Why Do Carriers Hate Skype? Let Me Count The Ways... (updated)

I meant to write this blog a while back but was just too busy before the summer vacations. So we heard that Microsoft bought Skype in May. I went on record saying that this is the death-nail to Microsoft's new smartphone operating system Windows Phone 7, because mobile operators/carriers hate Skype with a passion. Note, this is not necessarily a bad thing for Microsoft, as they get most of their business out of Windows OS for the PC and the Office Suite etc. Skype may well provide good synergies for various Microsoft properties - but not its mobile initiatives.


(UPDATE May 3, 2012 - Nokia's shareholder meeting has just ended. Nokia's CEO was asked directly about carriers refusing Lumia sales due to Skype. Elop answered that it is true some carriers/operators refuse Lumia but that Nokia hopes to use other arguments to win those carriers/operators over. The matter is now closed. It is a fact, admitted by Nokia's CEO himself, that some carriers are refusing Nokia Lumia and Microsoft Windows Phone sales, because of Microsoft's Skype purchase. Please take that in mind, as you read this blog I wrote half a year ago, and the insights in this blog - plus the severe arguments we have in the comments where many Microsoft fanboys try to defend the indefensible)


So Skype is hated by the mobile operators/carriers. And once Microsoft took ownership of Skype, that hatered was instantly transferred to Microsoft as well. If Nokia goes onto its misguided Microsoft 'strategy' with its smartphones, Nokia too will be victim of this hatered of Skype. So what is going on? Lets explore and explain why the carriers all around the world (with a few exceptions) hate Skype.

NOTHING WRONG WITH VOIP

First, lets be clear. Skype is a service that primarily allows us to make voice calls on the internet (it also does other things like instant messaging and video calls etc). That portion of Skype is delivered on a technology called VOIP (Voice Over Internet Protocol). VOIP is nothing new. Way back when, in the mid 1990s when I was still employed at Elisa Corporation and Finnet International, managing the international voice call services business, we saw the emergence of VOIP services as a new technology to compete against traditional 'circuit-switched' international voice minutes. VOIP has turned into a very reliable robust way to deliver more voice calls over the same telecommunications capacity, whether via wired lines or over the air in wireless solutions, like cellular telecoms. VOIP is good as a compression method (but sometimes it produces echos and distortions) to provide more efficient use of telecoms tech to give more people a chance to use the telecoms network capacity at the same time - hence it helps cut costs and those costs in a perfect world, will get transferred down to us consumers through competitive pressures.

Mobile operators and carriers like VOIP too. Most of them - most of them - have already deployed VOIP solutions into their networks to help drive down the costs of voice calls again often led by international calls. If you have a special discounted international call service from your provider, for example one that requires you to dial some special prefixes before you call your international calls to get the discounted international minutes, odds are, that the service (and your discount) is then delivered via VOIP technology. So to be very clear, mobile operators/carriers do not have any philosophical issue whatsoever with Skype because of VOIP the technology. Mobile operators/carriers themselves are deploying VOIP. So with that out of the way, lets get into this Skype matter.

MOBILE INDUSTRY STRUCTURE

The mobile telecoms industry is one of a rare few that generates more than a Trillion dollars (1,000 Billion) of revenues per year. So mobile is far bigger than the landline telecoms business, twice as big as the computer ie IT industry, three times as big as global TV business, four times bigger than the internet industry etc. Mobile was tiny twenty years ago and only mid-sized a decade ago but now towers as one of the biggest industries on the planet, on par with the total sales of all automobiles, or size of the global military spending annually etc. And mobile is by far the fastest-growing Trillion-dollar industry ever seen - generating new billionaires and the worlds' richest person too (Carlos Slim the Mexican mobile telecoms tycoon now for 2 years in a row been richest man, took that title from Bill Gates).

So how does this industry make its revenues? Most of the money is not in the smartphones or their apps, even as those are in the news a lot. Its not in the ringing tones or in mobile advertising or other content or media. The majority of the mobile industry's revenues is earned by the mobile operators/carriers - like Vodafone, China Mobile, AT&T, Telefonica etc. Last year 2010, a total of 79% of all revenues earned by the mobile industry were billed by the carriers/mobile operators - worth 928 Billion dollars (out of the total industry worth 1.18 Trillion dollars last year). Almost 4 out of every 5 dollars in this mobile telecoms industry, is money billed for by the carriers/mobile operators (and most of those, by the way, are through 'prepaid' accounts where the customer purchases a prepaid amount of voice minutes, SMS text messages etc).

So the revenues earned by the mobile operators alone is more than twice that of all TV operators (broadcast, cable TV, satellite etc where nearly half is advertising) combined and three times more than all internet related revenues (most of which is advertising as we know). What is mobile telecoms revenue made of? You'd think much of it is advertising but no, advertising is a tiny tidbit of the mobile operator revenues, of the magnitude of 6% last year. What is most of the revenue for mobile operators?

VOICE CALLS AND MESSAGING

Voice calls. Voice services made up 628 Billion dollars of mobile operator revenues last year, ie exactly two thirds. 67%. And more importantly, how much of total mobile operator profit came from voice calls? In rough terms about 50%. So voice calls are what is called a 'cash cow' in management terminology, a product that is mature, is used by most customers and which generates a giant share of the total industry revenues and profits. Two thirds of total revenues and half of total profits come from voice calls. To say thats pretty important is an understatement. Without voice revenues, the mobile telecoms industry would collapse.

And to see where is the rest, the second biggest revenue generator for mobile operators is mobile messaging (mostly SMS and MMS) which generated 172 Billion dollars of revenues to the mobile operators last year. To understand how big this is - thats more than all handset sales (165 Billion dollars) last year, and handset sales includes both the smartphone we like and the cheaper 'dumbphones' that sell in the Emerging World markets to less affluent consumers. Mobile phone messaging earned more revenues last year than every single handset sold, out of a handset industry that sold 1.4 Billion handsets last year including almost 300 million smartphones. Mobile messaging is that big (yes with 4.2 Billion active users, mobile messaging user base is more than twice as big as the total internet, 3 times more people consume mobile messaging than own a TV set, more than 5 times more people use SMS text messaging than use Facebook etc).

So mobile messaging generated 19% of total mobile operator/carrier revenues and get this - generated 45% of total profits. Together, voice and messaging produced 86% of all mobile operator revenues and 95% of their profits! Because they deliver essentially all of the profits, hese two services are what keep the mobile industry alive. If either was to be threatened, that would be an instant threat to the very survival of the mobile operator/carrier community. An existential threat in fact.

All the other cool things we do, from our Angry Birds to our weather reports to search to maps to mobile money, all that fits into the last 14% of revenues and mere 5% of profits earned by the carriers/mobile operators. Yes, they do want us to surf on the 'mobile internet' but the money is not there. The profits for this industry (today) are generated by mobile voice, and mobile messaging. That is what keeps the carriers/mobile operators alive. That is why they are paranoid about anything threatening voice or messaging.

SKYPE IS NOT THREAT TO VOICE CALLS...

Skype has been around now for about a decade. It has grown tremendously and today has over 600 million users. To put that in context, it is the third biggest internet community behind only Facebook at 750 million and China's QQ/TenCent which has 675 million. If Skype was a country, it would be the third biggest nation on the planet behind only China and India, almost twice the size of the USA. If Skype was a telecoms operator, it would be second biggest, closing rapidly on the biggest, China Mobile which has 620 million subscribers.

To put Skype into another context, more relevant to the survival of the carriers - the fixed landline telecoms industry has passed its peak in users and is in gradual decline of users now, down to about 1.15 Billion subscribers. In many countries a third of households or more have abandoned the fixed landline phone already like the USA. (Finland was the first industrialized country where more than half of households that once had a fixed landline, had abandoned it). The primary driver killing the landline business is of course mobile telecoms. But of what remains, the entity that is devastating what remains, is Skype. In less than a decade, Skype has cannibalized 52% of the fixed landline voice connections, if counted as a percentage of Skype subscriptions vs total fixed landline subscriptions. I know thats not a fair comparison for many reasons, but it is illustrative. If we simply count Skype users and divide that number out of the total fixed landline subscriptions, the equivalent result is that 52% of fixed landline voice subscribers have migrated to Skype.

(This is a provocative argument. The real percentage is lower for many reasons, such as one user may use both services in their home for example, and Skype is often used on broadband PC connections that are not delivered via the voice telecoms connection so the total count is bigger than 1.15 Billion)

BUT SKYPE IS A THREAT TO VOICE REVENUES

So then we get to the point. Skype has devastated voice revenues. Most Skype users pay for no Skype premium services like Skype local phone numbers or 'Skype Out' or other such services. Most users, most traffic, most voice calls on Skype are free. And who is most attracted to use Skype? Its where the price point for voice calls is the most painful - in international calls. And in traditional international voice calls, where we pay per minute usually quite large fees, we tend to be cautious of 'not talking too long' on an 'expensive' international voice calls. On Skype as the calls is free, we can talk for hours. So the really heavy usage, not just the heavy users, the heavy usage is shifting to more and more Skype.

The more expensive the connection, the more attractive is Skype. So where the big revenues are, Skype is cannibalizing it. Telegeography reported from 2008 that international voice call traffic revenues had stopped growing (while the number of minutes still grew strongly that year) and Telegeography said that was due to Skype.

Fixed telecoms operators/carriers had seen mobile phones steal most of their local call traffic in the 1990s. Now in the past decade, they saw that Skype came in and took most of their long distance and international call minutes. And as Skype offered it all for free - not at a discounted price, where perhaps the carriers could still compete (like against mobile minutes which mostly were not free a decade ago), but for free - that is devastating the voice call business of the fixed landline carriers today. And that is where most of the profits were in fixed landline telecoms, in long distance and international calls. Skype is wiping out most of their profits! So mobile operators/carriers hate Skype first of all, because they witnessed what Skype did to their siblings, the fixed landline operators/carriers, devastating their business.

MOBILE VOICE EVEN MORE DEPENDANT ON INTERNATIONAL

So lets move to voice on mobile networks. Most networks offer intra-network deals where calls to subscribers within the same network are cheaper. Then they offer 'buckets' of 'free minutes' that usually are mostly also within the same network. In some very competitive markets, such offers extend to all networks, so you get low-cost minute calls, and a generous 'bucket' of 'free' minutes to 'any network' as part of your contract or your prepaid top-up fee.

These almost as a rule do not apply for international calls (ie you are in your home country, but call someone in another country), or for international roaming calls (when you are visiting another country, and make or receive calls there). There are no formal numbers on the profits of international calls for mobile networks, but in rough terms, I've seen some analysis that says that about 3% of all mobile minutes are international or roaming calls - but they generate about 20% of all voice call profits.

These are by far the most lucrative minutes of the mobile operator voice services. Most fixed landline operators/carriers tend to have to offer competitive international call rates, against many other rivals like 'call back operators' and various discount international call operators. But most mobile operators/carriers do not even bother to advertise their international call rates and keep them very murky, hidden and confusing. You get different rates if you roam to a partner network in a given country (not all countries have partner networks) etc etc etc. So mobile operators/carriers hate Skype even more in the mobile space, because in voice calls, mobile operators make a lion's share of their voice call revenues and profits out of international calls, the very calls that Skype specifically targets.

SKYPE DOES IT WHILE GENERATING LOSSES ITSELF

What is even more infuriating to all telecoms operators/carriers, is that Skype had done its damage to the telecoms industry where most of the time, Skype has not been able to generate a profit. So they offer free services that kill off commercially viable giants, by giving away valuable service (telecoms) for free, and then do it 'unfairly' by attracting investors who pump into Skype more funds to keep it afloat, all while Skype itself continues to generate a loss or very modest profits.

Note, this is of course good for consumers and businesses who use Skype services. As long as some silly investors pump in millions to keep Skype afloat, while making losses, and Skype continues to provide free or ultra-low-cost telecoms services, that is of course good for hte end-user, in the short run. And please do not misunderstand me, I am not here to defend ridiculous punitive pricing plans that many operators/carriers have. I am all for open competition, transparent pricing and reasonable profits in the industry, as driven by open competition. The operators/carriers have abused the international calling regime for a long time (I should know, I was part of the system haha). But the answer is not to destroy the system, it is to fix the system. In the long run, if Skype destroys viable commercial companies that are able to provide telecoms services at reasonable costs - and Skype continues to make a loss - at some point Skype investors wise up and stop subsidising it. And if Skype free calls disappear, its not the same thing anymore. But as long as Skype doesn't need to operate on sound commercial basis, where its investors (Microsoft now as the latest to buy Skype to keep it afloat) keep subsidising the mostly loss-making business, and that kind of rival continues as a thorn in the side of telecoms operators/carriers both fixed and mobile - no wonder the carreirs/operators all hate Skype. If Skype was 'playing fairly' and judged by more-or-less the same rules as most other carriers/operators - quarterly profit and loss statements etc - that would be different. But now they see that Skype is actively destroying their business, without being built on sound business logic.

Again, I am not saying a 'loss leader' based or 'freemium' based business model is not sustainable, in some niches and some markets and some industries even (like gaming). But telecoms is 30 times bigger as an industry as all of videogaming, software and hardware all added together. So whether it is 'good for the consumer' or not, I am here to tell you why carriers/operators hate Skype, and this unfairness in how Skype competes in the telecoms industry is another reason why Skype is so hated.

SKYPE VS OTHER INDEPENDENT VOIP PROVIDERS

There are many VOIP based providers on fixed networks and increasingly also on mobile networks. But Skype is different because of its network. Most other VOIP services are modest in reach, some millions of users or dozens of millions perhaps. But Skype is a giant at over 600 million users. So Skype instantly is a threat because of its size. If you want to call your uncle who is living in Australia, odds are that your uncle also has Skype, but its far less likely he'd have the other VOIP service you may be using back home in Europe, etc. So if you can see any mobile operator/carrier 'embrace' any other VOIP based services, other than Skype - don't think they'd extend the same trust to Skype. Here is where Metcalfe's Law applies (the utility of any network increases in the square to the increase in its number of nodes; or in common speak, if you double a network, the utility to its users grows four times (ie two squared, two to the power of 2).) So a network of 100 million users is four times more 'dangerous' rival compared to a network with 50 million users etc. Metcalfe's Law is very crucial to all business in the networked industries, especially telecoms. Because of Metcalfe's Law, whoever is the biggest VOIP provider is far more dangerous than whoever is number 2 or 3. And thus operators/carriers hate Skype very passionately and curse every added million who join Skype swelling its numbers.

MICROSOFT MAKES SKYPE FAR MORE DANGEROUS

Today Skype reaches some 600 million people. Microsoft's Windows is on close to a Billion PCs. If we just add Windows (ignoring other Microsoft products like say Xbox) we potentially double - double - the reach of Skype! Remember what I said about Metcalfe's Law - it drives all telecoms operator/carrier business and Metcalfe's Law is for example a reason why low-income people who cannot themselves afford to place voice minutes (or text messages) onto the network, are still valuable additions to the network - their richer cousins, children etc will be able to call them and add paid traffic to the network! The carriers/operators know Metcalfe's Law. They would hate Skype to grow one million people bigger. Microsoft instantly makes Skype potentially one billion people bigger. The combined number of all existing Skype users, and all existing non-Skype users of Windows on their PCs, would make Microsoft-Skype bigger than the total existing fixed landline industry, by number of users! That is a huge, dangerous jump for Skype. The carriers/operators, both fixed and mobile, truly hate this development. Skype and Microsoft is instantly the biggest existential threat - survival threat - to the carriers just on voice calls.

SKYPE IS ALSO MESSAGING

So then Skype. Its not just voice calls. Its also instant messaging! And where was the remaining almost half of mobile operator profit - profit - after voice calls? In mobile messaging! Differing from our emails which in most cases are free, on most networks for most users, most of their mobile messaging traffic is individually charged by message sent (on some networks still today, like the USA, they are also charged for incoming messages too, ouch!). The international SMS average price last year was about 3 cents US, and in the industrialized world countries, that was about 10 cents per SMS text message sent.

Skype lets users send instant messaging text messages to each other between Skype users. Skype, not Blackberry Messenger, Skype is the biggest single threat to the whole 172 Billion dollar income stream for mobile operators/carriers that they derive from mobile messaging, mostly SMS text messaging. Blackberry messenger has about 100 million users. Skype today is 6 times bigger and with Microsoft Office integration could be easily more than ten times bigger than Blackberry's highly addictive mobile instant messaging service. Ten times bigger? Metcalfe's Law says a network that is 10 times bigger would be 100 times more valuable. Skype, when fortified by Microsoft becomes 100 times more dangerous to mobile operator SMS texting cash cow, than Blackberry Messenger! 100 times more dangerous! Do you understand now, why carriers/operators so deeply hate Skype.

AND THEN VIDEO CALLS

And then we get video calls. The Apple iPhone 4 with its inward-facing camera and the Facetime videocalling service re-ignited mobile phone handset interest in video calls. What most recent converts to mobile telecoms do not know, is that video calling was one of the big early promises of 3G, literally ten years ago (nine years before the iPhone 4 was launched). And I've had 3G videocalling ability in my pocket on at least one of my phones ever since 2004. I was even flown into South Africa to celebrate the first 3G network to go into commercial production on the continent of Africa, to make the first public video call on that network at a Vodacom event in November of 2004. So videocalling is nothing new.

Now, while the 3G industry enthusiastically preached the promise of video calls back ten years ago, the reality we soon saw, was that video calls were not eagerly embraced by most users. They fizzled out very quickly in the early shake-up of 3G service portfolios and far better success was found in mobile music, mobile gaming, mobile social networking, picture messaging etc. But videocalls did grow. Do you know where videocalls now are most used? On Skype! Yes, on Skype half of the traffic is videocalling traffic. Hundreds of millions of people are very happily connecting with family and friends on distant shores, via videocalls, on Skype and for free.

This was 'supposed' to be the next big thing in 3G networks on mobile, after voice from 1G and SMS text messaging from 2G. It did happen in the past decade, but who hijacked the videocalling traffic and torpedoed its revenues - Skype! The operators/carriers hate Skype for stealing part of their future and turning a clearly highly used service into being economically unviable. Nobody would be using videocalls even on Skype if they had to pay even average voice minute charges for it, far less what mobile operators/carriers were charging for 3G videocalls.

BUT SKYPE EXISTS ON SOME NETWORKS

Yes. Skype has been available on mobile phones since 2006. Skype first came on E-Plus network in Germany, and then onto the Three networks of Hutchison Group which provide only 3G services in the UK, Italy, Austria etc of the Three empire. Note, that Skype calls from those phones were free not to other mobile phones, but only to Skype on PCs and only a few select countries also Skype on mobile phones. But yes, Skype already exists on some networks and some phones, and on some price plans.

Note, nobody offers free unlimited Skype calls and messages and videocalls from mobile phones to any Skype users for free. It is either a premium service that is separately priced, or it is part of a special priced data bundle that is clearly then pricing the Skype portion into that price package. And even then, on most mobile networks, the Skype offering is not the same we get online. It is a 'crippled' variation. And separate from that, most networks have 'fair use' rules that limit the total amount of data traffic you can put onto the network, and real time services like Skype, especially its videocalling, will produce a lot of data traffic. So Skype users on those price plans may find that their Skype use is causing them to go over their limit.

Note, Skype is used usually by smaller networks in some countries - like the Three networks who tend to be the smallest in most of their markets like the UK, Italy, Austria, etc - and they are using Skype as a tool to fight against their bigger rivals. The bigger you are, the less appealing Skype becomes. But yes, Skype does exist in some forms on some networks.

NOKIA WOULD MAKE SKYPE EVEN MORE DANGEROUS

So now, to the ultimate threat. Today Skype alone would be the second biggest telecoms operator in the world, and the active user base of Skype alone accounts for about 10% of all telecoms voice communication capable connections in the world, adding fixed and mobile telecoms together. Skype messenger alone reaches about 14% of all messaging users on the planet (not all of them use Skype as a messenger yet). With Microsoft Windows, if we say removing overlap, that the Skype+Microsoft Windows combination would roughly produce 1 Billion users for Skype, that would be 17% of all telecoms voice connections and 24% of all messaging users.

Now add in Nokia to the mix. Nokia branded phones are used by about 1.4 Billion people on the planet. Nokia alone, more than doubles the threat posed by a Skype fortified by Microsoft. Yes, Skype+Microsoft+Nokia would be more than twice as big, and thus four times as dangerous than Skype alone, Microsoft alone or Nokia alone! If we say Nokia users, after we remove overlap, adds another Billion, we are at 2 Billion potential users for the unholy alliance of Skype, Microsoft and Nokia. Thats a third of all voice call connections and 48% of all messaging users on the planet! Yes, the Nokia phones would not start off all capable of supporting Skype, but if that dam is broken, you don't need a 'smartphone' to do Skype on a phone. Nokia could easily bring Skype also to its older Symbian phones - just last week we heard Nokia was bringing several Microsoft applications (for free) to new Symbian phones. Nokia could also do a Java based Skype client and deploy it to its 'featurephones' running S40. Easily. If one Nokia smartphone running Windows has Skype on it, soon that will be on every Nokia phone. Not because Microsoft or Skype would want that - and they would - it is because the consumers would love it.

WHAT IS BEST FOR CARRIER

Here once again we see the clash of what is in the best interest of the consumer, vs what is in the best interest of the mobile operator/carrier. Nokia had its nose bloodied very badly last decade, when it launched the N-Gage, and attempted to have games for N-Gage sold bypassing the carriers/operators (much like how Apple now does with the iPhone App Store). The operators/carriers boycotted globally, and in the next 18 months, Nokia sales fell by 20%. This by the way, coincided with the Razr. Many pundits of the industry fell for the nonsense that the Razr was killing Nokia (we still hear that said today). The Razr only sold about 50 million units in that time. Nokia sales fell by more than 200 million. No, it was not due to the Razr and Nokia 'missing the flip phone trend' haha - as many wrote back then. No, it was because the carriers/operators boycotted against Nokia, simply punished all Nokia sales until Nokia withdrew the N-Gage and its offensive gaming apps store.

Nokia witnessed this also in the US market. Early Nokia premium smartphones had really cool user-friendly features such as WiFi and Bluetooth and removable memory card slots. The US based carriers hated those, thinking they are ways that the consumer will bypass expensive carrier-based over-the-air services delivered via the cellular network. They asked Nokia to cripple those features. Nokia had a strong brand at the time, it felt the Nokia brand would be damaged if the globally advertised features were not offered in the USA and refused. The carriers boycotted Nokia premium phones, for several years, with the end-result that in the USA, long before a guy named Stephen Elop came along as CEO, the Nokia brands stood for bargain-basement cheapo cellphones in the USA (while Nokia made some of the most highly desired superphones for the rest of the world, such as the N93 and E90 Communicator etc).

Google witnessed this same phenomenon with the first Nexus One 'superphone' that many thought was a highly rated competitor to the iPhone 3GS of the time. Originally the Nexus One was to be sold on several US carriers, but they decided not to sell it. The Nexus One died in a few months. Microsoft has seen this too. They released two highly desirable youth-phones, the Kin line. This was to be sold on several networks who decided not to do it, and the Kin was killed in six weeks, I believe a world record for how quickly a new line of phones was pulled off the market. Its not whether you make the most desirable phones, in mobile telecoms, the control is with the carriers. And if you upset the carriers, you are dead.

So. Microsoft. In May they bought Skype. Already in June we heard from San Francisco and from Boston, that US retailers were boycotting Microsoft phone sales. We saw the disasterous results in Microsoft Q2 when Microsoft itself refused to tell us how badly they were selling their brand new smartphone OS Windows Phone. We have since seen that the total sales had fallen by about half, to about 1.1 Million units, down from about 1.7 Million units in Q1. Even when we add the older Microsoft smartphone OS based phones running Windows Mobile, Microsoft's total smarpthone sales in Q2 were well below 2% of the global sales - and declining.

Since then we have heard that HTC is migrating more of its handsets away from Microsoft Windows Phone and older Windows Mobile to Android, and HTC is now considering buying the Palm WebOS from Hewlett-Packard. Meanwhile Samsung is said to put added effort into pushing its own bada, at the expense of Microsoft Windows Phone and Windows Mobile. Meanwhile Nokia, the big producer of handsets for Microsoft, is said to be delaying its Windows Phone launches, we just heard today from Australia that they won't be seeing first Nokia Windows Phone based handsets until early next year, not this year as previously promised.

AN EVIL EMPIRE, SQUARED

So, Microsoft the Empire known as Evil. It already is on a mission to undermine the carrier business in so many ways. The Microsoft Windows Phone OS is loaded with spyware and Microsoft's advertising engine and Microsoft's messaging etc and all sorts of sneaky ways to get into the moneys earned by the mobile operators/carriers. Look at Microsoft's greedy approach to its IP, it is the only OS platform out there that supports more than one handset maker, that forces its handset makers to pay a royalty for every handset sold. Android doesn't do that, Symbian doesn't do that, MeeGo doesn't do that. But Microsoft greedily watches after every penny.

Then their history of broken promises and lawsuits. The mobile industry remembers well the lessons from Microsoft royally screwing UK smartphone start-up Sendo, which resulted in a long lawsuit that ended up killing Sendo. The mobile operators/carriers are used to collaboration while competing, and they do not look kindly upon evil empires crushing players, like Microsoft did with Sendo (incidentially, they settled, in ways that were reported that Sendo was found to be almost completely right and Microsoft almost completely at fault, but by then Sendo was broke). The Windows Mobile OS has been such a comedy of errors by Microsoft, so badly broken promises of updates and bug-fixes, that HTC, who had made more than 60% of all Windows Mobile phones ever made, said they would not even make phones for the last version of Windows Mobile. Talk about your own troops shooting you in the back. This is the kind of support that Microsoft engenders from its own.

Nokia was seen as a gentle giant, who mostly collaborated closely with its ecosystem, such as offering the Ovi store and Nokia assets to the carriers, helping with language editions, local content - and with that, building a carrier network of over 130 carriers who provided 'carrier billing' - the preferred way to pay for content by any content providers in the app space. After all, when Symbian needed a total update, Nokia paid its partners, turned Symbian into a foundation, and made it open source. Then Nokia added a migration path from Symbian to MeeGo. Nothing like that at Microsoft, god forbid. When Microsoft saw that Windows Mobile needed a total update, they just ended it, no migration path and screw the developers. So now headed by a Microsoft dude, the attitude of Nokia is completely changed. They screw their partners (Intel at Meego and NTT DoCoMo, Sharp, Fujitsu, Panasonic at Symbian for example) and break promises (migration path for developers from Symbian to MeeGo) and will sue you if you complain. Just like Microsoft. Nokia is learning how to become the 'New Microsoft' or to be 'the Microsoft of Mobile'. Maybe their motto should now be, 'Connecting Evil People'.

If PC makers grew to hate and despise and fear Microsoft, I mean 'Evil Empire' is not my invention haha, it is commonly the name used about Microsoft, for more than a decade - imagine how much more damaging a Microsoft could be with Skype and Nokia, in the mobile space. This is Evil Empire, squared.

IN SUM

So, for Microsoft overall, time will tell. I am not enough of an expert on the main businesses of Microsoft, its Windows for PC business, the Office Suite, and its cloud migration strategy etc. Skype looks like a good fit in many ways to the current main businesses of Microsoft. But for Microsoft's mobile business, acquiring Skype is a death-nail to carrier relationships.

For Skype, the Microsoft owner is exactly what they needed, to be able to continue to grow without worrying too much about 'making profits' and continuing to disintermediate the telecoms industries.

For Nokia, the Skype acquisition is the worst possible step its new partner Microsoft could possibly do with Windows Phone. Nokia is now committed to Windows Phone, and is gearing up to launch a series of new smartphones next year - and by end of year 2012, essentially all smartphones made by Nokia will be running Windows Phone. Nokia suffered a far bigger carrier/operator boycott this year due to the Elop Effect (Nokia CEO Stephen Elop massive communication blunders that combine the Osborne Effect and Ratner Effect have caused Nokia handset sales to plummet by half already in only 6 months, and will be down to one quarter of what they were, in less than 12 months). What Nokia desperately needs, is for mobile operators/carriers to lift their current Nokia sales boycott, and to sell new Nokia Microsoft Windows Phone based smartphones eagerly. But from June, Microsoft's smartphones are also under boycott.

And when all is said and done, the effect of Microsoft buying Skype is actually even worse for the carriers, than the Elop Effect was for Nokia. So in a very real sense, Nokia's smartphone strategy under the Elop Effect has gone from falling into a ditch, and now under the Microsoft Skype partnership, running into a minefield. The world of 2012 for Nokia, Microsoft (and Skype) will be worse than it was in 2011. And for this, I predict, the mobile operators/carriers are far too smart to fall for any Microsoft Steve Ballmer/Nokia Stephen Elop promises. As long as Microsoft owns any part of Skype, the Microsoft Windows Phone based smarpthones will be boycotted globally. They will never thrive to achieve that promise of a 'third ecosystem' and wont' come anywhere near 20% market share, not in 2012, not in 2014, not in 2020.. Microsoft has a reputation of breaking promises and putting its own interest ahead of any partners. And as long as Nokia is led by a Microsoft-dude, Nokia will suffer the same fate. Yes, Microsoft has deep pockets, yes Nokia has wide reach, yes some millions of Nokia-Microsoft phones will be sold, but after some years of this, even Steve Ballmer will see this adventure as more of a Zune than an Xbox, and quitely, Microsoft's Windows Phone project will be killed. What killed it? Not Nokia. Skype.

Comments

[Øyvind Mo]

Interesting article, Tomi. In particular the numbers giving some perspective as to how important revenue from voice and sms still are.
Lee - I see your point, but although you are right about there being existing options for installing and using Skype over most mobile networks, I feel you are missing Tomis point: the carriers do NOT wish to encourage nor accelerate any increase in the adoption of Skype. (There is a significant difference between: "pre-installed and actively encouraged" and "there's an app for that"). And the negative sentiment of the operators can be expected to translate into a less than preferential treatment of WP and of Nokia phones.
Even though "the horse has left the barn", as you say, the speed at which the horse is moving is highly relevant to carrier's profits over the next many years. The fall of the Roman Empire took more than 300 years. The Spanish Empire took slightly more than 70 years to tumble. Nokia seems to lose it's "empire" in less than one year... If you were managing a network carrier, why, oh why should you choose to accelerate the adoption of Skype, or support the organizations affiliated with it? Would you do "an Elop" because it's plain to see that your business model has no future, so better take all losses as quickly as possible, or would you tug it out like a roman and keep trying?

[Poifan]

If this is true, it certainly isn't good for Windows Phone/Nokia, but it will be a short lived victory for the carriers. Defending a model of artificial scarcity is not viable long term. If it's not Skype, Google Voice will fill the void. The carriers should be doing two things: 1) Price data to benefit from VOIP, esp. video calling (we've had a couple of uh oh bills on our iPhone due to Skype usage on some long video calls). 2) Encourage and foster VOIP competition to prevent one system from being ubiquitous. IM could have superceded SMS for a lot of users if they wouldn't have spent so many years actively preventing compatibility. SMS (like regular voice) is universal.

[Some Name]

In addition to what Øyvind Mo said: maybe iOS and Android were gradually supporting Skype, but the carriers could not really hit these 2 rising stars, it's far more easy to hit Nokia when it's down.

[James Barnes]

Why didn't you mention the Verizon Skype business relationship? Verizon is the second largest mobile carrier in the USA, not an insignificant partner by any means.

[karlim]

All those reasons why carriers might hate Skype and maybe even hate Microsoft might be true. But as Lee just said - the horse has already left the barn. So they are already accepting Skype (it is available and working quite often via their 3G networks, and always via Wi-Fi) on every smartphone they sell. Everyone who wants it can easily get and use skype. And carriers will soon be embracing it and looking for way to make money with it. Just like the biggest U.S. network - Verizon - did years ago. With Verizon on board - is it really "the bigger you are the less appealing Skype is"?

Regarding Nokia and Skype - they had it available for older Symbian phones for years. Yes as a separate app, but anyone could get it. For its next generation devices - Nokia had the best native Skype integration of any smartphone in N900. It is the best Skype integration with phonebook and other functions I have ever seen and it is still better then anything Android or iOS have to offer today. That integration was architectural in Maemo and was most likely migrated to Meego. So that huge potential blockbuster phone N9 that Elop killed will probably come with the best Skype integration in the industry. Shouldn't that affect potential N9 future if carriers hate Skype so much?

Did Samsung decide to push Bada at the expense of Windows Phone? Are you sure that was not at the expense of Android, because Google bought Motorola and Samsung decided to invest more into its own software? Or HTC considering WebOS is not because of Googolora, but because of something Microsoft did? Holding a worldwide product launch events, in 4 international locations at once, to announce the first WP Mango phones (on Sept 1 HTC Titan and Radar) does not really sound like HTC is cooling off towards Microsoft. Last year HTC used the similar early September launch event to announce 2010 Holiday Season Android flagships. This year they used it to announce their WP flagships.

And about that carrier boycott? According to Wikipedia - "A boycott is an act of voluntarily abstaining from using, buying, or dealing with a person, organization, or country as an expression of protest". Translated into current carrier/Microsoft relationship it should mean that carriers will not accept Widows Phones into their inventories, will not promote them and will certainly not subsidize them.

So how come AT&T announced 3 new subsidized Windows Phones yesterday? How come HTC Radar and Titan are already available or will soon be available (subsidized) for pre-order on Orange and T-Mobile in Europe? Are these really the signs of boycott?

[John Phamlore]

The war between Intel and the US carriers started at least by 2002 as detailed in articles such as Businessweek's "The Road to WiMaX"

http://www.businessweek.com/magazine/content/07_36/b4048401.htm

Something that should be emphasized is that with the United States almost non-existent regulation, the carriers are allowed to compete in both landline and wireless markets.

Intel with WiMaX attempted an end-run around the US carrier monopolies. This and not Skype is in my opinion what the carriers saw as their existential threat in the coming decade.

Observe the Businessweek article clearly articulates Qualcomm as the real threat to WiMaX and therefore the natural ally of the carriers who otherwise might not appreciate Qualcomm's IP tax.

What we appear to have currently is an alliance between the two largest US mobile carriers with Apple, Qualcomm, and yes Microsoft in some fashion. Obviously these companies interests do not completely overlap and they sometimes can still damage each other in other areas.

The fear of WiMaX explains why Apple has been able to negotiate deals with the US carriers, because Apple's mobile offerings, as distinguished from their Mac computers, are ARM-based. What Apple's iPhone and iPad have really done has been to totally kill off Intel's proposed "mid" mobile device category. (Observe that Intel has recently declared it is sinking $300 million into Macbook Air competitors but that the PC makers are saying they only plan to ship 50,000 units. The PC makers know who is going to win the struggle with the US carriers deliberately pricing tethering of Intel devices beyond the reach of consumers.)

Considering that Microsoft's Windows Phones 7 at first only ran on Qualcomm chips and that Microsoft is porting Windows 8 to ARM, I wouldn't count out the possibility that some surprise deals will be made putting Nokia Microsoft Windows Phones on US carriers are relatively attractive terms.

[darwinphish]

The problem for the carriers, of which Skype is just an example, is that everyone is figuring out just how out-dated and uncompetitive their pricing models are. Having networks that can now handle lots of data relatively cheaply is a game changer.

Take Skype and assume $0.05/MB. You can get 5-10 minutes of calling with 1 MB of data, which works out to 1/2 to 1 cents per minute. True, Skype/VoIP calling is not as reliable as regular wireless voice calling, but I do not think that justifies such high price differences. And as data rates go down, the difference will be more pronounced.

The numbers are worse for SMS. With a MB of data, I can send the equivalent of over 7000 SMS messages. No wonder BBM is never a cheap add-on. And if the carriers are so worried about Skype, how must they feel about iMessage?

[John Phamlore]

To see how the real cause of Nokia's downfall was their executives decisions to listen to fellow Finn Linus Torvalds in the early 2000s, simply read the following article "Android, forking, and control" at lwn.net:

http://lwn.net/Articles/446297/

Here are some choice quotes about the Linux developer community from the accompanying comments to the above article:

"Nokia did everything the community told them to, and lost big."

"... over five or six years ... They gave the GTK/Gnome world a long enough chance to produce something decent ..."

"At a certain point, it's easy to get the impression that your time is intentionally being wasted by people who have no interest in ever accepting your work."

In my opinion, Nokia allied with Intel only because Linux was born on Intel and a Finn started Linux. Intel never delivered the mobile chips with a small enough power draw. Nokia set their own house on fire by obsoleting what was to become Symbian and declaring they were moving to Linux, for which there was no reason to transition since Intel simply cannot produce x86 mobile phone chips. Nokia angered the US carriers by three times allying with Intel over mobile television and over WiMaX.

[apollo_dev_team]

One of the main reason why Nokia starts Meemo/Meego was only a trend. In fact that they want to have a second foundation similar to Symbian in the beginning of smartphone business.

But Intel was a totally wrong partner since they don't care at all about mobile devices and in addition with that, no one interested in Meego which makes it as "no future" mobile OS compared to Android.

Meego, sad but true...

And Skype, who doesn't use Skype? Soon or later voip will be a standard in mobile phone.

[Mikko Martikainen]

@Tomi

Very interesting numbers, and the only conclusion I can draw is that the Microsoft + Nokia + Skype strategy is going to be a tremendous success in the long run. Your own numbers prove it: no carrier stands a chance against potential 2 billion users. The iPhone started the disruption of the carrier business, one could argue, and it is only accelerating: iMessage, Google Voice, and now the ultimate blow, Skype. No amount of boycotting is going to change the end result, and one by one the carriers will come to the same conclusion and cave in.

[Steve]

@darwinphish

Where I live in the Netherlands. T-mobile charges 1 euro per 1 MB of data on prepaid plans so you might want to multiply your assumption by a factor 20. For postpaid plans they have a different trick, they give you 'units' that can be used to either use up a Minute/sms/mms/MB.

And don't think the other Dutch carriers (Voda & KPN) are different because they've all changed their subscription plans this summer in *lockstep* to mitigate the loss of revenue from Skype and Whatsapp.

An executive from KPN (the market leader) said the migration to smartphones in the Netherlands outpaced e.g. Germany and therefore they had to change their subscription model here and not *yet* in Germany.

As Tomi illustrated this is about BIG money. The companies raking in these big buck are NOT STUPID. Don't be fooled they will let themselves be marginalized by some nifty workarounds circumventing their pricing plans (e.g. 1MB = 10min). In the Netherlands they effectively form a cartel of 3, prepaid you pay about 10c per voice minute: they have pricing power. This price is not determined by the 'real' costs of carrying those voice bits over the network but by their pricing power.

Tomi's argument basically boils down to: Skype threatens the pricing power of the carriers hence they will oppose Skype every way they possibly can and get away with.

As a consumer I might not like this but from a business perspective this is a perfectly logical reaction from the carriers. Don't let your preferences as a consumer cloud your analysis of the situation. As a consumer one might perceive the carriers as 'the bad guys' so instinctively one tries to come up with arguments leading to the bad guys losing. This is bad science, just imagining arguments leading to your preferred outcome.

If you want to refute Tomi's argument come up with reasons why the carriers would want to embrace Skype, i.e. show how Skype will make them more money instead of cannibalizing their revenue streams.

[LoveNokia]

the Carriers could hate skype, but they can't stop consumer using it.

There is no reason Carriers hate Nokia for Skype, on youtube there was a lot videos Android phone showing using skype -- even at that time they didn't really work well with skype. Iphone user also use skype.

Looking forward Nokia bring Skype function, it is a pity Nokia couldn't work with skype well.

[Steve]

@LeeBase

Originally they wanted to throttle or block apps like whatsapp (bbm clone) and skype and charge for allowing the use of these services. This ran into legal issues and caused political controversy. It turned out the carriers were packet sniffing customer data traffic to keep an eye on the usage of these apps.

The current approach by e.g. KPN the market leader is to just bundle voice, sms/mms and data into fixed ratio subscriptions where you cannot choose a separate amount of voice minutes and data. So it's either few voice minutes and few MBs of data per month or mucho voice minutes and mucho MBs per month:
- 100 min/sms & 100 MB = 30 euro p/m
- 1000 min/sms & 1500 MB = 100 euro p/m

So if you want a lot of data you get lots of voice minutes & sms messages if you use them or not. You cannot just get cheap data MBs alone. So if you get these voice minutes and sms messages anyway it obviously negates the need to use Skype.

Like I said mobile internet has boomed big in the Netherlands in the last two years and carriers offered cheap unlimited smartphone data subscriptions. T-Mobile even had network capacity issues due to their iPhone succes and monopoly at first.

But now the carriers have openly stated apps like whatsapp and Skype are eating into their revenue and that the age of unlimited internet subscriptions is over since it's just costing them too much. Playtime is over.

So in short the carriers just make the value proposition of using Skype less attractive negating the need to use it. It might still be attractive for e.g. calling abroad but not for calling nationally.

I still have read no arguments on how the carriers would make money from Skype, i.e. on why they would love it.

[Mikko Martikainen]

@Baron95

I agree. It will take years, but the carrier business model has been disrupted and it is apparent the carriers won't disrupt themselves. In time, as has been the case nearly always with disruption, the carriers will lose revenue, profits and influence. In the meantime, they will do their utmost to try to slow down the disruption and preserve their current business model.

In this regard, Microsofts purchase of Skype was a great disruptive move. Coming from a company that has spent the last couple of decades defending it's business model from the open source disruption, I think it's pretty remarkable that they are now embarking on a disruption of another industry altogether.

@Tomi

You don't seem to acknowledge how fundamentally the mobile industry is changing. Sure, the change is slow and easily hidden behind the incredible growth and transition from dumb/featurephones to smartphones, but the days of glory for the carriers are already numbered. Unless you acknowledge all the disruptive forces at play, your analysis will miss critical elements. You have a great understanding of the "traditional" carrier business, yet you don't really report anything about how that side of business is changing. This post, and your previous mentions about Skype and how much carriers hate it, is pretty much the only thing you've said related to that. Do you honestly believe that carriers will be able to stop Skype and other VOIP apps altogether (and mobile TV, and streaming music, and instant messengers, and the ever growing number of other things that threaten the existing carrier business model)? Or do you agree with me that the future business of carriers is simply to provide the infrastructure to move data?

[darwinphish]

@Steve

I am not trying to refute anything Tomi said. As I wrote, Skype is the best example of the problem faced by the carriers. The reality is that the carriers have increased the capacity and performance of their networks by many orders of magnitude. When you sell data by the KB, voice and SMS rates seem reasonable. They now sell by the GB, which changes everything.

As Tomi keeps saying, this is an enormous industry where huge amounts of money are in play. This is drawing a lot players into the game, many who see pricing distortions created by the carriers and hope to capitalize on them. I do not think the carriers can control pricing as they have in the past.

By the way, my $0.05/MB figure was based on rates in Canada, one of the worst markets for consumers in the developed world. Our market is controlled by a powerful three company oligopoly who, still force feed us 3 year contracts and charge $25/MB when roaming. Obviously they are very, very reluctant to compromise the higher margin side of their business. However, even in this environment data rates have come down and will likely continue to.

[Steve]

@Baron95 & Darwinphish

In the Netherlands we also have a 3 party oligopoly. At the start of this year we *had* reasonable priced unlimited data plans. But now the carriers are losing too much revenue and have reversed that in lockstep.

Are they playing nice? Hell no, it's not in their interest. We used to have 5 carriers but 2 got acquired. The carriers argued the market was too small for 5 carriers. Of course this is BS but remember this is about big money. The carriers just buy their competitors, the politicians or engage in all kind off stalling strategies.

Just look at Microsoft with their endless bag of anti competitive tricks, technologically, commercially, politically, etc.

Just for fun I checked how many Windows Phone handsets are offered at the 3 Dutch carriers' websites:
KPN: 1 WP phone (http://www.kpn.com/mobiel/alle-telefoons.cat)
T-Mobile: 1 WP phone (http://gsm.t-mobile.nl/tmobile/RAPRL/Alle-telefoons/)
Vodaphone: 0 WP phone (http://www.vodafone.nl/shop/mobiel_bellen/mobiele_telefoons/alle_mobiele_telefoons/)

And those 2 lonely Win Phones at KPN and T-Mobile's site are show below the middle of very long pages buried between dozens of other phones. All Nokia phones are also shown below the middle of these page at *all* 3 carriers.

So at least in the Netherlands WinPhone and Nokia are clearly getting the cold shoulder from the carriers. It for all to see just check their sites. And make no mistake the vast majority of phones are bought through the carriers over here. People get a new phone when they renew their subscription (typically 2 yr) and can get a new subsidized handset.

Btw. Wifi is not mobile, there's no handover between cells. It might be a stopgap alternative e.g. when on vacation, but it just does not offer the same convenience: moving while calling.

[DJB]

The operators hate Skype so much that at least 3 of them, to my certain knowledge, looked into buying it before Microsoft.

Most operators are being sensible and pragmatic. They know that voice revenues are under threat from:

- Regulators squeezing interconnect & roaming fees (far more important short-term than VoIP)
- Shift away from telephony services to other modes of communication (teenagers hate talking on the phone & use Facebook or BBM instead)
- Accounting standards changes changing how "voice" is calcuated. At the moment it's over-inflated with subsidy repayments & "line rental" which is increasingly used mostly for data anyway
- Some impact from Skype & peers
- A complete lack of innovation in voice services. Apart from being able to do it while walking around, it's the same as 100 years ago

I speak regularly to operator strategy and voice/messaging heads who know that the writing is on the wall. They are trying to defend against faster erosion, but also being pragmatic about future possibilities.

They are also aware that there is a major transition coming up fast with LTE, which *needs* mobile VoIP. The official solution, VoLTE, *might* work, but it's unproven. White-labelling Skype or a similar service is a Plan B if it fails. And they'd much rather deal with Microsoft than Skype on its own.

Finally, operators are (or should be) happier that it was Microsoft that bought Skype, and not Google, Apple or Facebook. Although I still think that Vodafone or AT&T should have acquired it instead.

[Steve]

@Baron95

I think your 'sooner or later' thought assumes a free and level playing field. In practice these do not exist 'naturally', these situations quickly evolve into mono- or oligopolies I think most people can directly observe in their local carrier market. Hoping for the free market entrepreneur to ride to the rescue will be a very long wait in my opinion. You can probably better wait and marry a rich prince or princess so you don't have to worry about such lowly issues as carrier rates ;-)

Just compare the state of wireless in the US with e.g. Japan. The supposed US 'free market' situation has lead to an oligopoly that offers buggy primitive fragmented networks that are lagging those in Japan by half a decade where the government is far more deeply involved. A laisez-faire free market is not the answer since disruptors will just be acquired and neutralized so the oligopoly will retain its pricing power. The acquisition of T-Mobile by AT&T in the US neatly illustrates this.

My point is this is not a technology issue where you say 1 minute of HD video = 10.000 minutes of voice. Bottled water is also 1000x more expensive than tap water, this comparison is moot. You have to look at it from a commercial perspective. Any new entrant carrier will also charge the maximum they can for the voice/sms/data and differentiate between them. It doesn't make business sense not to do so.

Here in Europe the European Council (euro gov.) has lowered the amount carriers can charge for making and receiving calls & texts when you're roaming in a different EU country. This *has* had a direct negative impact on the carriers and a very positive impact on anyone using their mobile abroad within Europe. Skype has it's place for e.g. making video calls to friends and family when your at your hotel but it's a niche. When I'm traveling I want to be able to call and be called *all the time* not just when I'm in range of free or cheap wifi.

The 'techno utopia' argument being articulated here (free or cheap data combined with circumvention tools like Skype) is very narrowly focusing on technology. It doesn't take into account the business & political ecosystem the carriers live in and the convenience of regular voice call & texts for the end user.

[E7]

Nokia is becoming like MS under Elop indeed. Look at this article:

“Mosaid deal raises worry of anti-trust probes”
http://www.ottawacitizen.com/business/Mosaid+deal+raises+worry+anti+trust+probes/5416913/story.html

[Rant]

@Steve; Weird that there are only 2 WP phones on carriers in the Netherlands right. Or is it because they are hard to sell because of the lack of Dutch language support right now or the lack of normal Marketplace access?

It's a testament to KPN that they even carry a WP phone right now with so little support from MS in the Netherlands. WP isn't even officially launched in the Netherlands right now.

WP isn't getting the cold shoulder right now. It's rather getting a pretty fair deal. Being sold, by a carrier, in a country the platform doesn't even support.