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Skype's Offer Of Free Calling: Desperation Or Smart Business?

Skype's announcement yesterday that it was offering free SkypeOut calls to landline and mobile phones in the US and Canada was either an act of desperation, part of a well-thought-out, long-term business plan, or an attempt to sabotage Vonage's upcoming IPO -- and possibly a combination of all three.

Skype, naturally, says the move is smart business, and nothing else. Skype spokesperson Erica Jostedt told Networking Pipeline, "This initiative has always been in our business plan for the US and Canadian markets."

Previous to the announcement, SkypeOut users paid two cents per minute for the calls to the US and Canada. Skype is forgoing that revenue as a way to gain new customers --- rather than spend money on advertising to gain new customers, Jostedt says, the company uses these loss-leader phone calls.

That begs the question, what's the point of having a customer if he's not paying you anything? The plan is to turn freebie customers into paying customers. Skype upsells a variety of premium products, including Skype Voicemail, ringtones, and SkypeIn, which gives customers a number for receiving inbound calls from conventional and mobile phones. So it's betting that premium services it can sell new users will outweigh any revenue loss.

Albert Lin, an analyst with American Technology Research, told Business Week that Skype gets an average of about nine cents in sales a month of these premium services per customer. So Skype's plain is to rope in enough new customers as a way to offset its revenue loss.

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