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Online telephone company Skype has been making headlines today for its impressive growth over the last year. According to new research from TeleGeography, Skype now accounts for 12% of all long distance calls.

But is the company eating its competitors' lunches or growing the telephony market? Signs point to the latter. But that doesn't mean long distance carriers have less to worry about.

Skype's business model seems easy enough. The company offers free phone calls (and video) over the internet between its users. If a Skype user calls a landline, he or she is charged for that call, but even that cost is much lower than traditional phone company billing. 

It seems like a pretty easy way to undercut the competition. But Skype's exponential growth over the last year hasn't really come at the expense of other companies. The company has grew its phone calling rates over 60% last year.

Paul Brodsky, an analyst for TeleGeography, tells The Wall Street Journal that Skype grew its rates cutting into the business of traditional phone companies:

“Skype is taking away would-be market share of international traffic from conventional phone companies.”

But that does not account for the fact that international voice traffic is still expected to grow around 7 to 8% annually between 2009 and 2011 according to TeleGeography.

How is that possible? Because Skype has actually created business for itself. Consumers who have sworn off international calling because of high fees are more than willing to try out a service that allows them to videoconference for free. And the 2009 numbers from Skype show that they liked what they saw.

Skype's registered user number is impressive — the company had over 500 million registered users towards the end of 2009, versus 405 million registered users at the end of 2008. But because it is a free service, that number has less to do with the company's health than how often people use its services.

And those numbers are more than healthy. In addition to its more than 50% growth in Skype-to-Skype traffic last year, Skype users are expected to generate 54 billion minutes in international traffic in 2009 compared to only 33 billion minutes in 2008. Meanwhile, Skype is now the largest long distance phone company in the world.

Meanwhile, Skype charges for its SkypeOut service, which lets users to make calls to standard telephones. Those calls generated about 12 billion minutes of traffic in 2009. Skype relies on traditional wholesale carriers to connect these calls to the telephone network.

If Skype was really cutting into traditional telephony business, that business would not have grown 8% from 2008 to 2009.

That's not to say that the company won't also steal business from more expensive competitors. But so far, Skype is not integrated into the telephone habits of most consumers the way that traditional phone carriers are.

Most Skypers are still using their computers to make calls and they are not using the service as an alternative to more expensive options, but to make calls where previously they would have chosen another mode of communication.

While telephone carriers should be afraid of Skype, it's not because the online company has underpriced them. It's because the company has gotten people excited about something that they had made difficult and avoidable.

Now that gives Skype room to go after the rest of their business in 2010. Especially when the service starts getting onto mobile phones. 

Meghan Keane

Published 19 January, 2010 by Meghan Keane

Based in New York, Meghan Keane is US Editor of Econsultancy. You can follow her on Twitter: @keanesian.

721 more posts from this author

Comments (2)

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Lucas Cobb

I have used the SkypeOut service for over a year now to call my girlfriend in Canada from the US. We talk every day and it only costs me 10 bucks a month. Amazing service that I will use forever.

@LucasCobbDesign

almost 7 years ago

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Jason Dandridge

Skype is a great product for global communication. I personally use Skype everyday to communicate with friends, family and business partners. I have used every single feature Skype has to offer! Voice calling on multiple platforms (PC), (MAC) and even mobile devices. Skype (VOIP) is the future of communication for everyone. I'm looking forward to huge year for Skype in 2010!

almost 7 years ago

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