More than 20.4 million U.S. households will subscribe to some form of Internet-based broadband phone service by 2010, according to Jupiter Research. Web-based calling with Skype is certainly part of it. Skype has 35 million registered users, one million paid subscribers, and more than 100 million copies of its software that have been downloaded from the Internet. Its users are primarily generation X and Y callers. Skype has emerged as a compelling Internet-based calling platform because its phone calls are basically free--something that comes as no surprise, since Skype is a member of the open-source community.

With the recent acquisition of Skype by eBay, however, a number of questions have been raised:

* What will Skype do, now that it has been purchased by eBay?

* Will Skype pursue the business market as aggressively as it has consumers?

* What makes Skype different from VoIP?

* Where does Skype go from here?

Call this toll-free number now

Skype is a software program that allows you to make free calls over the Internet to any other Skype user. The software is free and you can download and use it with most computers. Once you have the software downloaded, all you need is a PC microphone and speakers, or a PC headset.

The purpose of Skype is to offer its users free worldwide telephony with an uncomplicated, reliable and user-friendly communications methodology. Skype users get their friends and family to join the Skype community, and everyone talks for free.

Skype's instant messaging and phone calls resonate with the younger generation and with technology people, and will appeal to virtually anyone who is Internet savvy.

"While instant messaging is Skype's strength, there are also other attractions," says Jon Arnold, principal with Arnold and Associates in Toronto. "Skype is a pure form of communication. You don't get pop-ups and viruses and unwanted solicitations."

Is Skype VoIP?

Yes and no. Skype is VoIP (voice-over Internet protocol) in the sense that it runs over Internet protocol (IP) and requires the Internet like VoIP. From a technology perspective (peer-to-peer VoIP), Skype can also be considered as a type of VoIP. However, the business models and goals of Skype and VoIP have traditionally been very different.

Although some VOIP operators, like Skype, give away their software and rely on the sale of premium services and hardware peripherals to generate profits, the majority of VoIP service providers do charge for phone call services. Popular VoIP consumer business models are those used by companies like Vonage, or some of the cable operators.

These companies offer their customers unlimited local and long distance calls to any kind of phone, VOIP or not, for as little as $15 a month. They depend on their paying subscribers as their revenue base, and then provide add-on features that subscribers can choose to add for incremental fees.

"It is a common perception that Skype and the VoIP products are the same, but they're really not," says Arnold. "If you compare Skype with a commercially available product like Vonage, the two are complementary and they don't really compete. Skype is peer-to-peer technology. VoIP-based services like Vonage are centrally controlled, with monthly subscriber fees, a dedicated phone number and technical support and customer service."

The peer-to-peer technology that Skype uses is a true distributed architecture that takes the intelligence commonly found in a central server and puts it into a PC. In essence, peer-to-peer telephony puts enough intelligence into your personal computer to allow it to act as its own private branch exchange (PBX).

Applications like instant messaging can be layered on top of the Skype software that resides on the PC. This allows people to communicate with self-contained telephony infrastructure that lets them to do everything they want to do with each other within the Skype community--for free. If you use Skype in a business, the peer-to-peer technology will eliminate your need to consider centralized telephone equipment--or a service provider that will provide you with centralized service (and charge for it).

Although VoIP has its peer-to-peer products, the majority of VoIP offerings function around a centralized communications concept. One reason is the growing base of businesses using VoIP. VoIP providers are expected to deliver 360-degree management of communications over IP networks, along with enterprise security and reliability. At this point in time, a central server that ties into multiple handsets over a secure network is the best way to do this. Corporate demands on VoIP also put it ahead in several key areas where Skype does not yet provide support, such as the provision of 411 and 911 services.

"Many enterprises are shying away from Skype because it can get through firewalls with its peer to peer architecture," says Arnold. "These larger enterprises have rigorous security requirements and privacy issues. In certain industries like finance and healthcare, Sarbanes-Oxley is also a factor, and compliance is very important. With Skype, there is no centralized monitoring of service.

"The bottom line is, many businesses see Skype as an inherent distraction," Arnold continues. There is simply no way to control it because it is entirely decentralized. Skype is also free and easy to use. It could be another employee time waster. Skype was never built to be a business tool, although it is possible over time that the product could evolve into this space."

Growing pains

Skype understands that its products appeal most to the less formal end of the consumer market. Like any technology company, Skype also recognizes that it needs to add critical features to stay ahead in a highly competitive market.

Shortfalls that the company is addressing include the inability of users to use Skype software to contact those outside of the Skype community; key missing features that are givens with other forms of VoIP, like voicemail; and the ability to use Skype on other devices besides personal computers.

In April 2005, Skype launched several premium services, including the ability for its customers to purchase phone numbers so they can be reached by non-Skype users with either fixed or mobile phones, and to sign up for voicemail service. In January 2006, the company also added video services for both individuals and small and medium businesses.

The Skype-In service gives users up to three free phone numbers in any of eight countries (Denmark, Finland, France, Hong Kong, Sweden, the U.K. and the U.S.). This service is subscription-based, and costs $13 for three months. It allows users to call these numbers in place of other numbers in other countries--for a lower cost.

There is also a Skype-Out service that allows users to call standard telephone numbers from VoIP devices at a per-minute fee. In January of 2006, Skype 2.0 included free video calling and even mood messages that let fellow Skypers know how you're feeling.

These services help to fill the gaps that other types of VoIP cover. VoIP also offers service level agreements (SLAs) and managed network services to businesses--an area untapped as yet by Skype--but at this time, the company has not indicated that it will enter into these services.

Another shortcoming of Skype has been its inability to be used in an environment other than that of a personal computer. VoIP, in contrast, can be used with computers, wireless phones and handsets.

Skype is positioning itself to change this by targeting the consumer market through strategic partnerships with handset and technology suppliers like Philips, Netgear, and others. In the Philips case, the Philips VoIP321 phone is being introduced to offer consumers free Skype calls on a cordless phone, as well as on an ordinary landline call. Skype software is also now pre-loaded on Netgear wireless phones that can work at home, in the office, in cafŽs and public hotspots, in hotels and airports, or in citywide wireless networks. Netgear's Range Max wireless router will be optimized to work with Skype.

Skype has additionally formed business partnerships with phone set manufacturers like Kodak, Panasonic, VTech, D-Link, and Creative. At the same time, Skype is working with retail chains like Radio Shack. All of this adds up to more Skype exposure to consumers and businesses.

eBay makes a bid

In October, 2005, eBay acquired Skype for $2.6 billion. Most analysts acknowledge that it is too early to tell how the acquisition will ultimately affect Skype, or how it will transform eBay.

Some have speculated that eBay was attracted to Skype because of Skype's worldwide community of users, and that the eBay vision might well be to have an audio community of Internet-based users that complements its Web site community. The two would be different business channels, and each would have its own merchants, buyers and transaction structures.

"We have to wait and see," says Arnold. "It is a matter of execution, and how eBay figures to integrate Skype into its business. Skype is more into the Internet than telephony. There could be cultural issues. Skype has recently lost a lot of key people. The programmers didn't share in the windfall from the eBay acquisition that the founders got, so there may be motivational issues. In the bigger picture, integrating a European startup with a large California company is quite a challenge. Beyond a doubt, there will be cultural impact, and the Skype culture will have to change."

Skype has proven once again that freshly innovative technology and business approaches can create market excitement and generate a new value paradigm. Its youthful followers will continue to promote Skype, and that promotion might ultimately lead to business adoption.

As a member of the open-source consortium, Skype also benefits from a worldwide developer community that can continue to deliver innovative applications for the Skype platform. The big question is how Skype integrates with eBay. If the Skype internal culture changes, is its technology innovation at risk? Or will it form into yet another unthought-of business concept that has everyone raving?

Mary E. Shacklett is president of Transworld Data, a marketing and technology practice for technology companies and organizations.