speed since it was launched in April 2003.

But the field of internet calling, known as Voice over IP (Voip), is becoming increasingly crowded and Skype is under pressure from all sides.

It has even attracted the attention of supermarket giant Tesco, which launched its internet phone service last week.

It is a sign that more firms are looking to offer Voip services, offering the lure of cheap and sometimes free calls.

"Skype is going to be challenged by a host of others, by services that live independently of the PC," said Steve Blood, vice-president of research at analysts Gartner.

He said one of Skype's weaknesses was that it was still used primarily by early adopters - people who know their way around a computer, rather than the person in the street.

Survival of the best

The UK is lagging behind other countries such as the US, where telecoms giants like AT&T and Verizon, and broadband phone service provider Vonage, are muscling their way into Skype's arena.

"The first way you survive is by being the best at what you do and I think that Skype is there now," said Henry Gomez, recently appointed from eBay to run the company's operations in the US.

Skype general manager in the US, Henry Gomez
You will see closer integration between eBay, PayPal and Skype going forward
Henry Gomez, Skype

"The other thing that gives us a big advantage is that we have a very large network of over 66 million users worldwide. That's a big network, it's already there, you are more likely to find someone you are looking for on Skype than anywhere else."

"We believe that the way to keep the lead is to have the best voice quality and best user interface. The lead we have now and the technical superiority we have will keep us ahead."

Skype is seeking to build on its two-year lead over the competition by making it easier for people to use the service.

At the recent Consumer Electronics Show in Las Vegas, it announced partnerships with a number of gadget makers to integrate its technology into telephone handsets for the home.

Whereas most computer users talk each other via a headset or microphone and speakers, the new products are designed to make Skype's service seem far more like a traditional telephone experience.

Cash in the bank

The Voip giant can also count on a healthy cash balance in the bank. In September last year, it was bought by online auction giant eBay in a $2.6bn (1.4bn) deal.

For them to ultimately succeed, they need Skype in every desktop and that is not going to happen
Steve Blood, Gartner
The acquisition has provided Skype with the resources to expand aggressively and improve its technology at a far faster pace than would otherwise have been possible.

It also provides it with a channel to the millions of people who use eBay and its payment system, PayPal.

"We're looking at a whole bunch of ways that we can integrate services and I think you will see in '06 and '07 more integration," said Mr Gomez.

"Obviously we'll have to see what our community wants to do and how it will work. But you will see closer integration between eBay, PayPal and Skype going forward."

The challenge for Skype is to stay ahead of the game. But this is likely to become harder, say analysts.

"These are services which people experiment with," said Mr Blood. "Skype grew very quickly as they were very clever with marketing and how they distributed the software, and, above all, the quality was very good."

"Success will come from how many other people use Skype. For them to ultimately succeed, they need Skype in every desktop and that is not going to happen."

Security concerns

A further obstacle in Skype's way is technical. It uses its own proprietary software rather than recognised standards for Voip.

This means that people using Skype cannot make free call to people using Voip services based on industry standards.

In addition some companies are developing software to block Skype specifically due to security concerns.

One of them is US company Verso, which says that Skype has could open up a computer network to viruses and denial of service attacks.

In November Canadian analysts Info-Tech Research Group advised clients to ban the software.

"The bottom line is that even a mediocre hacker could take advantage of a Skype vulnerability. If you are going to use Skype within enterprise, manage it as you would any other information technology service: with policy and diligence, said Info-Tech analyst Ross Armstrong at the time.


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