July 26, 2004 7:00 PM PDT

Skype goes server-less for Net phone calls

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Software maker Skype has begun selling a service that lets Net phone users call traditional telephones anywhere in the world.

Customers of SkypeOut, as the service is called, download free software and then create an account with $12, $30 or $62 worth of voice minutes. The accounts are charged at various rates, depending on where the call originates and which region is being called.

Calls between PCs or personal digital assistants (PDAs) that download the Skype software will remain free.

Skype's first commercial venture is turning heads, even though it is routine for dealers of voice over Internet Protocol (VoIP) to sell access to the local phone networks. But Skype differs from its competition in that it doesn't use a central server to route its calls. Instead, it uses the same peer-to-peer technology borrowed from file-swapping giant Kazaa, whose creators also fashioned the Skype software.

VoIP calls are cheaper than regular phone calls because they use the Internet rather than traditional networks, which are heavily regulated and taxed. Downsides to VoIP include spotty voice quality, problems with the routing of 911 calls and the service's reliance on electricity.

"In a server-less environment, you can increase in size indefinitely without adding cost," Frost & Sullivan analyst Jon Arnold said. "That's a scary proposition if you're a phone company."

Luxembourg-based Skype can expect major competition from cable companies, which are now launching their own VoIP services. Other competitors include major carrier Verizon Communications, which launched a nationwide VoIP service last week, and Primus Telecommunications, whose $20-a-month Lingo service is generating the most buzz among the smaller providers bursting onto the scene, Arnold said.

SkypeOut is also likely to attract more attention for Skype from U.S. regulators, who are now drafting Net phone rules due in about three months. The rules are expected to require that VoIP providers contribute to Universal Service, for example.

A Skype representative said the company is already being assessed Universal Service and other fees by telephone company partners Colt Telecom Group, iBasis, Level 3 Communications and Teleglobe, which are connecting Skype's calls to the traditional phone network.

The funding for SkypeOut, Skype's commercial venture, comes primarily from the $19 million invested by Draper Fisher Jurvetson, Index Ventures and others in March.


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