Three Competitors Threaten Skype With A Smackdown: Analysis

It's been a good few weeks to be a VoIP user, and a bad one to be Skype.

To a great extent, up until now Skype has had a lock on the consumer P2P VoIP market, and even though its recent move into business VoIP hasn't been universally well-received, things looked rosy for the company in that market as well.

But a trio of competitors makes the future less rosy for Skype. Yahoo, the well-financed startup Jajah, and the big Web site Lycos have all released no-cost or low-cost VoIP P2P solutions within the last few weeks, attempting to muscle in on Skype.

Watch Out for Jajah

Possibly the most intriguing of the group is the European-based Jajah. The service requires no client to download, and doesn't actually use a user's PC to make the call. Instead, someone logs onto the site, types in his number and the number he is calling, and the site calls him and connects him to who he wants to call. For the most part, the call goes over the Internet, although the last-mile connection uses the PSTN or mobile service. The calls are low-cost, but not free, and are comparable to Skype PC-to-landline rates. But Jajah does not offer free PC-to-PC calls, like Skype does.

So why should Jajah be a competitor in the VoIP market? In two words, money and pedigree. Its has the backing of the big Silicon Valley venture capital firm Sequoia Capital (the companies won't reveal terms of the backing) and with that cash and pedigree behind it, it's bound to be a contender. And there's another pedigree that bodes well for the company as well; one of its board members is ICQ co-founder Yair Goldfinger.

Some say that it's not Skype, but Vonage that Jajah has in its cross-hairs, because Skype offers presence as well as free voice. But if people are looking for inexpensive phone calls, presence is a secondary consideration. In any event, both Vonage and Skype may need to worry. Yahoo's VoIP Entry

Yahoo is entering VoIP through its popular instant messaging program, Yahoo Messenger. It has been available in several countries outside the U.S. since December. Its "Phone Out" PC-to-landline rates are comparable to Skype's, at approximately two cents per call for the top 30 national phone markets. Rates are higher for other phone markets. The service's "Phone In" rates let people receive calls on their PCs from landlines and mobile phones for $2.99 a month.

What does Skype have to fear from Yahoo? An installed base of people with Yahoo Instant Messenger. Anyone with Yahoo Messenger can use the VoIP feature, and they may be reluctant to download another client -- Skype -- to give them what their instant messaging software already has.

In addition, Yahoo uses the Global IP Sound codec, which Skype also uses. Skype became popular at least in part because that codec gives it great sound popularity. But with Yahoo using the same codec, that's no longer an advantage for Skype.

Finally, Yahoo has bundles of cash and an internationally known brand that extends well beyond communications, and it'll be tough for Skype to contend with that.

Remember Lycos?

There was a time when Lycos was one of the biggest search engines and directories on the Internet. Today it's an also-ran. But that hasn't stopped it from entering the VoIP market with Lycos Phone, which like Skype and Yahoo's program, allows for free PC-to-PC calls. So how will Lycos differentiate itself? With a bundle of freebies. Users get free incoming calls from landline and mobile phones, 100 free minutes of PC-to-landline calls, and free fax and voicemail services. For those who care about such things, there will be movie trailers and music videos as well.

Will this everything-but-the-kitchen sink approach work? It's hard to know. For now, people appear to be looking for one primary thing from VoIP -- cheap phone calls. All the movie trailers in the world won't help. The free services will help, but in exchange for those, people will have to put up with banner ads, and that annoyance may be sufficient to chase people away.

The Bottom Line

For now, none of the new Skype competitors have enough of an installed voice base to threaten Skype, which is particularly strong outside of the U.S. And Skype's parent, eBay, certainly has enough marketing muscle so that it's in VoIP for the long haul. So the competitors, at the moment, are also-rans. Their release, more than anything, confirms that Skype's P2P approach to VoIP was on target.