Google Vs Skype: IP Telephony Battle Begins

Author: Ms. Sushuma G

Abstract: Voice over Internet Protocol (VOIP) or Internet Protocol Telephony (IP

Telephony) had become a common means of communication. Availability of low cost

VOIP services had driven the extensive use of these services for worldwide

communication. The global VOIP market was estimated to reach $3.3 billion in 2010.

Since the start of 21st century, IP telephony had gained ground and was accepted by the

service providers, businesses and consumers. It had become the future of voice

communications. Globally large and small operators and service providers were converting

their networks for a successful migration to VOIP. It had been estimated that VOIP

subscribers would be around 200 million by 2012 globally. VOIP had been transforming

the telecommunication industry and stimulated tough competition. In addition, rise of

mobile telephony was a big challenge for the operators. They had been tuning their

business models to be in line with the market needs.

Google Inc, Internet search giant, had offered email services through Gmail since 2004.

Gmail attracted more users through enhanced services such as instant messaging in 2006.

Later it had provided voice and video chat facilities to its users. Over the years, Gmail had

become the third largest email site and had 186 million users a month in 2010. Google had

decided to penetrate into the mobile telephony market as Smart phones were expected to

dominate the internet search market in the future. Hence it had launched PC–To– Phone

calling service in 2010 as an extension of its Gmail. Skype, another leading internet

Communications Company had been offering similar service and was a dominant player in

the IP telephony market. In such a scenario, the case study analyses the IP telephony

market, Google and Skype‟s market strengths and whether Google would succeed in its

venture.

Pedagogical Objectives

The case study helps to understand and analyse: Global Market Trends in Voice over

Internet Protocol Google‟s Growth over the years Skype Growth in IP Telephony

services Google‟s PC to Phone services.

Case Study

Technological advancements in the 20th century had revolutionised the communication

globally. It had modified the way people were connected across the globe and how

information was transmitted and exchanged. Voice over Internet Protocol (VOIP) services

provided enhanced telephony features compared to standard telephony service and were

also cost effective. Through VOIP or Internet Protocol Telephony (IP Telephony) services

people across the globe could connect through a personal computer or a laptop and a

broadband network. With the increased use of broadband network since the late 20th

century, IP telephony had been gaining ground and became vital for many business

strategies both in the developed and the developing countries. International VOIP traffic

was around 400 billion minutes in 2008. As it was a threat to the traditional telephony

services, VOIP services was legally permitted in 46 countries and was implemented in 57

countries without legislation in 2004. In a span of five years (2009) the number of countries

permitting VOIP services was 92 and in addition 39 countries had tolerated it. It was

estimated that revenue from VOIP services would amount to $9.7 billion in 2010. Wider

acceptance of VOIP services among business, service providers and consumers had brought

in many players into the VOIP market spurring intense competition. Growth of VOIP

indicated that it would revolutionise the telecommunication industry.

Google, known for its fastest search engine was incorporated in 1996 in California with an

aim to organise world‟s information and make it universally available. With a simple home

page and innovative technologies Google increased its site traffic. By the end of 2000,

Google had handled 100 million queries in a day and by 2004 it became the most popular

and highly visited site on the World Wide Web.6 While it stabilised its core business –

search engine, Google launched its free web based mail service Gmail in early 2004. Gmail

provided the users 1 gigabyte space to store their messages and had enhanced features such

as archive, search within the email and effective spam filtering. In 2005, Google extended

its mailing services and provided instant messaging and IP telephony service to its users.

Apart from sending messages, it facilitated users to share data and video files and also

provided voice chat services. However calls to regular phones were not provided then.

Gmail was well received by the users and became the fourth popular email service in 2008.

As Smartphone was expected to dominate the internet search market in the future, Google

had also wanted to venture the mobile telephony market. Hence in 2010 it launched the PC-

to – Phone calling service as an extension of its voice chat in Gmail. However, such

services were offered by many players in the market. Skype, the world‟s largest long

distance phone company, had been a dominant player in IP telephony market since its

inception in 2003. Skype with its low cost IP telephony service had attracted around 560

million users worldwide and had reported revenue of $406.2 million.11 In such a scenario,

the case study analyses whether Google‟s Phone calling service would attract users and

succeed amidst tough competition.

Voice over Internet Protocol Services: An Overview

Telephony had been the main source of communication for years. With the advent of

Internet and innovative technologies, traditional telephony had been changing and IP

telephony had started to gain market. IP telephony or VOIP refers to the transmission of a

voice message using Internet Protocol (IP). IP telephony reduces the communication cost

and provides many communication options. VOIP had a dominant role in providing cheap

form of communication to the world. VOIP had enabled users to get connected to users on

landline phones, mobile phones and computers. People can make long distance or

international calls at a very low rate or free. Using this technology, people can share

pictures, text messages and video data while on a call. VOIP services had been used for

both business and personal needs. This technology had facilitated low cost connectivity

globally.

VOIP noted as „disruptive technology‟ had been transforming the telecommunication

industry in the 21st century. Though VOIP market had initial problems such as loss of data

and poor quality service, over the years service providers, consumers and to

TeleGeography, Washington-based increased from 0.2% in 1998 to 13% increased to 23%

in 2007.

Business have accepted VOIP and it had gained market. According international research

firm, VOIP‟s share of international traffic had of global telephone traffic in 2003 (Exhibit

I). This further had The success of VOIP was mainly due to two factors - cost and market

liberalisation. Worldwide people were attracted towards VOIP systems to reduce their

telephone costs. It had been estimated that telephone charges would reduce by around 30%

to 50% through use of VOIP / IP telephony. Nermertes Research18 had estimated that use

of VOIP services would reduce the operating costs by 21%. However, initial investment

such as cost of equipment, network upgradation might lower the return on investment.

Apart from operating costs, mobility was another factor which made VOIP more attractive.

As calls were routed over the same network which ran business applications and data, inter

communication among employees in an organisation became easier, allowed flexible

working arrangements and people on travel could communicate with their office without

any additional costs. VOIP users also had the advantage of unified messaging which

facilitated people to manage their voice, e mail and fax messages in one location. Peter

Carbone of Nortel had opined that, “It (VOIP) completely decouples us from location – my

office is wherever I happen to be.” As new technologies evolved many users worldwide

had adopted VOIP technologies to communicate across the globe.

VOIP adoption was linked with market liberalisation. Initially many countries were not

receptive for the use of VOIP. In 2004, VOIP was legalised in 46 countries and was

tolerated in 57 countries. As VOIP services gained ground and the operators saw broadband

as the future direction of modern communication, adoption of VOIP also increased. In mid

2009, VOIP was legalised in 92 countries and 39 countries had tolerated. The number of

countries that banned VOIP had declined to 49 in 2009. (Exhibit II). Increased

liberalisation of the use of VOIP indicated that number of VOIP users worldwide also had

increased. iDate projected that 175 million VOIP subscribers would be present in 2009

amounting to 10% of mainline subscribers. Another firm Point Topic had indicated that

Western Europe had the largest number of VOIP subscribers followed by North America

and Asia Pacific (Exhibit III). Service provider VOIP equipment revenue had also

accelerated worldwide with the increased use of VOIP services. During the third quarter of

2009, Infonetics Research estimated their revenue at $595 million. Diana Myers, analyst for

VOIP at Infonetics Research had indicated that, due to the financial crisis in 2009, VOIP

revenue slowed down and high growth was expected in 2010. In the first half of 2010,

VOIP service revenue worldwide was $22.6 billion as a result of growth in business and

residential services across the globe. The number of residential subscribers were 145.4

million in first half of 2010. Regions such as Africa and South East Asia had also showed

signs of growth in this period.

Along with increased use of VOIP / IP telephony service, the number of players in the

VOIP market had also increased. Tough competition in the VOIP market had resulted in

price cut by the service providers. In addition VOIP service providers had been constantly

focusing on improvising their services and offer new features to attract users. IP telephony

coupled with unified messaging would drive the market to great heights. In addition VOIP

providers had predominantly followed prepaid model which relieved them from the risk of

payment defaults. According to new data from ABI Research, “Enterprises are ramping up

their investments in VOIP technologies, both on customer premises equipment and hosted

VOIP. The integrated unified communications (UC) suites market, which was adversely

affected by the economy, is also poised to see some consistent growth to reach revenues of

$4.8 billion by 2015.” Parminder Kaur Saini, Senior Research Analyst, ICT Practice, Frost

& Sullivan, South Asia & Middle East opined that, “We see good growth for VOIP in 2-3

years time. Factors like increase adoption of unified communication applications,

availability of required bandwidth and increased awareness levels will drive this market.”

VOIP had become an indispensable tool for business because of its cost effectiveness and

enhanced communication. The global VOIP was expected to be $3.3 billion in 2010.

Growth of VOIP had brought in many new players in the market and had also led cable,

modem, wireless and broadband service providers to compete directly with each other. Stiff

competition and entry of new players would bring in enhanced services and also attract

huge domestic and foreign investment.

Mobile VOIP had been gaining ground in the recent years. Market research firm, In-Stat

had predicted that mobile VOIP services revenue would be $32.2 billion from 278 million

registered users by 2013. However, now (2009-10) mobile VOIP had been used only by

few customers due to technical constraints. Availability of dual mode mobile devices had

been driving the users towards mobile VOIP over Wi-Fi to reduce their long distance

mobile calls. The rise of mobile telephony and VOIP had posed a challenge to the

worldwide operators. Operators had focused on changing their business models to suit the

latest trends and capitalise on new technologies.

Google‟s Growth Story

Google the world‟s largest and fastest search engine had a phenomenal growth since

inception. Google was started in 1996. (Annexure I). Its founders Larry Page and Sergey

Brin, two Ph.D. students from Stanford University had carried out a research project with a

mission to organise world‟s information and make it available universally. Initially they

had been developing a search engine called BlackRub. It was operated on the Stanford

servers. Within a year, the search engine was able to take more bandwidth. Subsequently it

was renamed as Google, a mathematical term for the number 1 followed by 100 zeros. The

name revealed their mission to organise infinite amount of data on the web. In 1998, when

Google operations reached international domains, the founders registered their company as

Google Inc. In the same year, they hired employees and it was recognised as one of the Top

100 websites of the year. Google‟s home page was made simple with lot of white space,

logo and a query box. When the user clicked the search button huge quantum of data was

available to the user in a very shot span. In 2000, Google had successfully indexed 1 billion

pages and thereby became the world‟s largest search engine. Google also offered searches

in several regional languages. By the end of 2000, Google had supported around 15

languages. Apart from search facility, Google had posted advertisements on its website

through programs such as Google AdWords and AdSense. Through AdWords program,

textual advertisements which were relevant to the user who was reading it were displayed.

Google charged the advertisers based on the number of times the ad was clicked. Google

AdSense allowed website publishers to display relevant Google advertisements related to

their content‟s page and earn money. This was a way to promote Google website and search

to their users. Over the years, Google advertisements became a major source of revenue for

the company (Exhibit IV).

Realising that Google search and advertisements would not sustain success for long,

Google had started to explore new products and services which were useful for advertisers

and publishers. In this regard Google resorted to several acquisitions and partnerships.

Though Google started to diversify in the early 21st century, its main focus was to provide

useful and relevant information to millions of users who used Google search. In this

connection, Google came across people complaining about free email services available

which were not user friendly and of poor quality. To facilitate email users, a Google

engineer wanted to develop a web based mail through which people could manage their

emails easily and have abundant space to store huge information. Google launched its free

search based webmail service – Gmail, to its users in 2004. Gmail had unique features like

huge storage space, speed and search technology. (Exhibit V). Gmail was quite different

from other applications and the full web page was not reloaded every time when the user

clicked. Users could easily search and sort their mails and manage them efficiently. Initially

the email service was offered to 1000 customers. Later it was extended to other users.

However to cut down spam, a restriction was placed on the new users. New users could

create a Gmail account only with an invite from the existing users. With efficient mail

archive, spam filtering, user friendly interface, linking related mails, Gmail became popular

and attracted many users.

Exhibit V Gmail - Key Features

Search: Gmail enabled people to quickly search every email they've ever sent or received.

Using keywords or advanced search features, Gmail users can find what they need, when

they need it.

␣␣ Storage: Google believed people should be able to hold onto their mail forever.

Hence it offered 1,000 megabytes (1 gigabyte) of free storage – more than 100 times what

most other free webmail services offered.

␣␣ Speed: Accessing mails was faster and more efficient by eliminating the need to file

messages into folders, and by automatically organizing individual emails into meaningful

"conversations" that show messages in the context of all the replies sent in response to

them.

Google webmail service lacked instant messaging or online chatting facilities. To expand

its business further, Google forayed into VOIP services and in August 2005, launched its

instant messaging service Google talk. It was a downloadable application which enabled

the users to send instant messages and voice chat from one computer to another. Google

Talk had a simple interface built upon open standards software and allowed to search

contacts easily. To use Google Talk, people need to have a Gmail account. Voice chat

required microphone and speakers on both ends. Calls to regular telephone were not

supported by Google Talk. Exchange of messages between two different operators was not

allowed. Google had revealed that they would try to integrate their instant messaging

services with other operators in the future.

After successful launch of Gmail and Google Talk, it had constantly worked upon

integrating chat facility to its email service. After a series of innovations and experiments,

Google launched its Gmail chat – a pop up chat window in February 2006. Gmail chat was

a simple design and opened within the browser. The status whether other users were online

was indicated. Another interesting feature of Gmail chat was the history maintained similar

to emails and could be viewed and searched anytime later. Subsequent to the launch,

Google had enhanced the chat functionalities in a phased manner (Exhibit VI).

With enhanced features and simple interface, Gmail had become popular and had 29.6

million unique monthly visitors in December 2008. Its competitors Yahoo61 and Hotmail

had 91.9 million and 43.5 million visitors respectively in the same period. Google to

popularise its free webmail service and increase its user base had constantly introduced new

features, tied up with its other products and was into marketing Gmail. Further in February

2009, a new feature – Multiple Inboxes, was added to Gmail. This feature allowed the user

to view their inbox in multiple panes. In addition to the standard inbox on the left, five

other inboxes can be viewed on the right which display search results in email, mails under

a specific label. Options were provided to view the multiple panes below the standard

inbox.

Continued innovation and upgradation was the success of Gmail. Gmail had showed an

impressive annual growth during 2010. While Inbox.com had higher growth rate of 65%

during 2010, Gmail‟s growth rate was 46%. The monthly unique visitors rose from 27.6

million in 2009 to 40.3 million in 2010. The difference between Hotmail and Gmail in

terms of users was narrowing down. Hence Gmail‟s competitor Hotmail had devised plans

to introduce new features such as social network updates, Sweep functions, birthday

reminders to attract and retain its users. Another major threat for Gmail was from

Facebook. In October 2010, Facebook had launched email service to its members.

Facebook founded in 2008 had more visitors than Gmail in March 2010. Now with its new

email service, it can attract more users and the existing Gmail users might shift to Facebook

email for convenience. Gmail and advertisements being a major source of income for

Google, it needs to implement well devised business strategies to gain and retain its users.

A Glance at Skype

Skype, the world‟s largest long distance phone company, had enabled real time

communications over the Internet since its inception in 2003. Skype was an eBay company

founded by Niklas Zennstrom and Janus Friis. Skype offered an online communication tool

that allowed users to communicate to anyone, anywhere, anytime across the globe. It could

be used as an instant messaging service or as a telephone. Through Skype phone or headset,

people could make calls (including video calls) to other Skype members, traditional phone

or cell phones. While calls made to Skype members were free, minimal rate was charged

for calls made to traditional telephone or cell phones. Skype had constantly offered new

services and had expanded its user base globally (Exhibit VII). Skype offered instant

messaging, paid SMS, screen sharing and file transferring to enhance its user

communication. It had also developed products that supported group communication for

messaging, voice and video calls. Over the years Skype had grown from a small program to

an useful program with interesting features catering to the communication needs of millions

people worldwide.

Exhibit VII Skype Services

Skype-In: This program allowed people using landline phones to reach a Skype user on his

or her computer via a regular telephone number.

Voice Conferencing: This feature was introduced in 2006 and allowed customers to hold

video conference calls with other Skype users. This feature became available for the Linux

OS in early 2008.

Skype To Go: The newest feature available to Skype Pro users, allowed people to make

international calls from their mobile phones, at the Skype-Out rate they use for all calls

from their computer.

Skype Mobile: In April 2008, Skype released Mobile Skype, compatible with around 50

different phones. The list of compatiable phones continues to grow as programming and

technology continue to sync.

SIP or Skype for Business was released in 2009. Skype 5.0 BETA and Skype for Apple‟s

iPhone app was released in May 2010.

Skype free products had gained popularity since 2008 and had accounted for 12% of the

international long distance calls in 2009. Skype had been ranked as the leading provider of

international communication in 2009 by TeleGeography research. During the first half of

2010 around 84 million SMS text messages were sent and 40% of Skype–to–Skype minutes

were video calls. Registered users increased to 560 million as of June 2010 and garnered

net revenue of $406.2 million (Exhibit VIII). The primary source of revenue was from the

subscription or pay–as–you–go for their SkypeOut product. Skype had varied users who

used their products for both personal and business. Skype‟s subscription packages

promoted customer loyalty. Around 2 million users had subscribed for Skype products

during a three month period ended June 2010.

Skype aimed to become the most preferred communication platform worldwide. To expand

their business it had tied up with Verizon Wireless in mobile market and LG, Samsung and

Panasonic in consumer electronics to embed Skype functionality into their products. In

addition, Skype had released Skype Kit, a software development tool which would allow

software developers to incorporate Skype functionality in their products in July 2010.

Further the company had identified four key strategies in order to augment their revenue.

First was to increase the connected and paying user base, while in 2010 it had only 8.1

million monthly paying users (Average monthly users). Next it had planned to increase the

use of paid products, advertising and develop monetization models to boost their revenue. It

had devised strategies to target business users as it had noted that many people used Skype

for their business purpose. Apart from these, it had also planned for exploiting high

bandwidth cellular networks and reduce the traditional tariff for mobile calls.

Communication industry had been evolving and many large and small players had

introduced services which directly competed with Skype. However Skype with its unique

business model had been able to expand its user base and lead the market. Skype had

successfully competed with major players like Google, Microsoft, Apple and Yahoo on the

basis of quality, price and geographical reach. Skype had also spent less on advertising

compared to its peers in the market. Cost was an added advantage for Skype. It had well

established infrastructure and lower working capital needs which reduced the cost of

operations. Skype had indicated in its Securities Exchange Commission (SEC) filing in

2010 that, "Google has recently acquired Global IP Solutions, which has developed a real-

time audio and video-over- Internet technology similar to ours. Google may use this

technology to compete against us." Such competition might reduce the power of Skype to

increase the price for their products. Skype had been in a crucial movement and need to

implement well planned business strategies to convert its communication business into

more profitable one.

Google‟s PC-to-Phone Services: Is it a Threat to Skype?

Gmail, the third largest email with 186 million users (per month in 2010) had expanded its

functionality with Gmail Calling. In mid 2010, Google had integrated voice calling

capabilities with its free web mail. This new feature would turn PC to VOIP enabled phone

system and allowed people to call from their system to any traditional telephone or mobiles

directly. To start with, Google had provided this service to the people in the United States

and Canada. Google Talk Voice and Video browser plug in was a prerequisite to use this

new facility. Gmail calling was user friendly as people need to click on “Call Phone” button

appearing on the left side of the Gmail screen. By clicking on the number pad, users could

connect and communicate to any phone desired (Exhibit IX). To attract users, Google had

offered calls within the US and Canada for free and charged international calls (minimum

rate two cents per minute) as of 2010. Further the service was integrated with Google

Address Book to ease the users. For future reference, the voicemail would be converted to

text and sent to the Gmail inbox or as SMS to their mobile. Craig Walker, Product Manager

for real time communications at Google, had said that, "We will transcribe voicemails and

convert it into text and put it in your inbox so that it's searchable and you will always have

a record of that voicemail."

Google‟s PC-to–Phone calling service had a promising start with around 1 million calls

through this service on the first day of its launch. It was estimated that through this service,

Gmail might double its subscribers during the first year (2010–11). Google‟s venture into

VOIP market would augment the revenue of the company by selling phone subscriptions,

attract new users to Gmail and thereby increase their ad revenue. Trefis, a stock analysis

firm had opined that, "Overall, we see a potential 3% upside to our $643 stock price

estimate for Google." Analysts of VOIP market had indicated that through PC-To-Phone

calling service, Google would directly compete with Skype, who had been providing such

similar service since its inception in 2003. Google had a larger user base and provided

varied services such as mail, calendar and chat under one roof. This would be a strong

incentive for Skype users to shift to Gmail as the phone calling was available along with

other services. Pricing would be another advantage for Google. While Google had charged

two cents per minute for international calls, Skype had been charging 2.1 cents per minute.

Apart from Skype, Google would be tough competitor for other operators such as AT&T,

Verizon and Sprint Nextel. To popularise their new service, Google had planned to set up

phone booths in airports and universities across the US.

While Google had few advantages over Skype, Google had not offered this service on

mobile browsers. Randall Sarafa, a spokesman for Google had revealed that, “We do not

offer this feature on mobile browsers, and right now we have no plans to do so." This

would be a major drawback for Google in a scenario where smart phones were gaining

momentum. Skype was a dominant player in this market and also had the advantage of

early entry. However, in the past, Google CEO, Eric Schmidt had highlighted the need for

developing application for mobile devices. Hence it was expected that Google would

extend their PC–To–Phone calling services to mobile browsers. Skype had also been active

in expanding their business and augmenting their revenue. It had tied up with electronics

and mobile companies to embed the Skype program into their products. Further to attract

businessmen, it had launched the Skype Connect, VOIP service for corporate

telecommunication, to attract the corporate sector. This was also a part of Skype initiative

to tackle competition from Gmail. Quality was another parameter which was advantageous

for Skype. Skype had been patronised by people across the globe for the voice quality it

offered. To offer such quality service would be a big challenge for Google. Siva Sanmuga,

Vice President of retail services for Callture (helps to sell telecom services such as VOIP to

clients) said, "Both (Google and Skype) are going after the tech-savvy clients, so it will

definitely affect Skype. Most of Skype revenue comes from Skypeout, and Google offering

it for free will have an effect." However Charles Golvin, Forrester Research analyst had

opined that Gmail calling would not impact Skype usage. He said that, “Skype's initial

adoption and usage was driven by cost avoidance, especially for international calls. The

equivalent opportunity that Gmail offers is much smaller, since switching pays dividends

for domestic calling to phones (displacing the cost of SkypeOut), and a very small savings

for international. So I don't expect a big impact on Skype usage from this.”

Mobile telephony market had been growing at a rapid pace and Google expected the smart

phones to dominate the internet search market. Google had used internet phone call

business as a strategy to penetrate the mobile market. Hence succeeding in the internet

telephony business was crucial for Google. In such a scenario, it needs to be seen how

Google would battle in the internet telephony market and whether it would succeed in its

venture after the initial buzz softens.