September 5, 2004

In Internet Calling, Skype Is Living Up to the Hype

OW big a deal will Skype turn out to be? I have no idea whether the company itself, which was founded one year ago, will someday come to epitomize and dominate a particular booming business, the way Google, eBay and Amazon now do. But I feel confident that the service it provides will be attractive to most people who give it a serious look.

Skype, a made-up term that rhymes with "tripe," is the most popular and sexiest application of VoIP, which doesn't rhyme with anything. VoIP - sometimes pronounced letter by letter, like C.I.A., and at other times as a word - stands for voice over Internet protocol. Essentially, it is a way of allowing a computer with a broadband connection to serve as a telephone.

This new form of conveying voice messages has so many advantages over traditional systems that the whole telecommunications industry is scrambling to see how fast it can shift traffic onto the Internet. AT&T, for example, is no longer recruiting new home customers, but it is offering many new VoIP services. Dozens of other companies - new ones like Vonage and established ones like Verizon - are selling VoIP services, too.

Skype's distinction is that, for now at least, it is the easiest, fastest and cheapest way for individual customers to begin using VoIP. It works this way:

First, you download free software from skype.com. Skype runs on most major operating systems, including Windows XP and 2000, Linux, Pocket PC for portable devices and, as of this summer, Mac OS. On three of the computers on which I installed it, it ran with no tweaking at all. On the fourth, I had to change one setting for the sound card, following easy instructions on the site.

While running, Skype sits in a little window, like an instant-messenger program, and lets you to talk with other users in two ways. If the other person has Skype installed, you can talk as long as you want, free, and with sound quality that is startlingly better than that of a normal phone connection. Over the years, I have learned to say "that's 'F' as in Frank" when spelling my last name on the phone, because normal phone lines don't carry the frequencies that distinguish "F" from "S." Listening to a conversation on Skype, by contrast, is like listening to a radio program over streaming audio. The sound comes from speakers that are built into most laptop computers or attached to most desktops.

You'll need a microphone. Most laptops come with nearly invisible but quite effective tiny microphones embedded near the keyboard. (It may look odd to be talking to your laptop while using Skype, but in the cellphone age, we've all seen worse.) At either a desktop or a laptop computer, you can use a separate microphone or, less awkwardly, a phone handset or headset that plugs into a computer port. Skype sells headsets for $15 and up. I got the cheapest model, which works fine.

You can also reach people who don't use Skype, through a new service called SkypeOut. This allows you to dial nearly any cellular or land-line telephone number in any country and talk. Though it isn't free, it's really cheap. Skype's prices are in euros - its founders are Scandinavian, the main programmers are Estonian and its headquarters are in Luxembourg - and they average two or three American cents a minute, at any time of day. With a credit card, you buy calling time in units of 10 euros ($12.18), which are deducted automatically as you talk.

I started with 10 euros. After my wife talked to her sister in Italy for a half-hour and I made one quick call to the Philippines and five more within the United States, we still had 9.10 euros left.

Another time, I spoke from Washington simultaneously with my son in San Francisco and his business partner who was visiting Bangalore, India. (Up to five parties can participate in a Skype conference call.) All of us were at computers running Skype, so the conversation was free. The sound quality was sharp; it was about like speaking in person, and the connection had none of the satellite-bounce delay of normal transoceanic phone calls. Skype also allows file transfers and instant text messages during these computer-to-computer sessions.

There is one huge drawback: Skype works best from a fully connected computer, which runs counter to the whole trend of ever more mobile communication. At the end of Skype's first year in business, I spoke with its co-founder, Niklas Zennstrom - via SkypeOut, on his cellphone in London - about his ambitions for the second year. High on his list were partnerships with manufacturers of cellphones and personal digital assistants, to build in compatibility with Skype. The company will also sustain its push to sign up new users. Skype says it has about 10 million users in 212 countries, with an average of more than 600,000 logged on at any given time.

SKYPE illustrates network economics in the purest form: free connections within the network become more valuable to each user as more users sign up. Because of the system's peer-to-peer design, loosely related to the Kazaa file-sharing program that Mr. Zennstrom and Skype's other co-founder, Janus Friis, invented four years ago, the system scales well - that is, it doesn't bog down as more users join. The peer-to-peer design also allows it to work behind most Internet firewalls.

Skype's own economics, including its promise that it will never impose a charge for Skype-to-Skype connections, depend on maintaining its rock-bottom cost structure and slowly adding revenue, through services like SkypeOut and future voice-mail and video-call services. The drive to hold down costs is also what originally took Mr. Zennstrom, a Swede, and Mr. Friis, a Dane, to Estonia. As Mr. Zennstrom sees it, during the "bubble years" in Sweden, programmers lost some of the hungriness and hustle he could still find in the Baltics.

The risks make it hard to predict the company's future. The world's existing telecom companies, battered for more than a decade by technical, regulatory and marketing changes, will presumably want to answer this latest challenge. Mr. Zennstrom says the telecoms should view Skype as healthily "disruptive technology" and respond by reinventing their business - as I.B.M. has done since the rise of the personal computer - instead of pouting their way into decline.

From the individual user's point of view, there are also questions about whether this new form of instant access could become as oppressively intrusive as e-mail often seems. But at this moment, it's hard to resist.

James Fallows is a national correspondent for TheAtlantic Monthly. E-mail: tfiles@nytimes.com.