Business Research
Research Expert
Impact of Skype on Telecom
Service Providers
An Evalueserve Report
January 06, 2005
© 2005, Evalueserve. All Rights Reserved
Evalueserve
Impact of Skype on Telecom Service Providers
Contents
Evalueserve
Marc Vollenweider
Marc.Vollenweider@Evalueserve.com
Tel: +43 (4245) 65183
Austria
Sameer Shetty
Sameer.Shetty@Evalueserve.com
Tel: +91 124 515 4000
India
India Team
Vaibhav Khera
Sumit Gupta
Suchi Mehrothra
1
2
Executive Summary .....................................................................1
Introduction - Skype ....................................................................3
2.1
2.2
Skype – The Product .............................................................................. 3
Skype – The Company ........................................................................... 3
2.2.1
Business Model......................................................................................................................3
2.2.2
Competition ............................................................................................................................3
3
Future Outlook – Skype...............................................................5
3.1
Skype Penetration................................................................................... 5
3.1.1
Growth Drivers .......................................................................................................................5
4
Impact of Skype on Telecom Service Providers .......................6
4.1
Telecom Operators will witness a significant decline in their profitability . 6
4.1.1
Fixed line revenues will decline due to reduction in long distance and local revenues .........6
4.1.2
Mobile revenues will decline due to a reduction in roaming revenues.................................10
4.1.3
Though reduction in mobile and fixed line revenues will not be significant, the impact on
profitability will be significant................................................................................................10
4.2
VoIP providers will need to change their business models.................... 12
5
Conclusion .................................................................................14
© 2005, Evalueserve. All Rights Reserved
Evalueserve
Impact of Skype on Telecom Service Providers
1 Executive Summary
Skype, by far the most successful P2P VoIP solution, clocking almost 45 million
downloads in 2004 is expected to have a major impact on the entire Telecom
industry. Skype has revolutionized VoIP telephony by offering unmatched quality and
by reducing cost for Skype-to-Skype calls to zero and to a fraction of current longdistance rates for Skype-to-Fixed/Mobile network calls. Skype might reach between
140-245 million regular retail users by the end of 2008 depending on the market
scenario. These figures do not take into account business users, who might switch to
Skype and other VoIP business solutions.
This report analyses the impact of Skype and VoIP in general on the profitability of
incumbent fixed line and mobile operators as well as non-P2P VoIP players.
The profitability of the high fixed-cost telecom operators is likely to be hit significantly
and permanently due to the following effects:
• Reduced fixed line revenues due to;
­ Migration of long-distance retail customers and local loop retail customers to
free Skype-to-Skype and low-price Skype-Out services
­ Reduction in long-distance calling charges forced by Skype’s pricing to avoid
loss of market share
­ Migration of fixed line customers away from fixed line to a combination of
cable internet access and mobile phone resulting in lower subscription
revenues
­ Reduction in wholesale revenues due to a decline in voice traffic
­ Reduction in revenues from the enterprise segment due to business solutions
offered by Skype and VoIP providers in the future resulting in the same effects
as in the retail segment
• Reduced mobile revenues due to
­ Reduction in revenues from roaming fees due to Skype/Wifi combinations
­ In case of Skype introducing a solution that can be used over 3G/GPRS, the
mobile voice traffic will decline further
By 2008, incumbent telecom operators offering fixed and mobile services are likely to
face a significant risk of permanent reduction in overall profitability and revenues of
at least 22-26 percent and 5 percent respectively over and above previously
communicated expectations. Another additional reduction of profitability will come
from an erosion of long-distance revenues in the business customer segment, once
Skype and other VoIP providers offer viable solutions in this segment. A recent
survey showed that 30 percent of Skype retail users also used Skype at work. VoIP
solutions offered by incumbents will not be able to offset the lost profits and will
instead accelerate cannibalization of existing profits too. Moreover, at this stage, it is
not quite clear whether such VoIP solutions will actually remain competitive against
Skype or not.
European operators are much more at risk due to certain characteristics of the
European telecom markets. For instance, calling and roaming rates as well as the
share of roaming calls are higher in Europe. Further, local calls are charged by the
minute rather than through a flat monthly fee, as in the US.
In a base case scenario, fixed line operators, especially long-distance operators, will
be much more exposed to risk than mobile operators. Additionally, a combination of
mobile phones and Skype via Internet delivered by cable may make fixed line access
altogether redundant, thereby, reducing revenues from subscription access fees.
© 2005, Evalueserve. All Rights Reserved
Page 1
Evalueserve
Impact of Skype on Telecom Service Providers
However, mobile operators will face much more significant decline in both roaming
fees and mobile voice traffic significantly, once Skype and other VoIP players offer
mobile solutions.
VoIP players that do not use P2P technology in the retail segment might not be able
to survive on their current business model, since P2P has an inherent cost
advantage and is likely to retain a quality advantage as well.
However, Skype’s performance and its ability to compete in the business segment
will be seen, only after it introduces its business solutions in the market. The value
proposition of Skype and its revenue model will improve further, once it starts
offering and pricing value-added services in the business and retail customer
segments.
Overall, Skype represents a massive discontinuity in the telecommunications
industry driving the convergence of voice and data much faster than originally
anticipated. Skype could also be a major step towards a change in the business
model of the telecom industry, --- a model in which basic voice services are offered
free of cost, and a bulk of revenues is generated from value-added services.
© 2005, Evalueserve. All Rights Reserved
Page 2
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Impact of Skype on Telecom Service Providers
2 Introduction - Skype
2.1
Skype – The Product
Skype is a peer to peer (P2P) Internet telephony software, in which, the call is routed
directly between the computers of the two users, instead of passing it through a
central server.
Skype allows free calls to
other Skype users through
out the world and calls to
fixedline telephones at a
fraction of traditional
international calling rates
Skype allows users to make free unlimited phone calls to other Skype users
worldwide. The software offers a feature, SkypeOut, which allows users to make
calls from PCs or PDAs to conventional fixed-line phones or cell phones. However,
SkypeOut is not free and a user is charged 1.7 Eurocents per minute for making calls
to North America, Western Europe, China and Australia; the rates being higher for
calls made to mobile phones and other countries.
The Skype software can be used on different platforms like Windows, Mac OS X and
Linux. It allows the user to make conference calls, wherein up to five people can be
connected at the same time irrespective of their geographic location. It also allows
file transfer across platforms and instant messaging to other Skype users.
2.2
Skype has over 13 million
users worldwide and has
clocked more than 45 million
downloads
Skype – The Company
The Skype software was developed by the same people that created KaZaa, the
P2P music file-swapping network. The software was launched in August 2003 and
since then, it has clocked 46.7 million downloads. At present, Skype has two million
users in the US and 13 million users worldwide. Further, the company claims to add
80,000 new subscribers daily.
2.2.1
Business Model
Skype offers its users free unlimited worldwide PC-to-PC calls and aims to keep this
basic functionality free forever. The company’s main source of revenue is SkypeOut.
Currently, SkypeOut is the largest source of income for the company, with 200,000
users paying a minimum of USD 12 in order to buy calling time. The sale of cyber
phones and PC headsets also contribute to the company’s revenue. In the future, the
company plans to introduce features and services such as voice mail, etc., which will
require a paid subscription or pre-payment.
Currently, Skype does not have any offerings customised for enterprise clients.
According to Kat James, Public Relations, Skype, “We are currently working on a
Skype for Business offering to be launched in 2005”. However, the exact nature of
the announced solutions both in terms of technology and economics is still to be
disclosed. Skype aims to generate revenues through its enterprise solutions.
2.2.2
Competition
At present, the company is competing with the following:
• Traditional service providers: Traditional service providers will face stiff
competition in long-distance services. This is because making calls using Skype
is cheaper, as compared with traditional long-distance calling. However, the
impact and degree of threat that traditional service providers face will depend on
the penetration of Skype and broadband.
• Other VoIP application providers: Skype offers better services at lower prices
when compared with other VoIP application providers. Therefore, VoIP providers
like Vonge and 8x8, have started offering more competitive call rates. Currently,
Skype does not have any offerings for business customers.
© 2005, Evalueserve. All Rights Reserved
Page 3
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Impact of Skype on Telecom Service Providers
• Internet service providers: Internet service providers like Earthlink etc. are
coming up with products similar to Skype. Earthlink has launched free online
calling and plans to offer a paid service similar to SkypeOut by next year.
• Other P2P services providers: Voiceglo has introduced a similar product called
glophone, that uses the P2P technology for making calls.
© 2005, Evalueserve. All Rights Reserved
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Impact of Skype on Telecom Service Providers
3 Future Outlook – Skype
3.1
Figure 1 depicts the growth of the retail user base for Skype till 2008.
Figure 1: Worldwide Skype Subscriber Base (2003 – 2008)
300
250
214.81
245.66
200
Million
The number of retail Skype
users is expected to reach
between 140-245 million by
the end of 2008
Skype Penetration
160.29
100
50
182.49
145.06
150
82.09
1.27
0
Dec-03
52.42
43.47
19.20
17.40
15.54
Dec-04
98.33
Dec-05
Conservative
142.54
113.85
78.35
Dec-06
Base Case
Dec-07
Dec-08
Aggressive
Source: Evalueserve Analysis
As shown in the Figure above, the Skype user base is expected to grow rapidly from
about 130,000 by the end of 2003 to about 182 million by the end of 2008.
3.1.1
Growth Drivers
As compared with other telephony providers, Skype enjoys significant advantages
due to its use of P2P technology, giving it considerable competitive advantage and
thus, contributing to its growth. Some of these include:
• Cost advantage: Skype software can be downloaded for free and enables
customers to make free Skype-to-Skype calls worldwide. The company charges
only 1.7 Eurocents per minute for Skype-fixed line calls to most European and
American countries. Rates are higher for calls to other countries and for Skypemobile calls (more information on SkypeOut rates can be found at
http://www.skype.com/products/skypeout/rates/). Skype users only incur the cost
of the dial-up or broadband connection.
• Better sound quality: Since Skype calls are routed directly between the users’
computers, instead of being passed through central servers, they offer better
sound quality and higher call completion rates than other VoIP applications like
Net2Phone, AIM, ICQ, etc.
• Improved security: Skype calls are encrypted end-to-end and therefore, offer a
more secure connection than other VoIP applications.
• Easy and low installation costs: For making calls using Skype, a user needs a
PC, a sound card, a microphone, a headset or speakers, and an Internet
connection. Thus, Skype can be used with a minimal investment. Moreover, it is
easy to install and works behind most firewalls, unlike most other VoIP
applications.
© 2005, Evalueserve. All Rights Reserved
Page 5
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Impact of Skype on Telecom Service Providers
4 Impact of Skype on Telecom Service
Providers
This chapter outlines the expected impact of Skype on telecom service providers.
4.1 Telecom Operators will witness a significant decline in their
profitability
The profit margins of telecom service providers are expected to decline considerably
due to a reduction in revenue. Since telecom operators have a high fixed cost base,
a decline in the topline will have a direct impact on the bottomline. The sections
below outline the various factors that will have an effect on the profitability of telecom
operators.
4.1.1 Fixed line revenues will decline due to reduction in long distance
and local revenues
Fixed line operators will feel the immediate and maximum impact of Skype uptake by
users. However, the impact will vary from one region to another. The impact will be
due to:
• A decline in long-distance revenues from retail customers: SkypeOut (at 1.7
Eurocents/min) is much cheaper compared with traditional long-distance call
rates and Skype-to-Skype is free. This will have an impact on the revenues of
fixed line operators as:
­ Subscribers will shift from traditional operators to Skype resulting in the direct
loss of long-distance calling traffic
­ Fixed line operators will need to reduce their long-distance calling rates to
slow down the migration. This will affect their existing customer base,
regardless of whether the customer segments switch to Skype or not
• Decline in local revenues from retail customers: Local calls in many countries are
charged on a per minute basis. In such cases, subscribers will shift from fixed line
operators to Skype as SkypeOut is a cheaper option compared to other offerings
from local call providers. In addition, Skype-to-Skype calls are free. However,
local revenues will not have a major impact on operators in countries such as the
US, where local calls are not charged on a per minute basis, and any number of
local calls can be made on payment of a monthly fee.
• Decline in wholesale revenues: Wholesale traffic for operators will decline along
with a decline in retail traffic. This will result in an additional decline in revenues.
• Decline in retail access subscription revenues: Some customers with access to
ISPs, which do not require a fixed phone line (e.g. through cable modems), may
decide to substitute their fixed line subscription for a combination of Internet
access through cable and a mobile phone, thereby reducing the fixed line
operators’ recurring subscription revenue. This effect is, probably, insignificant in
the short-term, but may increase in importance, once the penetration of mobile
phones reaches saturation and the calling rates from mobile-to-fixed networks
become competitive. Some European countries as well as the US have witnessed
this change.
The impact of Skype will be felt primarily on the retail segment. Although Skype does
not have any offering for the enterprise segment as of now, the entry of other VoIP
players will have an impact on the revenues of this segment as well. According to
Kat James, Public Relations, Skype, a recent survey showed that 30 percent of
Skype retail users also used Skype at work. It is, therefore, quite likely that the
uptake of Skype business solutions will also be swift.
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Impact of Skype on Telecom Service Providers
4.1.1.1
Long Distance revenues for
US based telecom operators
is expected to decline by
about 35-40 percent by 2008
due to the impact of Skype
on the retail segment alone
The US
Fixed line operators in the US will face a significant decline in long distance
revenues. This decline will be due to two factors:
• Decline in Retail Subscriber Base: US fixed line operators will witness a
reduction in their international long distance subscriber base as subscribers with
access to broadband will find SkypeOut a much cheaper option as compared with
ILD services. This will result in a 9-12 percent decline in long distance revenues
depending on the scenario.
• Reduction in Calling Rates: US fixed line operators will need to reduce their ILD
rates in order to retain remaining customers. We estimate that rates will need to
be cut by about 35-40 percent. This will result in a further reduction of 19 percent
in long-distance revenues by 2008.
Further, wholesale ILD revenues will decline by 37 percent due to a reduction in
retail ILD traffic.
Overall, we expect long distance revenues from retail customers for operators such
as Verizon to reduce by about 35-40 percent by 2008. The estimated impact of
Skype on revenues for Verizon, a leading operator in the US is shown in Table 1
below.
Table 1: Decline in Long Distance Revenues for Verizon due to impact of Skype on the
Retail Segment (Base Case)
Total revenue (USD mn)
Revenues from long distance (USD mn)
Number long-distance subscribers (mn)
(assuming no impact of Skype)
Number of subscribers (m) (providing
for impact of Skype)
Reduction in long-distance revenues
(Due to reduction in subscribers) (USD
mn)
% Decline due to a reduction in
subscribers
Long-distance rates (USD/min)
Revised long-distance rates (USD/min)
Reduction in long-distance revenues
(Due to a reduction in prices)
% Decline due to a reduction in price
Reduction in wholesale revenues
% Decline in wholesale revenues
Revised long-distance revenues (USD
mn)
% Decline in long-distance revenues
Revised total revenue (revised for net
impact of Skype) (USD mn)
% Decline in total revenue due to
Skype
2003
2008
67,752
3,788
75,731
5,332
17
28
23.7
480
9%
0.48
0.24
0.15
1,046
19.6%
455.5
37.1%
3,788
3,351
37.1%
67,752
73,750
2.6%
Source: Evalueserve Analysis
In addition to these, Network Access Revenues will also reduce due to a decline in
traffic. The decline in overall revenues, however, is not expected to be significant
© 2005, Evalueserve. All Rights Reserved
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Impact of Skype on Telecom Service Providers
(about 2.5 percent) as international long distance services comprise a relatively small
part of total revenues. However, this effect will be much stronger for long-distance
operators.
Enterprise long distance
revenues for US based
telecom operators will
decline by about 40 percent
due to customers switching
to VoIP solutions
In addition, we estimate long distance revenues from the enterprise segment to be
impacted even more strongly, due to subscribers shifting to other VoIP providers.
Revenues from the enterprise segment might decrease by about 40 percent due to
customers switching to VoIP solutions. Further, price decreases in business calling
rates might further reduce revenues from enterprise clients by about 20-30 percent.
The impact on total long distance revenues will be approximately 11.5 percent. It
remains to be seen how much market share will Skype be able to capture in this
segment, but it is clear that Skype will have to adapt its offering to business
customers by offering value added services such as VPNs, enhanced conferencing
services, etc. as well as seek compliance with existing corporate IT policies.
4.1.1.2
Long Distance revenues for
European operators will
decline by about 41 percent
due to the impact of Skype
on the retail segment
Local fixed line revenues for
European operators will
decline by 7 percent due to
the impact of Skype on the
retail segment
Wholesale revenues will
decline 37 percent, while
retail access revenues will
decline by 5 percent as a
result of retail subscribers
shifting to Skype
Europe
Fixed line operators in Europe will witness a decline in both long distance and local
revenues. In addition to a monthly access fee, European operators charge a per min
fee for providing fixed line services. Operators will witness a decline in these
revenues too.
• Retail Long Distance Revenues: European operators, like their counterparts in
the US, will face a two-fold decline in revenues. However, the impact on
European operators will be much higher, as broadband penetration is much
higher in European countries. Long distance revenues will decline by 41 percent
due to:
­ Decline in Subscriber Base: European fixed line operators will witness a 23
percent reduction in international long distance revenues by 2008, due to a
reduction in subscriber base.
­ Reduction in Calling Rates: European fixed line operators will need to
reduce their ILD rates in order to retain remaining customers. We estimate that
rates will need to be cut by about 38 percent. Rate cuts will result in a further
17 percent reduction in long distance revenues by 2008.
• Retail Local Fixed Line Revenues: European operators charge local calls on a
per minute basis. Subscribers with broadband access will find SkypeOut a
cheaper option compared with local calling rates and will shift to Skype. This is
expected to result in a 7 percent decline in local calling revenues
• Wholesale Revenues: European operators will witness a 37 percent decline in
wholesale revenues due to a decline in national and international traffic.
• Retail Access Revenues: In addition to charging callers on a per minute basis,
operators in Europe charge monthly access fees for using PSTN lines. It is most
likely that many subscribers using broadband through cable will cancel their
PSTN subscription and opt for a combination of mobile phones and Skype.
Subscribers using dial-up or broadband through ADSL will not be able to cancel
their subscriptions as operators offer bundled services. We estimate 50 percent of
subscribers using broadband through cable will cancel their fixed line
subscriptions resulting in a five percent decline in access revenues. In addition,
some subscribers will shift from ADSL to cable for their broadband needs
resulting in a further decline in access revenues.
The estimated impact of Skype on revenues for Swisscom, a leading operator in
Switzerland is shown in Table 2 below.
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Impact of Skype on Telecom Service Providers
Table 2: Decline in Long Distance Revenues for Swisscom due to Impact of Skype on
the Retail Segment (Base Case)
Total revenue (CHF m)
Revenues from long distance (CHF
m)
Number of retail long-distance
subscribers (m) (assuming no impact
of Skype)
Number of subscribers (m) (providing
for impact of Skype)
Reduction in long-distance revenues
(Due to a reduction in subscribers)
(CHF m)
% Decline due to reduction in
subscribers
Long-distance rates (CHF/min)
Revised long-distance rates
(CHF/min)
Reduction in long-distance revenues
(CHF m) (Due to reduction in prices)
% Decline due to reduction in
price
Revised long-distance revenues
(CHF m)
% Decline in long-distance
revenues
Local revenues (CHF m)
Reduction in local revenues (CHF m)
(due to reduction in subscribers)
% Decline in local revenues
Wholesale revenues (CHF m)
Reduction in wholesale revenues
(CHF m)
% Decline in wholesale revenues
Access revenues (CHF m)
Reduction in access revenues (CHF
m)
% Decline in access revenues
Revised total revenue (CHF m)
% Decline in total revenue
2003
2008
14,837
9,634
306
285
1.79
1.79
1.19
67.9
23.8%
0.24
0.24
0.24
0.15
50
17.6%
306
167
41.4%
1,203
1,102
79
755
7.2%
450
168.6
1,488
37.5%
1,927
96
14,837
5%
9,172
4.8%
Source: Evalueserve Analysis
Enterprise revenues for
European operators will
decline by about 30-50
percent due to customers
switching to VoIP solutions
Here again, we estimate revenues from the enterprise segment to be impacted even
more strongly, due to customers shifting to other VoIP providers. Revenues from the
enterprise segment might decrease by about 30-50 percent due to customers
switching to VoIP solutions. Corresponding price decreases in business calling rates
might further reduce revenues by about 15-30 percent. Total international revenues
are expected to decline by about 18 percent.
© 2005, Evalueserve. All Rights Reserved
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Impact of Skype on Telecom Service Providers
4.1.2 Mobile revenues will decline due to a reduction in roaming
revenues
Currently, Skype does not have a product that can be used in mobile devices with
GPRS/3G networks. However, Skype has introduced a product called PocketSkype,
which enables users to make calls using PDAs and WiFi networks. PocketSkype
enables Microsoft Pocket PC 2003 handhelds users to make free unlimited SkypeSkype calls over Wi-Fi networks. Skype is also in the process of evaluating various
mobile platforms such as Windows Mobile, Symbian and PalmSource. Further,
Skype is attempting to develop products for use over mobile networks such as 3G.
Mobile operators in the US
will face a 1.7 percent decline
in mobile revenues by 2008
due to a reduction in mobile
roaming usage. European
operators on the other hand
will face a 6.8 percent decline
in mobile roaming revenues
due to the same factors
In the short run however, revenues for mobile operators will not be impacted
significantly. The decline will arise from a reduction in roaming revenues, as
business travellers shift to Skype on WiFi enabled devices for making mobile
roaming calls. We estimate mobile revenues for mobile operators in the US, such as
Verizon, to decline by 1.7 percent due to the impact of Skype. European operators,
such as Swisscom, will witness a 6.8 percent decline in mobile revenues due to
Skype. The impact on European operators is higher compared with US operators as
roaming revenues form a higher proportion of revenues in Europe. We expect
roaming revenues to be impacted by about 27 percent for both US and European
operators.
However, in case a commercially viable product like Skype is developed for usage
over 3G/GPRS, the mobile operator space will see a significant shift from voice traffic
to data traffic. This will necessitate mobile operators to unbundle voice and data
services due to a shift in demand. Mobile operators might need to offer standalone
data services as compared to combined voice and data services.
4.1.3 Though reduction in mobile and fixed line revenues will not be
significant, the impact on profitability will be significant
4.1.3.1
The net impact of Skype
adoption by retail customers
on US based operators will
be a decline of 3.4 percent in
net revenues
The US
We estimate revenues for US based operators such as Verizon to decline by 3.4
percent by 2008. However, this is a conservative scenario and Verizon might be less
exposed to Skype than other fixed long-distance oriented operators. Table 3 below
shows the break-up of this decline.
Table 3: Decline in Verizon’s Revenues due to Impact of Skype on the Retail Segment
(2008)
DECLINE IN REVENUES
2008
Total revenues (USD mn)
Reduction in long distance revenues
(USD mn)
Reduction in mobile revenues (USD mn)
Net reduction
% Decline in total revenues
75,731
1,980.7
576.5
2,557.3
3.4%
Source: Evalueserve Analysis
Profits of US based operators
are expected to decline by
17.4 percent due to the 3.4
percent decline in revenues
Though, Skype adoption is not expected to impact the topline significantly, its impact
on the bottom-line will be much higher. Operators have invested heavily in setting up
their infrastructure, which accounts for the largest part of the fixed cost base. Hence,
a reduction in subscribers hence will not result in a significant reduction in the overall
costs. This will result in a magnified impact on the bottomline, with a 3.4 percent
decline in overall revenues resulting in a 17.4 percent decline in overall profits.
Moreover, due to business clients shifting to other VoIP providers, profits are likely to
decline by 20-25 percent.
© 2005, Evalueserve. All Rights Reserved
Page 10
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Impact of Skype on Telecom Service Providers
Figure 2: Impact of Skype on Fixed Line Operators’ (Verizon’s) Profitability (2008)* (Effect
of Retail Segment only)
100
Forecasts
80
Impact of Skype
3.4% decline in Revenues
60
40
17.4% decline in Profits
20
S
ev
en
ue
s
R
C
O
G
A
SG
Pr
of
its
D
ep
re
ci
at
io
n
e
D
ec
lin
of
its
Pr
SG
D
A
ep
re
ci
at
io
n
S
G
O
C
R
ev
en
ue
s
0
Source: Evalueserve Analysis
*All figures are normalized by forecast revenues for 2008
4.1.3.2
Net revenues for European
operators will decline by 7.9
percent due to the uptake of
Skype by retail customers
Europe
We estimate revenues for European operators such as Swisscom to decline by 7.9
percent by 2008. Table 4 below shows the break-up of this decline.
Table 4: Decline in Swisscom’s Revenues due to Impact of Skype on the Retail
Segment (2008)
2008
Total revenues (CHF mn)
Reduction in long distance revenues
(CHF mn)
Reduction in local telephony revenues
(CHF mn)
Reduction in wholesale revenues (CHF
mn)
Reduction in access revenues (CHF mn)
Reduction in mobile revenues (USD mn)
Net reduction
% Decline
9,634
118
79
169
96
300
763
7.9%
Source: Evalueserve Analysis
European operators will face
a 22.9 percent decline in
profits due to the 7.9 percent
decline in revenues
The impact of Skype on European operators’ topline, at 7.9 percent, will be higher
compared with their US counterparts. The impact on the bottomline will consequently
be much more pronounced. We estimate European operators’ operating profits to
decline by 22.9 percent, as shown in the Figure below. Here again, profits are likely
to decline further by more than 25 percent due to business clients shifting to other
VoIP providers.
© 2005, Evalueserve. All Rights Reserved
Page 11
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Impact of Skype on Telecom Service Providers
Figure 3: Impact of Skype on Swisscom’s Profitability (2008)* (Effect of Retail Segment only)
100
Impact of Skype
Forecasts
80
7.9% decline in Revenues
60
22.9% decline in Profits
40
20
R
ev
en
ue
s
C
O
G
S
Pe
rs
on
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O
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er
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its
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er
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Pe
rs
on
ne
l
C
O
G
S
R
ev
en
ue
s
0
Source: Evalueserve Analysis
*Numbers are normalised by forecast revenues for 2008
4.2
VoIP providers will need to change their business models
Unlike other VoIP technologies, P2P technologies providers such as Skype do not
have to invest in setting up and maintaining infrastructure such as servers, etc. Thus,
Skype enjoys two inherent and fundamental advantages over centralized models:
• Cost advantage: Skype can offer its services at a much lower prices due to its
lower cost structure
• Scaling: Scaling of the subscriber base is easier as no additional infrastructure is
required to accommodate additional users.
Non P2P VoIP players will
witness a 94 percent decline
in their retail revenues due to
the impact of Skype
Hence, VoIP providers not using P2P technology in the retail segment will witness a
significant decline in projections for 2008 in revenues due to:
• Retail subscribers shifting to Skype will result in a significant erosion of their user
base
• VoIP providers will have to reduce their prices to compete with Skype. This will
result in a further reduction in revenues. We estimate that VoIP providers will
need to reduce their prices to approximately four Eurocents per minute to remain
competitive.
This will result in a 94.5 percent decline in revenues for VoIP providers as shown in
Table 5 below.
© 2005, Evalueserve. All Rights Reserved
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Evalueserve
Impact of Skype on Telecom Service Providers
Table 5: Decline in revenues for VoIP providers due to Skype
Revenues (USD bn)
No. of subscribers (mn)
(assuming no Skype)
No. of subscribers post
Skype
Reduction in revenues
due to reduction in
subscribers (USD bn)
% Decline in revenues
Reduction in revenues
due to reduction in price
% Decline in revenues
Revised Total VoIP
revenues (revised for
impact of Skype)
% Decline in revenues
2003
2008
2.5
12.0
0.5
71.1
46.2
4.2
35.0%
7.11
59.5
2.5
0.65
94.5%
Source: Evalueserve Analysis
Retail VoIP providers not using P2P technology will probably not survive on the
current business model
• VoIP providers will need to bring their end user charges down to the level of
SkypeOut (1.7 cents per minute) for local and long-distance calls, which might not
be feasible given the technologies used
• VoIP providers will need to invest in improving their technologies to bring service
levels to the same quality as that of Skype
The above steps imply a simultaneous decline in revenues and increase in costs.
Hence, VoIP providers will need to scout for additional revenue streams and
markets. A few alternatives are summarized below:
• Business customers: Skype currently does not have any offerings for business
customers. VoIP providers are already addressing this segment. Skype plans to
roll out services for enterprise customers by mid 2005. These services will include
value added services such as video conferencing, user groupings, etc. Skype will
charge business consumers for these services. However, given its use of P2P
technology, Skype poses some inherent issues for enterprise clients. The Skype
software routes calls through a self-propagated network. This might result in
fluctuations in call quality, depending on network usage at different nodes.
Enterprise clients demand robust services with built-in redundancies and are
ready to invest money in dedicated lines for the same. Further, it would result in
the enterprise’s network being used to route calls made by other Skype users.
This will take up some part of the enterprise’s bandwidth. Whether or not, Skype’s
business solutions address these issues still remains to be seen.
• Value added services: VoIP providers could move on to a model of offering basic
telephony services for free or at very low prices and generating revenues on
value added services such as video conferencing, voice mail, etc. Skype plans to
introduce these services for a fee. VoIP providers could also offer these solutions
at comparable prices.
© 2005, Evalueserve. All Rights Reserved
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Evalueserve
Impact of Skype on Telecom Service Providers
5 Conclusion
Incumbent telecom operators offering fixed and mobile services are likely to face a
significant risk of permanent reduction in profitability of between 22-26 percent by
2008 due to Skype on the retail segment alone. There will be a significant reduction
in profitability due to an erosion of long-distance revenues in the business customer
segment, once Skype and other VoIP providers offer viable solutions in this segment.
European operators are much more exposed due to the characteristics of European
telecom markets, since calling and roaming rates are higher and since local calls are
charged by the minute. Additionally, a combination of mobile phones and Skype via
internet delivered by cable may make fixed line access redundant altogether thereby
resulting in a decline in subscription access fees.
In a base case scenario, Fixed line operators will be much more exposed than
mobile operators, as a much larger share of the fixed line traffic will be exposed to
Skype. However, mobile operators will face much more significant exposure, once
Skype and other VoIP players offer mobile solutions by reducing roaming fees and
mobile voice traffic significantly.
VoIP players not using P2P technology in the retail segment might not survive on
their current business model, since P2P technology has an inherent cost advantage
and is likely to retain a quality advantage as well. Skype’s competitiveness in the
enterprise segment will have to be seen, once Skype introduces its business
solutions.
In conclusion, Skype represents a major disruptive force for all telecom service
providers and will result in a faster than expected convergence of voice and data
traffic. Skype will accelerate the already underway change in telecom business
models, to one where basic voice services are offered free of cost and are
subsidized by revenue generated from value added services.
© 2005, Evalueserve. All Rights Reserved
Page 14
Evalueserve
Impact of Skype on Telecom Service Providers
Evalueserve Disclaimer
The information contained herein has been obtained from sources believed to be
reliable. Evalueserve disclaims all warranties as to the accuracy, completeness or
adequacy of such information. Evalueserve shall have no liability for errors,
omissions or inadequacies in the information contained herein or for interpretations
thereof
© 2005, Evalueserve. All Rights Reserved
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