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Verizon and Skype: Who’s the Winner?

This article ran earlier today on Jon’s Service Provider Views column on TMCnet…

Although I didn’t attend, this week’s Mobile World Congress seemed like a fitting stage for news of this nature. Until only recently, has it been remotely plausible to consider such different companies joining forces. I’ve written about Skype often, and for the most part, they’ve been a threat for incumbents of all stripes. To hear about this from Verizon during such a public event makes it very clear that the sands are shifting once more, and yet again, VoIP is the culprit.

Skype has upset another apple cart, but I’m more inclined to put a positive spin on things, and say the opposite. No doubt the golden egg of wireless is poised to go the way of the RBOCs in the wireline world, and that’s not good for the major mobile operators. On the other hand, this trend is inevitable, and in time, all mobile voice calls will be IP, running over a data network. Service providers are well aware of the risks of waiting too long, where either an established asset becomes a liability, or they miss the boat the first time around.

Think about the wireline incumbents, who of course, were the last to embrace VoIP. They’ve hung on too long, and that market is going away either to cablecos or wireless. We all know that today’s youth will never have landlines, so there really is no future in this market. Think about how Verizon Wireless turned down the iPhone, and what a winner it’s been for AT&T. Verizon Wireless has a pretty healthy business, but they’ve never had an answer for Apple.

Skype, on the other hand, has its own challenges. Having gone to Silver Lake, they have debt to manage now. Their growth story is still intact, but the business model has inherent limitations, and this has led them to seek closer ties with service providers. The business market could be a great opportunity for them, but they need carrier partners to really make this work. They absolutely need to grow beyond the desktop, and their efforts to date have been moderately successful, but a far cry from being a real growth driver.

I am sure you can see where this is going. Verizon and Skype both have needs, and face some common enemies. They are hardly complementary and have no warmth in their history. However, when long term survival is at stake, you can rationalize anything, and at face value, its news on Tuesday makes good business sense. Verizon gets access to Skype’s huge global community, which they expect will be a great driver of data traffic over their 3G network.

Also, with Skype being mostly a voice service, you don’t need an iPhone to use it. Any smartphone will do, so in lieu of offering the iPhone, Verizon can now create a distinct value proposition built around the smartphones they want to offer. This may not totally neutralize AT&T’s handset advantage, but it gives Verizon a different advantage that comes by not being an Apple partner.

With Skype, Verizon has more levers to control the overall value proposition, and not be held hostage to the demands of Apple, who have radically shifted the traditional balance of power between operators and handset vendors. I would argue that this matters to Verizon, especially when all evidence points to the superiority of their network over AT&T. An example of this control is the fact that Verizon’s deal with Skype precludes the use of WiFi. This ensures that Skype calls are routed over their network and not someone else’s. It’s not clear how long they’ll be able to uphold this, but for now, it helps make their data plan more attractive, hopefully to the point where people will think twice about going to AT&T just for the iPhone.

Interestingly, Skype’s deal is not exclusive to Verizon, as they do have an iPhone app with AT&T, so they actually get the best of both worlds. However, with Verizon, they get an instant bolt-on to a huge subscriber base and integration with every top smartphone not made by Apple. We don’t know the revenue sharing details, but I have no doubt the financial upside is attractive for Skype. It’s also not clear how using Skype for IM will impact Verizon’s SMS revenues - which could be substantial—but I’m sure they’ll figure this one out.

Thinking more strategically, Apple may be the coolest tech brand ever, but Skype has cachet too, and Verizon knows this is a great way to gain overnight credibility with the youth market, as well as business users (and their addictive BlackBerrys), both of which are heavy Skype users.

I’m keeping this analysis high level, mainly because the details would make this a very long piece, and they’ve been dissected extensively by bloggers who followed this minute-by-minute. There are many items I haven’t touched on here, but from my view, I’d say both companies come out as winners.

Skype brings more to Verizon than to AT&T and the iPhone, and the longer mobile operators ignore VoIP, the more they stand to lose. Sure, those long distance and roaming charges will be hard to give up, but they won’t disappear entirely any time soon. More importantly, anyone using mobile broadband knows there are cheaper ways to make phone calls, and customer goodwill will turn into goodbye if carriers stand still.

With IP, the economics of voice change big time, and there’s no turning back. What happened to wireline will be repeated with wireless, and this news with Skype and Verizon is a major inflection point in the evolution of mobile. The iPhone was a big one for sure, but I think this will be bigger as it will cause every mobile carrier to rethink their core business plans. It will be very interesting to see who makes the next move, and how they will respond, and you can be sure I’ll have something to say about it soon after.

By Jon Arnold, Principal, J Arnold & Associates

Jon is also co-founder of Intelligent Communications Partners that focuses on the smart grid space.

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