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Tue 2 Mar 2010 12:00 AM

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Out of the shadows

Fixed and mobile operators are increasingly coming to recognise that they can benefit from opening up access to VoIP services. Roger Field speaks to Skype's Middle East and Africa head, Rouzbeh Pasha.

Fixed and mobile operators are increasingly coming to recognise that they can benefit from opening up access to VoIP services. Roger Field speaks to Skype's Middle East and Africa head, Rouzbeh Pasha.

The fear that Skype instills in traditional telecom operators is perhaps most evident from the number of operators that try to restrict access to the service.

But despite being viewed as a harbinger of lost revenue by many operators, a growing number of telcos, both fixed and mobile, are coming to view the world's leading voice over internet protocol (VoIP) player as an unlikely ally in the battle against churn and the drive to generate more data use.

In the Middle East especially, Skype has been viewed with deep suspicion by incumbent operators afraid of losing lucrative international voice minutes to the software company.

In the Middle East and Africa, access to Skype and other VoIP players remains blocked in the UAE, Oman, Kuwait and Ethiopia. In the UAE, access to Skype was restricted by the telecom regulatory authority (TRA) in October 2006, and while there have been a number of statements from the regulator about liberalising VoIP services since then, there has been little sign of a change of direction.

Most recently, Mohamed Naser Al Ghanim, director general of the UAE's TRA's hinted that a new policy to allow VoIP calls would be allowed, but gave no timeframe or indication that companies other than Etisalat and Du would be able to offer VoIP.

It is perhaps unsurprising that the appearance of VoIP around 2003 led to some extreme measures on behalf of traditional telecom operators, given its rapid growth.

For Skype, the past couple of years in particular have seen strong subscriber growth, according to Rouzbeh Pasha, head of Skype Middle East and Africa.

"We have grown quite substantially during the last couple of years. In 2009 alone we grew with 160 million new users," he says. "In 2008, we were representing 8% of total international communication traffic according to Telegeography, and this increased to 12% in 2009. This is a company that did not exist eight years ago."

Going local

Developing markets, including countries in the Middle East and Africa, are contributing to a significant proportion of Skype's growth. For Pasha, this is most likely attributable to the roll out of internet infrastructure, and people having easier access to internet.

"That is why emerging markets are becoming a much more important area for us to focus on when it comes to our future growth and how we can bring the advantage of Skype to new people," he says.

While Pasha says that the MEA region is providing strong growth, he is unable to give clear figures on where Skype's users are from, mainly because the service is based on the internet, and "the internet has no boundaries," he adds. Skype, Pasha says, prefers to focus on the total number of subscribers which is now about 520 million around the world.

While three Gulf countries continue to restrict access to Skype, Pasha is optimistic about business in the region for the company, and he insists that the Middle East and Africa is a key region for growth.

He points to the launch of an Arabic version of Skype's website in November 2009, and ongoing discussions with local companies as an indication of the company's aims for the region.

"One of the main reasons we did it was customer feedback," Pasha says. "Arabic is a major world language and most Arabic speakers are in emerging markets," he says. "As internet access becomes more readily available in a lot of emerging markets, so Arabic speaking people are growing as part of our customer base.

"The localisation is about how we can help people, how can we forge partnerships with local companies to let people be able to access the internet and access the advantages of Skype," Pasha adds.

Verizon earns praise for alliance with Skype

When Verizon announced recently that it would allow unrestricted use of Skype on its mobile broadband network, it was widely credited as a positive move by analysts and industry insiders.

Dario Talmesio, a senior analyst at Informa Telecoms & Media said the announcement demonstrated that mobile operators were beginning to change their attitude towards VoIP providers.

"They have gone from blocking to managing what they consider to be an issue. However, the majority of mobile operators have yet to make a firm decision, but market forces are such that mobile operators can't avoid internet-based VoIP," he said.

He also had stern words for operators trying to defend older business models by blocking access to VoIP services. "Those operators wanting to be serious players in the mobile internet need to embrace openness and they need to allow internet services - this includes VoIP.

"Blocking VoIP is a short sighted strategy. Those operators fearing VoIP providers need to be able to provide a compelling service competing with VoIP. Blocking VoIP simply doesn't work for customers," he said.

Mobility counts

While fixed line operators globally have gradually come to accept VoIP and realise that it is not an inherent threat, so mobile operators are also beginning to see that Skype and other VoIP services could represent an opportunity.

As operators around the world started to deploy 3G services, it soon became apparent that users could bypass the operators' voice network by accessing Skype, which led to a trend of mobile broadband operators blocking the service.

But in the past couple of years, operators are starting to show a change of attitude, with UK operator 3, which is owned by US operator Hutchison Whampoa, collaborating with Skype in 2006, and US operator Verizon launching Skype for its 3G users this month. Verizon's main rival AT&T allowed its data subscribers access to Skype in the fourth quarter of 2009.

Pasha adds that one of the most popular applications for Apple's iPhone worldwide is Skype. Within 24 hours of releasing a modified application for the iPhone, Skype had about 1 million downloads, he says. "We had been debating when to launch it...but this was proof of how much people were waiting for it," he adds.

For Pasha, mobile broadband is likely to represent a significant slice of Skype's business in the future, and he is keen to stress the potential benefits for operators.

Essentially, the pro-VoIP argument, and one which 3, AT&T and Verizon Wireless appear to have embraced, is that by offering their users access to applications such as VoIP, they will in turn reduce churn and attract more mobile data subscribers, which should more than offset any losses caused by subscribers using VoIP to make voice calls.

"If you are using Skype to chat to your friends and relatives, this is data that is being communicated from your device to the internet. You need to have a data plan to support that, and that is one of the areas where we see a strong sort of alignment with telecom operators in emerging markets," Pasha says.

Furthermore, Pasha predicts strong growth in the mobile broadband sector in emerging markets, not least because many smartphones are cheaper than PCs and laptops. He adds that in these markets, the ability to use services such as Skype on a smartphone could prove to be a powerful draw for potential subscribers.

"The value that we bring to users is the quality of the service does create a pull from customers to try to use this software, and that is where we see the operators could offer data plans that can support this type of application," Pasha says.

"A data plan like this is something that a user might not have otherwise subscribed to. If you are just doing a text message and a couple of short voice calls to people in your own city, then you are not in need of an advanced data plan, but as soon as you start using these more sophisticated software applications such as Skype, which creates a lot of traffic, then customers are going to need data plans that support their usage."

An added benefit for operators, according to Pasha, is that they do not need to make any costly infrastructure upgrades. They are simply allowing access to a version of Skype modified for mobile devices.

Benefits for 3

While UK operator 3 might be operating in a market considered different from emerging markets, Pasha points out that there are some similarities, in that many African countries also have extremely competitive mobile markets and low voice tariffs.

 In the case of 3, the operator did have doubts about whether to work with Skype. "Initially they saw it as something that might cannibalise on their main revenue stream, so it was a leap of faith," he says.

Both companies were surprised by the results of the collaboration. While 3 started working with Skype to differentiate itself from its rivals, it found that the addition led to a fall in churn and an increase in voice revenue from some users through the number of international voice minutes being used, according to Pasha.

"With Skype, they are making less money per minute but the number of minutes ballooned from very small numbers to millions. First they assumed they were going to make the same amount of minutes but with less money, but what they didn't take into account was the increase in the number of minutes. This is one of their major success stories," he says.

In the Middle East and Africa, Pasha says that Skype wants to make contact with operators looking for applications to help drive new business. He stresses that Skype is an ally and not a threat.

"What we offer is an innovative new way to communicate between people and I believe there is business here for telcos, who naturally see us as a competitor.

"But we are not a competitor, we are a software company. We work with telecom companies to bring our services and complement our services, but in the end, Skype is software. We would like to reach out to companies in the region to align our interests and bring the advantages of Skype to users."

Case study: 3’s partnership with Skype

When 3's parent group Hutchison started discussions with Skype, its key strategic objective was to reposition 3 as an innovative internet operator. These discussions were not part of a lengthy portfolio decision process, but focused on how Skype could strengthen the operator's main marketing theme of being a disruptive market player.

As a challenger in the fiercely competitive UK market, 3 saw the partnership with Skype as a means to differentiate itself, and as a way to build up its customer numbers. At the start of the partnership it viewed Skype as a leading brand in the consumer internet communications market, with a high public profile thanks to its acquisition by eBay.

According to research from UK-based CCS Insight Consulting, 3 opted to collaborate with Skype in a bid to reposition itself as an "innovative internet operator" and to stand out from its rivals. But the partnership also gave rise to other unexpected benefits.

Indeed, while 3 initially aimed to use Skype as a means of differentiation and as an acquisition tool, one of the most significant impacts was to drive up margins, especially through an increase in voice revenue, but also by reducing churn.

The research also found that 3's mobile Skype users generated almost 6% more voice revenue than non-users; spent almost a third more on SMS than non-users, and had a margin uplift of more than 20%. Regular Skype churned 14% less than non-users.

According to CCS Insight Consulting, the collaboration with Skype helped 3 "meet the challenges facing every mobile network operator" by contributing to higher revenue and higher margins, greater customer engagement and lower churn.

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