Skype and Voice Over IP

P2P exchange of data over the internet has been one of the key drivers of success of the digital platforms. It is the underlying technology supporting email. It was the underlying solution that supported Napster and other startups that disrupted the music industry. Voice communications were an obvious candidate for a similar disruption. Voice can be transformed into data packets and then transported over the internet, just like emails and music files, and for the same price: free. AT&T engineers who claimed that packet-switched telephony would not be possible have been proved wrong.

In August 2003, Nikolas Zennstrom from Sweden and Janus Friis from Denmark launched Skype, an application that allowed real-time voice communications between registered users. Skype was the first P2P service to allow the exchange of voice communications in real time, similar to a telephone service. The name Skype is short for Sky peer-to-peer. The founders originally intended to name the service Skyper, but the domain was not available so they settled for Skype.

Zennstrom and Friis were not newcomers to the P2P world. In 2000 they had developed Kazaa, a popular software for a P2P exchange of music files following the Napster model, but without a centralized server as Napster had. Files would directly be exchanged between users. The change in technological implementation did not escape legal attention. Kazaaa eventually closed, but the founders had understood the power of P2P networks in the internet. They just had to export the business model to a service without copyrights: voice was the next step.

Zennstrom and Friis were not newcomers in the telecommunications world either. They had both worked for the Danish telecom carrier Tele2 in the 1990s before creating Kazaa. They had actually proposed a VoIP project to their line of report. However, realtime voice communications require significant capacity to ensure the minimum quality of service. Broadband was not common in the 1990s, so that was not the right time to launch a VoIP service. This is why Zennstrom and Friis decided to start with Kazaa and the exchange of music files, as the exchange did not require real-time communication so it could be provided with lower-quality networks.

As broadband became increasingly popular in the early 2000s, VoIP was ready to go mass-market. Skype was the first popular VoIP service. Users would download the software in their personal computers, register a specific address to identify themselves, and then identify the address of the peers they wanted to call to. Skype would run the login server. Skype manages each customer’s account, but is not involved in the actual transmission of the signal in each specific call. Each user runs its own ordinary node. Users with a good connection and computing power could act as supernodes, supporting communications between third parties.'

The differences between VoIP and the public switched telephone network (PSTN) service were relevant. Firstly, no telephone numbering was initially used, so communication was only possible between Skype users who were identified with a Skype address: it was not universal in the sense defined by Vail for the Bell System. This is why it was necessary to grow a large customer base. Secondly, no specific circuits were reserved for the communication. On the contrary, voice was cut in small packets, all with the destination address and sent to the public internet to reach the called party, where packets would be transformed back into voice. Consequently, the service was provided on a best-effort basis, as quality of service could not be ensured due to potential congestion in the public internet, jitter, and delays in the transmission. Thirdly, access to emergency services was not ensured.

But it was another difference which made Skype so popular: it was free. No fee was required to use Skype and users could talk for as long as they wanted at no cost. Skype was particularly attractive for international calls, as such calls were charged by telecommunications carriers at particularly high rates. This was a big hit in Europe, as all traditional telephone calls, even local ones, were subject to a per-minute charge.

Skype VoIP communications could be offered at no cost for the calling or called parties, as the communications would make use of the access to internet service already contracted by the calling and the called party with their regular provider (in most cases, a traditional telecommunications carrier). Skype did not deploy telecommunications infrastructure and not even pay interconnection fees for the use of telecommunications carriers’ networks. Skype was free just like email or many other internet applications.

Skype is another digital platform built thanks to network effects. Skype allows individuals connected to the internet through different ISPs to have voice conversations. As in the early days of Vail’s Bell System, network effects were key in the growth of Skype. The larger the pool of Skype users, the more useful the service was for the entire customer base. Skype grew very quickly. Just six months after it was launched, it had been downloaded 1.5 million times. Two years after its launch, Skype had 53 million registered users out of the 938 million of individuals connected to the internet. Skype went viral just like other closed networks, as early adopters convinced people around them to join the network so they could all benefit from the new service.

It is not by chance that the venture capital firm providing the seed capital to Skype is a familiar name: Draper, Fisher, Jurvetson, the same firm that had provided seed capital to Hotmail. Having understood the power of network effects created by digital platforms in communications industries, it seems now a pretty natural move from email (Hotmail) to voice (Skype). They acquired a 10 percent position in Skype.

In September 2005, just two years after its launch, Skype was acquired by eBay for $3.1 billion. eBay had already acquired PayPal in 2002. It had the ambition of creating a fully digital environment around its marketplace: communications, payments, etc.

However, the merger did not deliver the envisaged benefits, and eBay sold a controlling stake in Skype to a group of investors in September 2009 for $2.75 billion. Microsoft finally acquired Skype for $8.5 billion in May 2011. As of 2020, Skype had more than 300 million active users.

Eventually, Skype developed solutions to make calls to telephone numbers (Skype Out) and even to receive calls as a telephone number (Skype In). As these calls interconnect with the telephone networks, Skype has to pay interconnection fees to telephone carriers, so it charges users for such calls. In any case, fees tend to be low, particularly for international calls, as Skype uses the internet for the international transport of the call, and interconnection takes place at the local level, for a low fee. As a result, Skype can charge an international call to a telephone number as if it would be a local call. Over time, as broadband expanded, Skype supported not only messages and voice calls, but also video communications.

Skype services are not always easy to classify from a regulatory perspective. In most legislations around the world, communications services are defined as the transmission/ conveyance of information. This was the case in the US and the EU. Therefore, the regulatory nature of the service depends on whether Skype is actually transmitting - that is, transporting - the conversations.

However, Skype’s VoIP service is fundamentally different from the public telephony services provided by traditional telecommunications carriers. Skype is not in charge of the transmission of the conversations. Skype merely provides software that allows a computer to interact with another computer making use of the same software. Conversations are transmitted over the public internet just like emails or any other packet of information. Traditional telecom carriers are actually transmitting the signals. As a result, Skype VoIP service was not originally considered a communications service according to telecommunications legislation in the US or the EU.

Skype has been required to notify or be licensed as a communications carrier in some jurisdictions, particularly as it has started to use telephone numbers and interoperate with the telephone network.2 This is not a theoretical debate. Communications services are subject to a heavy regulatory framework across the world: compulsory interconnection, access to emergency services, call interception, specific consumer rights, specific privacy obligations, etc. In exchange, telephone service providers have the privilege to be granted telephone numbers by the national regulatory authorities.

Competition between traditional telecommunications carriers and Skype as well as other VoIP service providers remains a hot issue in the regulatory debate.

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