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John Delaney – Research Director , IDC: 3 makes Skype calls completely free of charge: are they crazy?

April 2009 by John Delaney – Research Director , IDC

Today, 3 UK and Skype jointly announced that from 1 May, there will be no data charges or top-up fees for either contract or pay-as-you-go customers who use Skype on 3’s network. Anyone with a 3 handset will be able to buy a 3 SIM with Skype enabled, then talk and IM as much as they want to other Skype users, without ever having to pay anything. During the summer, 3 will expand its offer to those with other compatible 3G phones, whether supplied by 3 or not.

As the smallest by far of the UK’s five mobile operators, and as an entrant into a saturated mobile market, 3’s position has always required it to behave like a challenger. It does things the other operators are reluctant to do, and it tries to make a big splash about doing them. Today’s announcement of free Skype usage is squarely in line with that policy. Skype is popular with a lot of people (about 400 million, according to Skype’s own figures), and where other operators display wariness or hostility towards Skype, 3 has embraced it even to the extent of putting the Skype logo on some of its phones. By removing all charges for Skype calls and IM sessions on its network, 3 is deepening its association with the Skype philosophy of free communications over the internet.

As a 3G-only operator, 3 sees itself as becoming more of a mobile internet company than a traditional telecoms operator. Nevertheless, 3 still gets most of its revenues from charging for voice calls and SMS messages. So by offering and promoting free calls, is 3 in danger of cutting its own throat? We don’t believe so – at least not for a long time to come. Remember, the only calls that are free are ones that are made to another Skype user. We don’t have any Skype user numbers from 3, nor do we know how what percentage of 3 Skype calls are made to other Skype-enabled phones, versus PCs. But we feel pretty confident in assuming that 3 subscribers are a small percentage of total Skype users, and that therefore most 3 Skype calls are made to PCs, rather than to phones. In other words, these are not calls that substitute for mobile-to-mobile or even mobile-to-fixed phone calls. Thus, we think it is unlikely that Skype will significantly cannibalise conventional call revenues, at least until the number of Skype phones reaches a much higher percentage of total phones in use. If the number of Skype phone users in the UK gets into the tens of millions, voice cannibalisation will become a more pressing issue – but we suspect that’s a problem that 3 would love to have to deal with.

More immediately, there is also the issue of the data revenues that 3 formerly gained from Skype usage, and that it will now forgo. How big is that loss, and is it justified by the benefits gained by offering Skype for free? We can’t answer that question definitely, because 3 does not disclose how much revenue the Skype charges generate. (To be fair, it is largely a matter of definition anyway, since the charges are for data bundles, which can also be used for many other services besides Skype.) But we would guess the revenue loss is fairly small. On the plus side, substantial benefits that 3 could gain by the removal of Skype charges include:

a lot of good PR for the 3 brand – Apple has taught us not to underestimate the value of this an increase in subscriber numbers (though not necessarily at competitors’ expense: if a competitor’s subscriber only needs to buy a 3 SIM to use Skype for free, they do not need to churn to 3 for their general mobile usage) stimulating usage of other internet services on phones, and thus sales of mobile data plans

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