Friday, July 29, 2005

Cringely on Skype: Wrong, wrong, wrong

It's not very often that Robert Cringely gets *everything* wrong in a column, because he's a really smart guy. But his recent piece on Skype comes close to being a strikeout.

Let's take these one by one :

"So what's most interesting about News Corp. and Skype isn't that the deal fell through, but that News Corp. even knew Skype was available."

In case no one has noticed, communications and media are merging. In particular, Barry Diller over at IAC sees this happening. Is Match a media property, or a structured medium of communication between single people? Ummm, both. The last peer-to-peer client (Kazaa) that the Skype founders did was for distributing paid content (music), whereas Skype distributes free user-created content (voice calls and text messages). Is one of those a media company and one of thos a communications company, with a big bright line between the two? Kind of blurry, huh? If I were Rupert Murdoch, I'd not only know this convergence by heart, I'd be watching Diller like a hawk, which means I'd be all over this space.

"Since Skype service requires broadband, and broadband so far is inherently fixed, Skype threatens only incumbent FIXED phone service, not mobile service..."

Skype is based on the Global IP Sound (GIPS) codec. GIPS is the magic inside Skype that gives it its incredible ability to overcome latency, packet loss, jitter, and all the other crappy data delivery realities of the Internet. If you go to the GIPS website, you can hear a very nice demo of their sound quality over "telephony bandwidth" which is plenty narrow enough (8Kbps if I recall correctly) to fit within a GPRS channel. GPRS usually has waaay to much latency to work well for packet voice, but EV-DO? Absolutely.

And if that's not convincing enough, I have it on pretty good authority that a major CE manufacturer might be selling some Skype-enabled mobile devices in the not-far-distant future. Which they aren't doing because "Skype requires fixed broadband."

"Expect Skype to be sold, another viral marketing success sucked up by big business. Expect it to go to either a major broadband provider or, more likely, to a big mobile carrier with no fixed telephone assets."

I don't have any inside information on this point, but I can see that Skype is most attractive to Yahoo and Google and Microsoft and IAC and... NewsCorp, I guess, given that they're now buying web properties. All these guys get that communications+media = the future, because media is professional content and communications is user-created content and their combination is the "architecture of participation" which is Web 2.0. Why doesn't Cringely get this? He's got all the pieces in front of him.

"Of course, the rest of the VoIP industry loves this. If Skype is worth $3 billion, then so is Vonage and maybe Packet8."

Oh, puh-leez.

Firstly, let's look at cost base. Since Vonage doesn't use a decent codec like GIPS, they have been required to build out POPs across their targeted territories in order to get their calls off the public internet and onto their private low-latency high-quality backbone as soon as possible. This is an *enormously* expensive process similar to building a traditional telco network. Vonage also offers a physical box (CPE) that you plug your phone into, which means it is in the business of procuring, mailing, and managing hardware that has a BOM in the range of $60 to acquire every new customer. So both in capex and opex, Vonage has huge costs that Skype simply does not have. I don't know about Packet8's backbone, but their CPE situation is identical. So either should have a massively deflated value when compared to Skype, which requires only a software download (very low cost) and no network buildout for its "core product" of Skype to Skype calls. Incidentally, this is why Skype has 120 million people who've downloaded its client and Vonage and Packet 8 are in the single-digit millions at best. Skype does need POPs to do In/Out to the phone network, but that is a very different cost dynamic than what Vonage has to do simply to be in business.

Secondly, let's look at user experience. I have tried both Vonage and Packet8, and I have cancelled both because neither worked well enough to use, on Sand Hill Road right in the middle of Silicon Valley. This was due to some problems with my DSL line (thanks, SBC), but ultimately both solutions failed. Skype, on the other hand, works almost magically well. Recently I was in Chamonix in the French Alps, sitting on a plaza in front of the tourist office, using their free WiFi, and talking to (in succession) several foreign countries including the U.S., 6500 miles away.

Skype is unique in the VoIP, and while they may be bought by a smart network provider such as Comcast, my prediction is that they'll be snapped up by one of the usual-suspect next-generation communications+media companies, or as I should start calling them, "Extended Conversation" companies. I heard a rumor yesterday that Skype wanted $1 billion from Yahoo, and Yahoo offered $100 million. I don't know if any of that is true, but it sounds a lot more reasonable than anything Cringely is saying on this subject.

And someone really smart should buy Global IP Sound.

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