time to dump telstra

Google Talk makes a big noise


Google's entry into net phone has set the industry abuzz, writes Paul Durman
September 01, 2005

LAST week's newspapers left BT chief executive Ben Verwaayen shaking his head in bewilderment. As he surveyed the acres of press coverage devoted to Google Talk, the new telephony service from the favourite internet search engine, he struggled to make sense of the extent of the interest. The level of hype was ridiculous, he thought.

Here was Google introducing a service that was already available from many other providers - not just from BT, but Vonage, Yahoo, AOL and Microsoft's MSN.

Okay, so Google Talk was free, but it had fewer features and, initially at least, was available only to a limited audience - users of Google's Gmail email service. What was all the fuss about?

Verwaayen declined to be interviewed. But another senior BT executive said: "This is a pretty flimsy offer of something that other people have been offering for an awfully long time. The level of interest seems a bit staggering."

Vonage, a US company, also felt miffed, since it has a much greater claim than Google to be a pioneer of internet telephony. Kerry Ritz, its managing director in Britain, said: "The PR and noise level on this is far greater than the actual product. I don't think Google Talk adds a lot, if you compare it with Yahoo or MSN Messenger."

Nevertheless, the launch of Google Talk was a splash story. Of course, there is no great mystery here. Google is a 21st century phenomenon, a company that in seven short years has turned itself into the world's biggest media business, with an $US80 billion ($105 billion) market cap and advertising revenues that are doubling year on year.

It is liked and trusted by tens of millions of internet users, and admired for its apparently friendly corporate culture - its founders, Sergey Brin and Larry Page, try to run their business by the motto "don't be evil".

Five years ago, nobody could really understand how Brin and Page were going to make money from their elegantly simple search engine. They do now. And the extent of Google's success has made it a feared competitor in the many other markets it is seeking to move into -- news, email, shopping, local listings, digital-photo management, maps, digital books, blogging, and so on.

So, Google's arrival in the telephony business created a shudder of anticipation. Traditional telecoms companies have billions of dollars of annual revenues that are ripe for pillaging. Moving voice calls on to the internet - so-called voice over internet protocol (VoIP) - is going to devastate that business.

Paying for phone calls by the minute - whether to the other side of town, or to the other side of the world - is set to become a thing of the past. Using the internet to carry voice calls reduces costs dramatically. At best, phone companies will be able to charge a flat-rate fee for service; at worst, they will have to give voice calls away.

This is already well understood by leading telcos. But, so far, small companies such as Vonage have only chipped into the giants' dominance.

For many customers, relying on an internet-telephony firm involves too many compromises and uncertainties.

Google has the brand power, and the resources, to overcome some of these concerns. It has a reputation for delivering technology that is simple and works. At the very least, its entry into this market demonstrates that the internet telephony revolution is for real.

As launched, Google Talk is limited. It is not possible to call conventional telephone numbers, let alone the emergency services. You can only call other Gmail users - and Gmail is still undergoing "beta" testing and not openly available in the same way as MSN Hotmail and Yahoo Mail.

It is still not clear how the company intends to make money from Google Talk. But one possibility, suggested by Seb Bishop at Miva, a smaller rival to Google in the pay-per-click advertising business, is that Google Talk is one step towards making it easier to connect search-engine users with advertisers. With VoIP attached to the search engine, said Bishop, "users won't have to pick up the phone". Simply clicking on a search result could connect you to an advertiser.

Google may have taken the lion's share of the headlines. But in the telecoms industry, it is another young company that sets tongues wagging. That company is called Skype. The business is two years old this week. In that short period, it has already attracted 51 million users.

In its way, Skype is as much of an internet phenomenon as Google. It has demonstrated the same prodigious ability to attract new users through word-of-mouth recommendation for its simple-to-use technology. Just as in Google's early years, it is far from clear how Skype intends to make money.

Skype's great appeal is that it allows anyone with a broadband connection to make free national and international telephone calls. Free offers are great for marketing but they are generally poor for revenues.

One of Skype's backers looks at this another way. He points out that if you have already got tens of millions of willing users, it's just a question of working out what you can charge them for. And Skype has already made a start.

Skype's founders, Niklas Zennstrom and Janus Friis, labour under a darker reputation than those Silicon Valley pin-ups, Page and Brin. Zennstrom, a 39-year-old Swede, and Friis, a 29-year-old Dane, were previously responsible for Kazaa, the music-downloading website that is reckoned to have cost the record companies billions of dollars in lost sales.

Zennstrom and Friis are still trying to disentangle themselves from the legal onslaught the music industry has launched against copyright theft. They sold Kazaa three years ago, but remain cautiously elusive - unusual for a couple of entrepreneurs with a great story to tell.

Friis shrugged off the Google Talk challenge: "We've been competing with Yahoo, which is an equally big company, for a long time," he said. "We compete with Yahoo and MSN with a better product."

In fact, Google's move has proved helpful, encouraging more people to download Skype's software. "It really validates the whole internet- telephony message," said Friis. "We've been seeing 150,000 new users a day.

"That's just shooting up because of Google's announcement."

Friis claimed that Skype was responsible for 46 per cent of all VoIP traffic in North America. "We have created the world's largest internet-telephony network," he said.

Initially, it was not possible for Skype users to call out to conventional phone numbers, nor for regular phones to call in to the Skype network. The firm overcame this by introducing its SkypeOut and SkypeIn services, which customers have to pay for. SkypeOut offers a simple low-cost tariff. Calls to landlines and mobiles in 28 countries (including most of Europe, America and Australia) cost 1.7 euro cents a minute.

The take-up of SkypeOut, SkypeIn and Skype Voicemail has demonstrated that Skype has real potential as a business. Since launching SkypeOut in July 2004, the company has attracted 2 million paying customers, who are putting money on deposit with the company.

Friis said the success of SkypeOut was "totally funding the whole company's growth; five per cent of all new Skype users become SkypeOut users. That's a high percentage. We are not in any need for cash.

"What we say sounds counter-intuitive: we are saying telephony is free. We are a peer-to-peer network. We are not paying anything to attract new users. We have an internet business model."

The controversy over Skype's origins has not discouraged many big companies from wanting to work with it. Cable & Wireless and Colt are among the carriers that have supported the introduction of SkypeOut, by terminating calls on conventional phone networks.

It has also worked with Logitech and Plantronics, which supply the headsets that enable phone calls to be made from computers.

Perhaps most significantly, Skype is working with Motorola to enable users to cut out the PCs and make calls from mobiles.

So far, the mobile-network operators have been largely insulated from the threat. But the first mobile phones with a chip capable of connecting to a wi-fi network are available. More are set to appear in the next few months. And that's potentially bad news for mobile operators.

The rapid take-up of broadband - the same high-speed connections that support internet telephony - is also encouraging a proliferation of wi-fi in homes and offices. Cheap routers, or modems, are making wireless broadband increasingly commonplace.

This presents a new opportunity for Skype. With a wi-fi-enabled mobile handset, Skype users will be able to make calls over the internet, circumventing expensive mobile networks.

"That's very powerful," said Friis, "85 of all calls are made from fixed locations" - from locations that could be served by wi-fi access points.

"It gets more and more interesting as more and more access points become available. If people can get free calls, they will do so."

Skype's rapid growth has not gone unnoticed. Analysts had touted it as a possible acquisition target for Google, although the launch of Google Talk would appear to rule that out.

While not commenting on the rumours, Friis suggested Skype was not in a hurry to surrender its independence. "With the growth we have had, with the success we have had, Skype will be a player on the market for years and years to come," he said.

"We are building the business as an independent company. We have created something very, very big."

The Sunday Times