Thanks to Skype and its competitors, consumers can make calls directly from a PC, thus bypassing the conventional exchange—and the phone bill. With an Internet connection and a small software application, two users can have a conversation using a microphone and speakers connected to their computers. Digitized signals are sent between the two machines via a peer-to-peer direct connection—not via a separate server or hub, as in the case of email.

A product of the same Estonian-Scandinavian software team that brought us the legally-dubious Kazaa file-swapping service, there is nothing illegal about Skype. With 65 million worldwide users, and entering the 2005 Brandchannel Readers’ Choice Awards at number three behind Google and Apple, Skype appears to be rapidly heading toward the mainstream only three years after its launch. But it isn’t alone in the category, nor is it the first to offer phone calls over the PC. So why is it so far in front of the pack?

Like Google or the iPod, Skype isn’t the first player in its category, but it has managed to achieve scale that its competitors can only dream about. Skype shares a number of characteristics with Google and the iPod—namely, a single-mindedness and determination to be perceived as the category benchmark. As a result, the brand seems poised to ride the wave of interest in the sector and to grow with the category as a consequence.

The notion of making voice calls over the Internet requires stability, bandwidth, and scale in order to have real appeal. Skype’s critical mass has brought two benefits. First, it means the company has a dedicated user base that is busily using and advocating the product. But second, and perhaps more significantly, Skype’s scale is probably its best chance of locking out competitors. Newcomers to the PC VoIP category will immediately identify Skype as the preferred supplier, without even considering its competitors.

The success of the Skype brand is a textbook case of technology marketing. The company has taken time to build a loyal user base before attempting to tackle the mainstream or mass market. While appreciating the different requirements of the early and mainstream markets, Skype has created a brand which can straddle both.

In the technology space, where the product lifecycle is typically short, strong brands tend to be built upon a core of passionate users who feel that in some way they have “discovered” the product, and that their use of it marks them as cutting edge. Skype’s first three years of operation were spent establishing a secure base of loyal users from the early adopter community. During this period, it got a number of things right from the start, which endeared it to these customers. Firstly, it is incredibly easy to use, with intuitive controls and straightforward functionality. It is also quick to download and similarly easy to install with no special setup procedures or system settings to change. Furthermore, Skype offers interoperability: Windows, Macintosh, Linux, and even Windows PocketPC are supported, and users of different platforms can speak to each other seamlessly.

From a brand point of view, its personality—and indeed its name—seem to emphasize these points. The very non-corporate tone and the whimsical bubble around the logo suggest a company that is fun, easy, and consumer-friendly. Skype might be the customer champion, fighting phone companies to give you free calls. (In fact, many network providers see Skype as their champion too; suddenly their customers have a new reason to upgrade to broadband.)

Skype confidently claims the moniker “Global Internet Communications Company” as a trademark, and certainly has all the category-killer characteristics of Google. It’s easy to say (rhymes with pipe) and is already starting to be adopted as a verb (“Let’s Skype”) in the same way Internet searching has been replaced by the verb “to Google.” As well as being better suited to use as a verb, a made-up word is far more open-ended and less restrictive than a descriptive one. By comparison, Skype makes Yahoo’s rival offer, called Dialpad, sound rather quaint.

Skype was acquired by eBay in late 2005, and most of its competitors are owned by other well-known Internet or computer brands. Rivals include AOL Instant Messenger (which added voice capability to its text functionality a few years ago), Apple’s iChat (itself based on AOL standards), Yahoo’s Dialpad, Google Talk, and Microsoft Teleo. Clearly each of these operators hopes to tap into synergistic benefits of bundling and/or cross-selling under a well-known brand.

When iChat first appeared (as part of the OS X operating system suite, initially without voice capability but more recently with video as well), it seemed like a stroke of genius. It tapped into the loyal community of Mac fans by offering them an Apple-native application as innovative as it was Mac. The fact that it was based on AOL protocols and could thus connect to AOL Instant Messenger clients opened up a potentially larger still client base, albeit one that would be less loyal. But when PC VoIP started to take off, Apple and AOL both seemed focused on other things, and although AOL had become the text-based standard for instant messaging, its audio (or video) versions didn’t appear to receive the support they needed.

Lack of focus wasn’t the only barrier to success. From a brand strategy perspective, Apple, AOL, and potentially Microsoft all face another hurdle in the communications space. They are all in some way platform-specific. By contrast, Skype’s power lies in its apparent neutrality. When the history of consumer Internet telephony is written it seems likely that having a non-aligned brand will be an important part of the recipe for success.

Unlike Microsoft or AOL (or Apple for that matter), Skype is guided by a very simple idea: “The whole world can talk for free.” Not only is the sentiment anathema to traditional telephone companies, but its simplicity sounds foreign in the complex world that telecoms have become as providers struggle to avoid commoditization. (Incidentally, it isn’t the whole story of Skype either, since certain services are paid for.)

As well as the core PC-to-PC application (which is run as a loss leader providing genuinely free calls), Skype also connects to regular telephone networks for a small charge, via incoming and outgoing connection services called SkypeIn and SkypeOut. In keeping to the other aspects of the brand, the nomenclature works because it is simple and easy to understand.

Although Skype offers interoperability between platforms, and connects to regular phone networks in a number of countries, it does not connect to other Internet phone applications, and seems unlikely to do so. Skype is doing everything it can to keep hold of existing customers: encouraging people to refer friends, running a global searchable address book of Skype users, allowing users to choose when they are available to receive calls, and locking them out of rival products.

Skype, like Google, is now in a continuous innovation and extension phase. But while Google’s is a defensive positioning geared toward leveraging its position, Skype’s is about becoming the industry standard; aiming to become the trusted mainstream provider.

The next phase will see hardware products designed to work with Skype (the company claims there are about 200 in development). Skype-certified peripherals are available in high street stores in the US, and Skype recently launched a USB wireless phone handset and base station enabling customers to make apparently normal calls through a Skype connection, without the need to sit in front of a computer. It can only be a matter of time before a Skype-enabled mobile phone is launched, with functionality that routes long-distance or international calls through the Internet.

Skype has also been quick to use its trusted status to retail all kinds of computer equipment. Microphones, webcams, and headphones are all available for its website. But as well as functioning as revenue generators, these associations have also served to reinforce Skype’s leadership positioning.

Despite criticism from open-source fans who dislike Skype’s proprietary protocols, the company has actively encouraged software developers to develop software add-ons, such as Big Ears (an audio survey tool), Pamela (a talking personal assistant for your Skype account), and other products that enable Skype users to create podcasts (inevitably called Skypecasts).

Like Google, Skype’s first phase built the brand with little or no advertising, depending instead upon PR, word-of-mouth, and endorsement. Now that Skype is entering the mainstream, Skype advertising is starting to appear on the high street and online. In the UK, Skype has experimented with joint sales promotions with broadband providers via leafleting and demonstrations in shopping centers.

Also like Google, Skype appears to be worth a lot of money. Skype was sold to Internet giant eBay in late 2005 for €2.1 billion plus a performance-related earn-out worth up to a further €1.2 billion. Is this a good fit? Since eBay is built upon the community of shoppers and buyers that it connects on a daily basis, there are certainly some similarities. From a cross-promotional point of view, as a platform-neutral application, eBay (unlike Apple or Microsoft) is perfect. Expect to see Skype calling buttons integrated into eBay auctions soon so that potential buyers can speak direct to vendors.

As a previously privately-owned business, figures relating to Skype’s income are largely unavailable. But since most Skype calls are non-revenue earning, some observers have suggested that eBay has overvalued Skype. However, unlike many other Internet communications companies, Skype has a number of current and potential revenue streams that fit within its business model and can clearly be embraced by its stretchable brand. There are certainly unanswered questions about long-term future revenue (since as more customers connect Skype-to-Skype there appears to be less opportunity to connect to the regular phone network), but for the immediate future at least, perhaps the valuation is not so unrealistic after all.

Is Skype unstoppable? Rather like fax machines in the 1980s, such peer-to-peer technology depends upon having a community of users who can connect to each other. As the largest PC VoIP operator, Skype is consequently in a good place from which to grow as it tackles the broader market.

Of course, there are a number of ways that Skype could go off the rails. The company could get greedy and attempt to exploit its leadership position by charging higher prices, or by charging for features that are currently free. However, it seems that Skype is most at risk from external factors—either attacked by competitors or undermined by its existing partners.

Many cashed-up competitors will want to have a go at Skype’s market, and a couple could be well-placed to do so. Most significant among these would be Microsoft, which has a track record of successfully bundling software into its Windows operating system to gain scale with later adopters of technology. As already noted, Microsoft has acquired VoIP operator Teleo (in late 2005, shortly after eBay acquired Skype) and boasts that Teleo integrates with Internet Explorer and its Outlook email and address book software. It seems likely that some version of Teleo will be bundled into a seamless environment with future versions of Windows, which would introduce VoIP to many who may be reluctant to download and install from a third party.

Another potential weakness of Skype comes in the form of the proprietary (and secret) coding and encryption on which it runs. Concerns about security may prevent Skype from being adopted in some commercial circumstances where confidentiality is critical. The French government recently released a report saying that Skype wasn’t appropriate for certain types of communications, citing such security concerns.

In other respects Skype is exposed to further risk because it doesn’t own the end-to-end customer experience. It relies upon a (preferably broadband) Internet connection and the cooperation of conventional telephone service providers (in particular for the critical revenue-raising SkypeIn and SkypeOut products). But this support is far from secure in the future. As a sign of things to come, Vodafone Germany has been reported as saying that it will disable Skype calls beginning in 2007, and a Chinese regulator has reportedly made similar noises.

Early adopters of technology who feel more closely aligned to the open-source approach of Linux feel uncomfortable with what they deem the commercially-oriented nature of Skype. But the current list of potential competitors backed by global (and commercial) giants is unlikely to offer a more acceptable alternative. One option facing Skype would be to license its coding so that it becomes an industry standard (like fax or DVD) and thus to earn part of its revenue on a license basis from would-be competitors. But since Skype has invested in building a retail brand, this would entail turning its back on much of the value it has already created with consumers.

Despite these threats, Skype is well ahead and has scale as a huge advantage against competitors. With its strong brand and coherent business strategy it appears to be doing things right.

Of course, Skype could do more to consolidate this position, in particular with the all-important enterprise market. By building relationships with corporate partners (perhaps even traditional telephone company operators) and bundling its products with other services from resellers with big business relationships, it will gain traction in the large end of town. But if Skype’s recent track record is anything to go by, such developments will almost certainly be soon on the horizon in the next phase of its continuing rise.

Chris Grannell is a brand and marketing consultant with swat>marketing, based in Melbourne.