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 / Fall 2005 / Issue 40(originally published by Booz & Company)


Skype's Choice

The most attractive new form of Internet telephony is also the most threatening to corporate security — for now.

It was one of those little-noticed incidents that in hindsight turn out to be a significant hint of something big to come. In February 2004, Daiwa Securities analyst James Enck wrote in the Web log EuroTelcoblog ( that project teams at the consulting firm Accenture were bypassing their usual mode of communication — mobile phones equipped with GSM (Global System for Mobile Communications), a widely used protocol for enhanced privacy and security — during a shared job between Madrid and Pakistan. The teams had become frustrated with the erratic connections and dropped lines. Instead, according to Mr. Enck, they used Skype, a renegade Internet-based telephone service. They took this route “for obvious cost reasons,” said Mr. Enck, “but also because of the superior” voice quality.

Skype? Who? Skype is a “softphone” — a software-based telephone that uses a computer, cell phone, PDA, or any other equipment connected to the Web to deliver voice with simultaneous file transfer and instant messages over the Internet. Unlike the growing number of “voice over Internet protocol” (VoIP) networks offered by phone and cable companies, Skype is a peer-to-peer system. This means that it creates ad hoc computer-to-computer links over the Internet any time Skype users want to reach one another. With this approach, no central networks mediate or manage the connection.

Because Skype eliminates the middleman, calls between its users are free. The company generates revenue by selling services that allow subscribers to make calls to people who haven’t downloaded the software. A connection from a Skype-loaded device to a traditional telephone in most places generally costs about two cents per minute. And, according to the company (and some of its subscribers), Skype’s sound quality is better than typical telephone reception, primarily because it is not limited to the standard telephone transmission spectrum of 300 Hz to 3 kHz, a relatively narrow bandwidth.

In the peer-to-peer sector, Skype boasts an unmatched pedigree. It was launched in August 2003 by Niklas Zennström and Janus Friis, the Swedish entrepreneurs who founded Kazaa, the file-swapping, music- and video-sharing network that at one time was the most downloaded software on the Internet. Messrs. Zennström and Friis, who run Skype out of Luxembourg, claim that it costs their company about a penny to acquire a customer. That compares with about $150 for Vonage, a leader in traditional VoIP.

Since its debut, Skype has signed up 35 million users and, at any one time, well over 3 million people are logged into its network. One of Skype’s most high-powered adherents is former Federal Communications Commission chairman Michael Powell, who said in January 2004 at a telecommunications conference at the University of California, San Diego: “I knew [the traditional telephone system] was over when I downloaded Skype…. The world will change now inevitably.”

With all this going for it, Skype would seem to be on a smooth trajectory, but that’s not quite the case. In fact, Accenture’s use of Skype instead of GSM was significant because its project teams were bucking the prevailing bias among corporations. Most corporate IT and telecom managers are trying to avoid Skype at all costs.

Skype is an IT manager’s nightmare. For one thing, Skype encrypts all its traffic, which makes it impossible to monitor what employees are doing, sending, or saying when they use this communications tool. In addition, Skype doesn’t follow the path of most VoIP services. It enters the corporate network as an application embedded in a mobile device; it is activated whenever a user accesses the Internet from within the corporate network to make a call. In this way, Skype could theoretically open holes in a corporate firewall from the inside. The fear is that Skype users could expose corporate networks to hackers, viruses, and malicious software (“malware”) — or shield the activities of malicious employees.

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