Let’s start with what you’re paying for when you buy SkypeIn or SkypeOut.

SkypeIn and SkypeOut bring Skype nearly $60 million a year.

These are “call termination” services that let callers talk between the Skype network and non-Skype numbers. SkypeIn gives you a phone number anyone can call, your Skype softphones ring, and you and your caller can talk. Two examples. I have SkypeIn numbers in London, Manhattan, and San Francisco, numbers that connect to my Skype phone. The Katrina.info hotline bought a SkypeIn number in the middle of a disaster zone to accept local phone calls from New Orleans. You rent the number from Skype by the month or year. SkypeOut lets you call a traditional phone number from your Skype software. You pay Skype by the minute, about one euro per hour in most places.

Skype retails the InOut Services

To a Skype user, Skype builds and operates all of this. But they don’t. Skype retails these services, buying them from termination service providers. They provide the logical and physical interconnection to traditional phone networks in various countries. Skype’s partners include Level 3, iBasis, and Teleglobe. Skype sets up billing, buys blocks of phone numbers to be used for SkypeIn, meters use of these services, and sells them to Skype users. When you pay for SkypeIn and SkypeOut, some of the money goes to those partners and Skype keeps the rest. Think of the partners as InOut wholesalers.

Skype locks in customers through bundling.

Skype users can only use SkypeIn or SkypeOut. They can’t use other termination services.

[ Food analogy 1: In-N-Out Burgers. Famous West Coast drive-through hamburger chain. High quality, limited menu, only available at their restaurants. If you want their special sauce, you have to buy their burger in their store. And you can’t bring your own sauce. ]

This will change. Customers will have choices. And you will be able to thank Microsoft.

Microsoft must unbundle termination services from Windows

Microsoft will include a VoIP platform and client in Vista, their next version of Windows. Vista rolls out in 2006 and 2007 and hundreds of millions of people will wake up with at least one softphone on their computer.

Seems like happy days for Microsoft, right? Not so fast. If you thought Microsoft was in trouble for not having competitor browsers on their desktop, what do you think will happen when it comes to telephony? Can Microsoft put together a termination service deal that everyone, in all countries will find acceptable? Without massive litigation and regulatory involvement? Not likely.

So Microsoft will pass the choice to customers. They will unbundle the softphone from termination services.

Unbundling creates a new type of business: the InOut Retailer

People will experience this like unbundling your local phone service from your long distance carrier. You get to choose your in+out provider, probably in your softphone preferences or a control panel.

How will this work? Retailers will combine termination services and offer them up in a simple package. And you’ll choose among the packages. Skype could offer SkypeIn and SkypeOut services to non-Skype users, for example. Or you may prefer to get your In service from someone else.

[ Food analogy 2: You manufacture frozen pizza. Eight topping varieties. Then Microsoft comes out with bake-it-yourself pizza dough (a la Boboli). that lets you choose exactly the combinations and proportions of sauces and toppings. An abundance of personal choice and control. ]

Competition and shopping for InOut create opportunity.

So Microsoft unbundles, and Windows users around the world pick from a short list of early InOut services. We may even have a Windows wizard or a web catalog to help shoppers. Each InOut product will include geographies covered, voice networks covered (Skype, Yahoo!, et al), rates and tariffs, and links to account and billing pages. And branding, don’t forget the branding.

This data will be published via xml, RSS syndication style. This will make it very easy to keep millions of subscribers around the world updated. Side effects include very efficient competitive information, useful for those who compete strictly on price. It will also create options for those smart enough to game these markets the way airlines game ticket sales.

Service providers will compete on how well they serve specific markets. One gives great rates to the Philippines. Another provides customer service in Hindi. Enterprises will be able to map InOut service to their customer segments. Some services will be flat rate, others prepay, and yet others a hybrid.

Just as the syndicated product data informs the sell-side of the market, it may make it easier for customers to shop. Depending on the products, it may be as simple as buying a prepaid calling card or as complex as tiered long-distance plans. Expect third-party reviewers to compare services to help your choice.

Will there be switching costs? Aside from the customer attention burden, the biggest built-in switching costs will come from identity and credit verification.

What this means for Skype

Skype, and others like Skype, will respond to the new system. They will play in four ways.

As an InOut service provider. Skype will continue to offer simple, vanilla, global services. As they learn more about their user segments, they will create products optimized for types of use and markets. Perhaps spun off as a sister company, Skype could offer InOut services to people who use competing softphones.

As a softphone network operator. Skype will become a channel for other InOut providers. They will compete against Yahoo!, MSN, AOL, Google, QQ, telcos and others by:

• making it ridiculously easy to buy the right InOut service,
• adding trust to the InOut relationship by screening, rating, and certifying InOut services,
• easily managing my service (Am I really getting what I should out of it? Is the quality high?), and
• easily participating in referral sales through my social network.

As a complementor. Skype is in a great position to lower the costs for InOut retailers. They need back office systems for billing, profile management, credit checking and profiling, usage analysis, and selling to users. Those systems are expensive, a barrier to entry. By polishing up their own back office software, Skype can offer these services to InOut retailers for a fee or a piece of the action.

Non-PSTN Peering. Skype may offer InOut services that peer with selected IM and softphone makers. There’s no technical reason that lowest common denominator chat and telephony shouldn’t work across vendors.

Net: new sources of revenue and new brand touch points.

Skype is adept at hiding the plumbing so users focus on what works. That's their brand, to date. Those skills and brands should do well for them in this new space.