How Free is Free?

The great thing about selling software is that the incremental cost is very small - typically the cost of production and packaging.

If the software is delivered via download, even that cost goes away, and the incremental cost per unit shipped can be arbitrarily close to zero.

The exception is if the software includes any licensed technologies - then there can be a per-unit cost for licensing.

"So what's this got to do with telecom," you ask? Well, Skype has claimed that its marginal cost per user is less than US$0.01. But Skype licenses the Global IP Sound VoiceEngine product, and it's not free: Global IP Sound's 3Q04 results include in their highlights "First royalties from Skype Technologies S.A."

Also in their 3Q04 results, Global IP Sound notes that "Deployed software reached more than 26 million endpoints (measured by downloads and shipments)." Doing a pencil-and-paper interpolation from a chart in a Skype Journal post, it looks to me like Skype had about 21M downloads as of the end of 3Q04. Since this is the first quarter in which Global IP Sound realized revenue from Skype, let's assume every Skype download up to the end of 3Q04 generated revenue for GIPS in 3Q04.

Let's also assume that the Skype marginal cost per user is as much as US$0.01, and 100% of that marginal cost is the license for GIPS VoiceEngine. The royalties from Skype to GIPS would therefore have been around US$210k, or about KSEK 1,610 at current exchange rates (I don't know what the exchange rates were in 3Q04, but that's a level of precision way beyond this analysis anyway).

Now, Global IP Sound's total revenues reported for 3Q04 were KSEK 7,639. Which means that since Skype didn't contribute more than KSEK 1,610, other GIPS customers contributed about KSEK 6,000.

But if total deployed software reached 26M endpoints, and 21M of those endpoints were Skype, then the other 5M shipments generated KSEK 6000 for GIPS, or an average of SEK 1.20 per endpoint - over 15 times the upper limit on the revenue per endpoint that GIPS could be getting from Skype.

So either:

• Skype has a tremendously favorable licensing contract with GIPS (possibly getting a very good price in exchange for the publicity Global IPSound is getting out of being associated with Skype, and the potential business they can get licensing their products to other customers who want to make products that interwork with Skype) - in which case other GIPS customers could be getting pretty upset; or,
• Skype's marginal cost per customer isn't really less than $0.01.

Perhaps that's another reason why Skype is moving into retail - not only is the viral marketing growth potentially slowing, but giving away a non-free product can cut into one's margins...

Off-Topic: Pictures and Stories

Why, in an article headlined "US Regional Jets Under Scrutiny", over a caption of "During the first half of 2005, 33 percent of all domestic U.S. flights were on regional jets", does CNN run a picture of a Saab 340 turboprop? Couldn't they find any pictures of a CRJ? (I found 461 just on airliners.net; I'm sure with all of CNN's resources they could have found one picture they could license...)

Skype Codecs

Aswath believes, based on some rather cloudy statements in a CommsDesign interview, that Skype has built a proprietary codec that gives them better sound quality than POTS or other VoIP.

Personally, I'm skeptical. For one thing, codec design isn't easy. For another thing, there are a bunch of perfectly good wideband codecs out there (GIPS iSAC, which Skype is known to use; G.722, which goes back to the eighties; G.722.1 and G.722.2, more modern standard wideband codecs (G.722.2 is also known as GSM AMR-WB), though there may be licensing issues), so why reinvent the wheel?

Furthermore, the Global IP Sound VoiceEngine package comes with iSAC (known to be used by Skype), iLBC (ditto), G.711 (mentioned in the CommsDesign article), and with G.729 as an optional component (known to be used for SkypeIn and SkypeOut). If you're licensing a package with that complete set of codecs, why take the time and energy to build a brand-new wideband codec?

Then again, maybe there are a bunch of really bright Estonian speech processing gurus working for Skype. (Speech processing gurus who are Estonian, not gurus at processing Estonian speech...)

Maybe it's the Language Barrier

Aswath takes a shot at some claims in the CommsDesign interview of Niklas Zennstrom. Reading the interview, one has to wonder: is Mr. Zennstrom intentionally being misleading about how Skype compares to other VoIP architectures, or is he just uninformed?

In answer to a question about how Skype claims better quality of service than other VoIP providers and regular phone lines, Mr. Zennstrom replies that Skype's peer-to-peer technology means that "the connections between end users are set up directly over the Internet to end users, rather than having to go through a central server somewhere."

But in every VoIP architecture, the (media) connections between end users are set up directly over an IP network (the Internet or a private IP network). The only case where the media connections do not go directly between the end users is when a Session Border Controller is in the media path - but this an exception in the same way that Skype uses supernodes for NAT/firewall traversal, in which case the Skype media connection does not go directly between the end users either.

The call/session control information will "go through a central server" in an H.323 or MGCP network (though it may not in a SIP network); however, how call/session control information is handled has little to do with sound quality.

So is Mr. Zennstrom intentionally mixing call/session control information with media connections, or does he not understand the difference?

Clearwire Spectrum Acquisition

Several blogs have made note of a purchase by Clearwire of 2.5 GHz BRS spectrum from CT Communications, nee Wavetel, and questions have been raised about what areas the licenses cover.

You could search the FCC Universal Licensing System, but then, why would you be reading this when you could be having fun searching ULS?

So here goes. The licenses cover 6 BTAs (Basic Trading Areas):

BTA062, Burlington NC
BTA141, Fayetteville-Lumberton NC
BTA229, Kingsport-Johnson City TN
BTA295, Middlesboro-Harlan KY
BTA368, Raleigh-Durham NC
BTA382, Rocky Mount-Wilson NC

There are also nine specific licenses within those BTAs, and one license in BTA074, Charlotte-Gastonia NC.

Note that the NC BTAs are all in the Raleigh-Durham area. Clearwire did not purchase CTC's licenses for six other BTAs in NC.

Bring Out Your Lawyers

One of the most interesting (where by "interesting" I mean "capable of generating megabytes of informed, partially-informed, and wholly-uninformed debate") aspects of the FCC VoIP E911 Order is the determination of exactly to whom it applies.

For the one or two of you out there who might not have read it yet, the Order identifies something called "interconnected VoIP services," and defines it as having the following characteristics:

(1) the service enables real-time, two-way voice communications;
(2) the service requires a broadband connection from the user’s location;
(3) the service requires IP-compatible CPE; and
(4) the service offering permits users generally to receive calls that originate on the PSTN and to terminate calls to the PSTN.

VoIP provided by a cable MSO? Check.
Bring-Your-Own-Access residential VoIP such as Vonage or AT&T CallVantage? Check.
VoIP as part of Xbox Live? Nope.
VoIP as part of a chat application with no PSTN dial-in or dial-out capability? Nope.
VoIP tie-lines between PBXs? Nope. (No inherent dial-in/dial-out.)
Skype? Hmmm.

Well, it enables real-time, two-way voice communications. It requires IP-compatible CPE (since footnote 77 explicitly states that "IP-compatible CPE includes... a personal computer with a microphone and speakers, and software to perform the conversion (softphone)."

The other two traits are more interesting.

The Skype application makes use of adaptive, low-bit-rate codecs, and Skype could certainly claim that a broadband connection is not inherently required.

And Skype, in and of itself, does not "permit users generally to receive calls that originate on the PSTN and to terminate calls to the PSTN." You need to buy SkypeIn and buy SkypeOut minutes for that.

It'll be interesting to see Skype (or, more precisely, Skype's lawyers) respond to the Order. As has been noted several places, they've already said it doesn't apply to them at all - though I haven't seen them play the "no broadband connection required" card yet. I don't know if that argument will fly; keep your eyes open for the next Ex Parte Skype has with the FCC to see what arguments they make. They may have to fall back to an argument that Skype per se isn't an interconnected VoIP service, but Skype plus In plus Out is. (Which Richard points out the FCC pretty much concludes in Para 58.)

Next up: Jurisdiction.

VoIP 911 - Location Updates

This is the first on what I hope will be a number of posts deconstructing the FCC VoIP E911 order.

The Order requires that Interconnected VoIP Service Providers must "provide their end users one or more methods of updating information regarding the user's physical location." Fine; simple enough to provide a web page for users to enter their location when they take their service on the road.

Alas, not so fast. The Order also requires that the provider include "at least one option that requires use only of the CPE necessary to access the interconnected VoIP service."

I suspect the simplest way to implement this - and the only way it can be done in 120 days - is to go ahead and build the web application, encourage your users to use it (as I suspect that the overwhelming majority of VoIP users who take their ATA on the road also have a laptop with them), and give them the option of calling the customer service number to update their location.

Of course, given some of the reports of customer service wait times of up to an hour at Vonage, it's not clear a "call customer service" option would satisfy the FCC requirement that "any method utilized allow an end user to update his or her Registered Location at will and in a timely manner..."

Server-Side Skype

Aswath points to a white paper by Connectotel that describes server-side Skype applications, and notes that one could use the techniques described to build competitors to SkypeIn and SkypeOut (and, I'd add, Skype Voicemail).

Alas, playing in this sandbox has some risks.

For one thing, there are limitations. To quote one section of the Connectotel white paper:

It is important to be aware that granting authorization within the Skype client is currently a manual process for which no APIs exist. This implies a potentially large amount of work for personnel who will have to grant or deny authorization one-by-one to the userswho request it.

In other words, authorization can't be easily automated, which makes it rather hard to scale. This limitation of the API points out the second risk: If you do something with the API that starts taking money out of Skype's pockets, Skype can always change the API. After all:

Skype, in its sole discretion, reserves the right to add additional features or functions, or to provide programming fixes, updates and upgrades, to the Skype Software. You acknowledge and agree that Skype has no obligation to make available to You any subsequent versions of the Skype Software. (Skype EULA)

And

Furthermore, you acknowledge and agree that Skype, in its sole discretion, may modify or discontinue or suspend Your ability to use any version of the Skype Software, or terminate any license hereunder, at any time. Skype also may suspend or terminate any license hereunder and disable any Skype Software You may already have accessed or installed without prior notice at any time. (Skype EULA)

Not something I'd build a business case on.

Broadband Price Wars

SBC has escalated the broadband pricing wars, reducing the introductory price of their entry-level DSL offer to $14.95/month. (One-year term, and the price goes to the then-current price at the end of the term.) This is only $2/month more than their dialup internet access (bundled with local/LD service).

Next step: Incent dialup internet subscribers to convert to DSL and shut down/sell off the dial access network, reducing operational expenses. (Telcos love opex reduction business cases.)