Knowledge@Wharton

Although Skype, which provides Voice over Internet Protocol (VoIP)
telephony services and PC-to-PC calling, turns two years old on August
29, it remains unclear what kind of business this relative newcomer
will turn out to be. Skype could remain a mere fad for techies, become
a next-generation communications platform or evolve into the next eBay
or Google, say Wharton experts.

What's certain, however, is that Skype, which has offices in Estonia,
London, San Francisco, Korea and Japan, is worth watching. The company
touches on a handful of key trends—peer-to-peer technology (using the
computing power of a distributed network of PCs), the commoditization
of telephone service and the viral nature of Internet marketing.

Here's how Skype works. It's a software application that allows
people to talk and instant message for free using PC-to-PC connections.
Users—identified through names instead of numbers—talk through a
headset and microphone attached to their computers (although the
connections require someone else to have Skype). But, unlike most other
most other VoIP services, Skype uses peer-to-peer technology to combine
the computing resources of all of its users—not surprising considering
that Skype CEO Niklas Zennström also created the Kazaa software that
enables people to swap music files easily. Zennström says Skype is more
than just a cheap way to have a conversation and notes that the company
will be offering video and a host of other yet-to-be-created
communication services in the future.

Meanwhile, it's hard to argue with Skype's numbers. Skype's software
had been downloaded nearly 145 million times as of Aug. 4, and the
company claims to have 47 million people using its services. More than
1.8 million people use SkypeOut, a pay service that allows users to
call traditional phones from their PCs for low minute rates. Skype also
charges for voice mail. "It's funny the way things grow," says Barbara
Kahn, a Wharton marketing professor and Skype user. "Skype just crept
along and then there's this explosion."