Future of telecommunication-Internet telephony operator Skype

Future of telecommunication – Internet telephony operator Skype Antti Tapio Helsinki University of Technology Antti.Tapio@hut.fi Abstract It is predicted that in the near future the different devices of communication people currently use will converge from phones, email, instant messaging, etc. to single devices and applications. For example, voice communications and data transfer can be combined in an easy way which will enable new business opportunities. In fact, one company, namely Skype, is already exploiting these opportunities. In a short period of time, Skype has achieved a solid position in the Internet telephony market. This paper tries to identify the key factors that have led to the exponential growth of Skype compared to its competitors. This paper also discusses the changes that the new companies and technologies introduce to the telecom operator business models. The key factors of Skype’s success are both technological and business-wise. The use of peer-to-peer networks has lead to an efficient and lean organization with minimal network infrastructure. The ease of use and the lucrative pricing of the application has helped Skype to reach a large user base in a short time. KEYWORDS: peer-to-peer, Skype, Voice over IP, VoIP, Internet telephony 1 Introduction In the past few years, many companies (Skype[11], Buzzfon1 , Damaka2 , Geckophone3 , Teleo4 , and Teltel5 ) have introduced Internet telephony applications that utilize peer-topeer networks. Skype[11], the largest and most well known of these operators, has grown in only 1.5 years from nothing to a rapidly expanding Internet telephony i.e. Voice over IP (VoIP) operator with over 2 million active users as of March 2005. Why has this happened? The aim of this paper is to identify the key factors for success needed from Internet telephony operators and how Skype has managed to achieve them. The aim is also to recognize the changes the Internet telephony operators induce in the telecom business field. According to Schulzrinne et al. [10, 3, 2] the different means of communication will converge in the near future. Voice calls, voice messages, e-mail and instant messaging will move closer to each other and ultimately they all can be used from the same application. 1 http://www.buzzfon.com/ 2 http://www.damaka.com/ 3 http://geckophone.com/ 4 http://www.teleo.com/ 5 http://www.teltel.com/ As the way people communicate changes, it is worthwhile to consider what will happen to the telecom operators. How do they need to change their business model to react to the new competition from Internet telephony operators? Companies offering Internet telephony services have existed for quite a while. Why have they not managed to achieve the same as Skype has? What makes Skype so special in comparison with other Internet telephony operators? The answer is twofold. Firstly, in the history of the Internet, protocols that work in complex network environments, have survived and become widely used. The open VoIP standards including session initiation protocol (SIP) have problems with this. For example, getting SIP to work over network address translation (NAT) requires considerable knowledge and effort. Skype’s own protocols seem to make their way over NAT and through firewalls. Secondly, the volumes of traffic are huge but the profits are low. Major hardware investments are needed to support millions of concurrent users. Skype’s solution is to harness its users’ computers to do the work. The users are connected in a peer-to-peer fashion. Some computers function as super nodes which communicate with each other. They are responsible for connecting the users together and locating them from the network. The only things Skype has to do is to develop the software, market it and maintain a couple of login servers. The service, e.g. VoIP, should be ubiquitous, reliable, secure and easy to use but at the same time affordable. On the other hand the service providers are companies and their primary aim is to make profit. Here Internet telephony operators have at least at the moment several significant advantages over PSTN operators. Firstly, the ordinary telecom networks are location limited. This means that users have to choose an operator that offers services in their geographical area. This may suffice for much of the time, but when the users travel outside their home area, they have to hope that their local operator has roaming agreements with local operators in other areas. A Finn journeying through the UK, for instance, may find that Elisa has a roaming agreement with Orange. By contrast, Internet telephony operators are not limited in the same way, which gives them a competitive advantage. Telecom operators have large overheads from the existing network infrastructure. New innovations are difficult to take into use as the old protocols and hardware is everywhere. As Internet telephony is only a service in the network, it gives the Internet telephony providers more freedom in the way how they implement the services they offer. Without the burden of old technology there are many new opportunities to HUT T-110.551 Seminar on Internetworking exploit the new technology to fulfill the needs of the users. The telecom operators are also regulated by various laws and statutes. The Internet telephony operators can avoid the regulatory burdens by not connecting to the legacy network. But this is not a lasting situation, because presumably the users want to communicate with all of their friends, not just with those who happen to have an Internet telephony account. An interesting question is: is it possible to combine the freedoms of a Internet telephony operator and still fulfill the regulations? 2005-04-26/27 similar technologies. Faster networks are available in some cities, higher end hotels and airports. These networks are built using WLAN technology. As the mobile networks are closed and controlled tightly by their operators, there is a market for WLAN hotspots. It can be predicted that future mobile devices will include many different communication technologies. Already some Personal Digital Assistants (electronic hand-held information devices, PDAs) include GSM, GPRS and WLAN support. These devices free their users from having to carry a laptop with them. A successful Internet telephony operator will exploit these different technologies to the maximum. By this it can provide a service for end users that is as device and network independent as possible. The mobile phone manufacturers have close ties with mobile telephone operators, because the operators are big customers for the manufacturers. As Internet telephony operators can be seen as direct competitors to the PSTN operators, the mobile phone manufacturers have a conflict of interests. This raises interesting questions. Will the phone manufacturers provide their own Internet telephony applications or will some third party have to do that. For example, Skype has plans for providing a client for Symbian series 60 phones. This would enable their users to be connected all the time and make possible almost free calls between mobile phones. As a consequence, mobile telephone operators would probably have to rethink their strategies. For business users the needs are a bit different. but the basics are the same. They crave for cost efficiency, ease of use and extensive user base. But the business users want also to integrate Skype with their business systems. For example, a high volume helpdesk would almost certainly want to cut their phone bills. The helpdesk service providers have complex support applications that provide the helpdesk employees with call handling features and the management with various statistics and other relevant measurements. So what they basically need is a base messaging system that can be integrated to third party applications. 2 What do the users want? In this section we identify the key factors that users demand from their communication service providers. For example, email, voice communication, instant messaging and chatting are all different forms of communication. Typically each communication method needs its own application. Moreover, if a user wants to use different methods, he or she has to install many different applications and learn to use all of them. This is a major inconvenience as the end user does not care about the communication technology he uses for communication. Fortunately there is a change coming on the horizon. According to Schulzrinne [1] the different communication technologies will converge in the future. In other words, a user can utilize various technologies in one session with a single application. So in the end, a user might not even know which technology he or she is using. Furthermore, people will not have to use various devices to communicate with each other. Rather a user will probably have one or two devices that fulfill all the needs. The most important thing in communication networks for people is that they can get in contact with their friends and relatives. The larger the user base is, the higher are the chances that a user can locate his or her friends who are using the same application and communicate with them. This increases the probability that the user will continue the use of a application. Closely related to this are the connections out from the operators network to other networks. This interoperability helps to give the end users more possibilities of finding their friends from the network. On the other hand interoperability in particular makes premium services possible for the Internet telephony operators. For example, the operator can connect their network to the PSTN and give their users the opportunity to make calls to ordinary telephone numbers for a small cost. A large user base does not help if people are not well reachable. The more communication channels available to a user, the more the user is able to communicate anywhere and anytime. This kind of ubiquitous communication service enables the user to free him- or herself from worrying about reachability. For example, when a user is at home, he or she can connect to the network with an digital subscriber line (DSL) and when the user is strolling around shopping, the connectivity is enabled by a alternative radio technologies, like Universal Mobile Telecommunications System (UMTS) or Wireless Local Area Network (WLAN). Currently, slow Internet connections are available almost anywhere in the world. Mobile cellular networks offer connectivity with General Packet Radio Service (GPRS) and 3 What Skype offers? The Internet Engineering Consortium defines [5] Internet telephony as “communications services — voice, facsimile, and/or voice-messaging applications — that are transported via the Internet, rather than the public switched telephone network (PSTN). The basic steps involved in originating an Internet telephone call are conversion of the analog voice signal to digital format and compression/translation of the signal into Internet protocol (IP) packets for transmission over the Internet; the process is reversed at the receiving end.” According to Schulzrinne [10] Internet telephony can be seen in two ways, the first being that it is a transition from circuit-switched to packet-switched transmission of data in PSTN networks. The second way is that Internet telephony is just a new network service in the Internet. By this Schulzrinne means, that as voice traffic can not be identified from other data traffic. This implies various consequences as no internet service provider (ISP) can limit the use of their network for voice communications. HUT T-110.551 Seminar on Internetworking As there are practically no network resources reserved for connected Internet calls, there are no per minute costs either. This means that the traditional call model is going to break. There is no need anymore to limit the length of separate calls. On the contrary, there will probably be a on-growing need to stay connected for long times. For example, parents could keep track of their children by keeping a connection open at all times and discussing with them periodically. Hassan and Nayandoro discuss these possibilities in their paper[4]. They assert that data, voice and fax communications will be integrated as they all can be built combining different voice and data protocols to a single application. 2005-04-26/27 3.1 Overview of Skype Skype is the first major peer-to-peer Internet telephony operator. They have succeeded in providing the users easy to use, interesting, usable and affordable communication service. Their software has been downloaded almost 90 million times and there are over one million people using SkypeOut, their main chargeable service. Why have the users started to use Skype? This section tries to give an answer to the question. Information contained in this section is mainly based on Schulzrinne’s[1] and Khamsi’s[7] work. As mentioned in the last section, gathering a critical user mass is important in getting people to use your service. Skype currently has about two million active users any given moment[11]. This is not very much at the moment if we think at a worldwide scope. But still, it is the largest P2P Internet telephony operator and the number of Skype users is growing rapidly. An interesting question is accordingly, how has Skype managed to achieve this status in the market and will it be able to maintain it. Skype’s main advantages are ease of use, good voice quality and security. The installation and configuration of Skype is easy. No special knowledge is needed. Basically the user just has to create an account for the application and then he or she is ready to use Skype. The application works in almost any kind of a network configuration. Skype’s client is available for many platforms. Currently (March 2005), versions for Windows, Mac OS X, Linux and PocketPC are provided. Plans for Symbian series 60 support exist. Naturally users are concerned about their privacy. In ordinary telephone networks privacy is achieved by restricting access to the physical network. For example, only a selected group of employees have access to the PSTN exchanges. On the other hand all peer-to-peer applications are based on the fact that data is routed through some third parties. This data might be very sensitive as it is the case with Skype. To overcome this, all messages have to be protected from outsiders. According to Skype[11] and Khamsi [7] all data sent between two Skype users is encrypted. So the user does not have to worry about privacy if he or she trusts Skype as whole. Figure 1: The Skype Network[1] 3.2 Skype’s technology Skype does not disclose information about the technological side of their service. They haven’t released any public documents about protocols used or about any other technical subjects. Fortunately a description of the protocol is available from Baset and Schulzrinne [1]. From a technological point of view the Skype network is an overlay network that consists of three types of hosts: ordinary hosts, super nodes and login servers. The relationship of these nodes is illustrated in figure 1. First a client logs in to the network by registering itself directly with the login server. It then connects to the network through super nodes, which are other clients with sufficient computing power, memory and network bandwidth. These super nodes are responsible for locating users, routing calls and providing the clients information about hosts currently connected to the network. Each Skype client maintains a host cache which is a list of IP addresses of known super nodes. No personal data other than login information is stored in the network. For example, buddy lists are stored locally. This means, that a user either has to create his or her buddy list again every time the user installs a new Skype client to a new machine or he or she has to import it manually from another Skype installation. Basically this means, that Skype owns only the login servers. All of the other computers are in a way lent from their customers. This is in line with Skype’s main strategy which is to try to utilize the users’ hardware as much as possible [7]. The most interesting algorithm that Skype uses is still unknown. Skype claims, that any user who has logged in to the network in the last 72 hours can be found. This is a big promise as Skype’s user count has exploded. They say [12] they have implemented “Global Index” technology that keeps track of which users have used the network in the near past. All communication is encrypted with Advanced Encryption Standard (AES). The same algorithm is used by various United States Government organizations. The AES encryption keys are transmitted between hosts using the Rivest, Shamir, & Adleman (RSA) algorithm. Voice quality of Skype is claimed[1] to be much better than the PSTN quality. The codecs used are probably li- HUT T-110.551 Seminar on Internetworking censed from Global IP Sound6 . Network configuration is automatic. This means, that the user only has to enter only his or her login credentials to the Skype application and wait for the login to complete. After that the user is ready to communicate using Skype. Internally, Skype uses Simple Traversal of User Datagram Protocol (STUN)[9] and Traversal Using Relay NAT (TURN)[8] algorithms to bypass firewalls and Network Address Translations (NAT). One of the latest events has been the launching of an open application programming interface (API) that enables third parties to develop their own add-ons for Skype. This has proven to be very successful. Many third party applications are available ranging from answering machines to adapters that allow a user to connect ordinary telephones to their computer for use with Skype. A major drawback in the Skype’s service was that they did not provide phone numbers for users. In consequence of this the Skype users were not reachable from “normal“ telephones. This is changing in the near future as Skype is launching their SkypeIn product. With SkypeIn a user gets a unique phone number that can be used like any other phone number. 2005-04-26/27 All these products described are services that require special agreements etc. between different parties. Ordinary users cannot create these by themselves. So these premium services are crucial for generating revenue to Skype. Naturally these services require more infrastructure than their free counterparts. Premium services involve the need to gather accounting data for billing and access control for limiting the services to the paying customers only. By collecting money from the services, the customers will also demand more from the service providers. Thus, in Skype’s case they will need more hardware to cope with the requirements of the premium services. This raises the concerns about the scalability of Skype. Will the revenues generated by the premium services cover the expenses for the additional hardware and software needed? 4 Internet telephony and changes in communication cultures If Internet telephony achieves a status as one of the basic services in the Internet the way people communicate will probably change. Boyle[3] and Schulzrinne[1] both draw predictions about these transitions. As the so called call model of telephone conversations is no longer relevant, people will find new ways to communicate with each other. Schulzrinne gives two examples, push-to-talk and hoot-and-holler. The first, push-to-talk, is an adaptation of normal two way radio system to cell phones. The latter, hoot-and-holler, is a multicast-like system, where information from one point is transmitted to numerous recipients. Other similar changes in communication culture and possibilities could include monitoring equipment and similar machine-to-human or machineto-machine connections. As there is no time based charging, a remote burglary device, for example, could keep the users informed about its status constantly. Skype, with its open API and creative users, have created many examples of these new kinds of ways to make the most of the services offered. The Skype Journal blog7 lists many of these clever ideas. As an example, there are net radio stations operating over Skype, someone is using Skype as an intercom system in his house and so on. Internet telephony won’t make PSTN networks obsolete. As Schulzrinne [10] predicts that the same will happen to ordinary telephone calls as what has happened to fax when email got widely accepted. In other words, ordinary calls will be used for some special occasions when there is a particular need for it, just like fax is used for example to transfer credit card details. Still the PSTN operators will need to rethink their strategies. At the moment most revenues to them come from ordinary calls. If and possibly when Internet telephony bypasses PSTN networks in voice calls, the ordinary telecom operators will lose their main source of income. Fortunately, at least at the moment mobile operators are not in a great danger. According to the reverse engineering report [1] Skype uses about 2 kB/second of bandwidth. That is 120 kB per minute. So if a user is using Skype over a GPRS mobile link, he has to pay for data transfer fees of about 120 kB 7 http://www.skypejournal.com/ 3.3 Skype’s business Skype’s future success is determined by at least two key issues. First, how does Skype generate revenue and second, will Skype be able to scale to adapt to the continuously expanding customer base. Where does Skype get its revenue as normal communication between users is free of charge? The answer lies in Skype’s premium services. The main business logic of Skype seems to be to offer simple services for free and charge money from everything else. Their biggest premium service according to the web pages is SkypeOut. It enables the users to make calls from the Skype application to normal PSTN telephones. The charges are lower than by calling with an ordinary phone because Skype can route the call very close to the destination through the Internet. Their second service is SkypeIn which has just been launched worldwide. With SkypeIn people can call Skype users from PSTN networks. With SkypeIn the user can get up to three PSTN phone numbers which can be located in different countries. This means, that the user can be reachable by local calls from multiple locations. SkypeIn as a product could be the most profitable service as as Skype gets income from both the user and the caller. A third example of Skype’s premium services is Skype Voicemail, basically an answering machine. Another possible development in the future will be integrating SIP connectivity within Skype. This would enable Skype to interoperate with other Internet telephony operators. However, enabling interoperability has its risks. If Skype users have connectivity to and from other Internet telephony networks there will be fewer and fewer reasons why the users should use specifically Skype as their operator. Thus, it is more difficult for Skype to lock their users into Skype’s products. 6 http://www.globalipsound.com/ HUT T-110.551 Seminar on Internetworking per minute. That equals to from 3 to even 60 euro cents per minute with the current Finnish mobile operator costs. So using Skype might not be always the cheapest solution. Of course long distance calls will probably still be cheaper with Skype than through a mobile operator. Then again, few people have constant needs to communicate with people not geographically very near to them. As various Internet telephony operators achieve interoperability with PSTN networks, they also get closer and closer to being real telecom operators in the eyes of governments. A consequence of this is that the operators will need to fulfill local and global telecom-related laws. For example, they might be required to provide connectivity to emergency services, i.e. to the 911 or 112 numbers. All these requirements inflict extra bureaucracy and extra investment needs. These problems are becoming relevant for Skype too as they are providing PSTN connectivity with their SkypeIn and SkypeOut products. Currently they are trying to circumvent the regulations by stating in their end user license agreement that they are not a telecom operator. However, this might not be enough. At least the Finnish government has plans[6] to start regulating VoIP operators. 2005-04-26/27 used today; as a more reliable and secure way of communication than email. References [1] S. A. Baset and H. Schulzrinne. An Analysis of the Skype Peer-to-Peer Internet Telephony Protocol. http://arxiv.org/pdf/cs.NI/ 0412017, 2004. Referenced 2005-02-10. [2] S. Berger, H. Schulzrinne, S. Sidiroglou, and X. Wu. Ubiquitous computing using SIP. In NOSSDAV ’03: Proceedings of the 13th international workshop on Network and operating systems support for digital audio and video, pages 82–89. ACM Press, 2003. [3] J. Cadiz, A. Narin, G. Jancke, A. Gupta, and M. Boyle. Exploring pc-telephone convergence with the enhanced telephony prototype. In CHI ’04: Proceedings of the 2004 conference on Human factors in computing systems, pages 215–222. ACM Press, 2004. Referenced 2005-02-15. [4] M. Hassan and A. Nayandoro. Internet Telephony: Services, Technical Challenges, and Products. IEEE Communications Magazine, 38(4):96–103, April 2000 2000. Referenced 2005-03-19. [5] International Engineering Consortium. IEC: Voice over Internet Protocol. http://www.iec.org/ online/tutorials/int_tele/. Referenced 2005-04-11. [6] A. Karila. Internet Calls (VoIP). Publications of the Ministry of Transport and Communications Finland, (16), 2005. [7] R. Khamsi. Skype beyond the hype. Technical report, Technology Review, June 2004. Available from http://www.technologyreview. com/view/article.asp?p=12101. Referenced 2005-02-14. [8] J. Rosenberg, R. Mahy, and C. Huitema. Traversal Using Relay NAT (TURN). Internet-Draft, 2005. [9] J. Rosenberg, J. Weinberger, C. Huitema, and R. Mahy. STUN - Simple Traversal of User Datagram Protocol (UDP) Through Network Address Translators (NATs). RFC 3489 (Proposed Standard), Mar. 2003. [10] H. Schulzrinne. INTERNET telephony or Internet TELEPHONY. June 2004. Available from http://www.cs.columbia.edu/~hgs/ papers/voip.pdf. Referenced 2005-02-14. [11] Skype Technologies. Skype – the global internet telephony company. http://www.skype.com/. Referenced 2005-02-13. [12] Skype Technologies. Skype p2p telephony explained. http://www.skype.com/products/ explained.html. Referenced 2005-03-10. 5 Conclusions Overall it can be said that the way people communicate is changing rapidly. The breaking of the call model will enable new methods and ways to communicate. The convergence of applications and devices will hide the different technologies from the end user so that he or she will not know nor care which particular service he or she is using. The breaking of the call model will also make the life of PSTN operators more difficult as all services and thus billing is currently associated tightly with the model. This will force the PSTN operators to rethink their strategies and business logic. Skype’s success is based on understanding the needs of people, and being able to fulfill them. It has also been the first company to utilize the opportunities in Internet telephony made possible by peer-to-peer technology. By offering free services, Skype has gathered a large user base that is still expanding exponentially. Their revenue comes from premium services that, for example, enable connectivity to PSTN networks. However in the future the competition will tighten, as Skype will have to start interoperating with other Internet telephony operators. Skype’s competitors have a possibility to achieve competitive advantage by offering same services as Skype, but with open standards. The openness is especially important in the business user segment. Regulation is on its way to Internet telephony. For example, in Finland the Ministry of Transport and Communication is investigating possibilities to extend the regulations to Internet telephony. Skype and other Internet telephony operators need to take these regulations to account in the near future. Even if Internet telephony will achieve the status of most widely used telecommunication method, the original PSTN networks, as Schultzrinne points out[10], will still continue to exist. They will be used in the same way as facsimiles are