Skype received a booting from China today, the same day the company announced the addition of video calling to its iPhone app (and iPad and iPod Touch). The ban says that only China Telecom and China Unicom are allowed to operate VoIP services in the country--all private carriers are now deemed illegal.
The Chinese government has announced that any VoIP service administered outside of China Telecom and China Unicom are now deemed illegal, effectively making Skype and other VoIP services banned from use in China. The news comes on the same day that Skype announced the addition of video calling to its iPhone app, as well as the iPad and iPod Touch.
The decision points to an increasing monopoly on the part of the two state-run players, securing revenues for them and them only and of course ensuring state-watch over all VoIP communications. The addition of video calling is likely to be cause for extra concern for the tightly controlled media environment of China.
China previously banned all private carriers until 2008, the year of the Beijing Olympics, in an effort to give the government time to think about how to compete with players such as Skype. So this time the ban appears to be another stalling tactic--giving the country time to either beef up its own VoIP video calling capabilities to compete or plan strategies to stifle on-the-ground video reports (think if Nobel Peace Prize winner Liu Xiabo's wife, Liu Xia, was able to make Skype video calls with the outside world from an iPhone just prior to her house arrest).
Thomas Crampton, a former Asia-based correspondent with the New York Times who now strategizes social media campaigns for Ogilvy clients in Asia says that what's happening in China, though, is more of a "step in the direction of making a decision," he tells Fast Company. Crampton, based in Hong Kong, is cautious to glean China's news as an all-out ban.
"Skype and other VoIp services have become a mainstay of the Chinese economy," says Crampton.
As for Skype's response?
"Skype is tied in with [Skype's China partner] Tom.com--I don't see Skype taking a Google-like stance. I see them trying to resolve this behind the scenes because of their ties."
Netizens are already raising the question of how, exactly, China will go about enforcing the ban. Pornography is also illegal in China, relying on firewall blocks, but that is only so effective. The creator of China's largest porn site was actually sentenced to life in prison in 2006, so who knows what would happen to a corporate customer dependent on Skype for large volumes of calls, for example.
"It's ridiculous," Kan Kaili, a professor at Beijing University of Posts and Telecommunications told the People's Daily Online. "VoIP is a popular technology worldwide."
We'll post more updates here in the coming days and weeks as it becomes clearer what exactly China is up to.
COMMENTARY: China is a huge trading partner with the West, so banning Skype is really going to hurt Skype's business on both sides of the Pacific. In May 2006, Skype reported that it had 13 million users within China or roughly 13% of the Skype's 100 million internet users at that time. This did not the include the number of Skype users calling China from outside the country.
At the end of 2006, China has 100 million internet users. As of June 2010, China has 420 million internet users. If the proportion of Skype users to internet users in 2006 (13%) remains constant, then by Mid-2010, the estimated number of Skype users in China would be 54.6 million. At the end of 2009 and June 2010, Skype had 474 million and 560 million users worldwide respectively. If we calculate the number of Skype users within China, for December 2009 and June 2010, using a 13% Skype usage rate, then the estimated number of Skype users in China were 61.6 million and 72.8 million respectively.
According to Skype's SEC $100 million IPO filing of August 2010, revenues were $406 million in June 2010 (see above graph). This is just a rough estimate, but China's ban could cost Skype in the neighborhood of $55.7 million in lost revenues as of June 30, 2011 (year-to-year) and $62.66 million for the entire year 2011, using the following assumptions:
1) Registered user growth rate for 2011 (assuming no China ban) = 40% (per SEC IPO filing)
2) Revenue growth rate for 2011 (assuming no China ban) = 25% (per SEC IPO filing)
3) Estimated registered users end of 2011: 474 million x 40% growth rate = 663.6 million registered users - June 30, 2011
4) Estimated gross revenues end of 2011: $406 million x 25% growth rate = $507.5 million gross revenues - June 30, 2011
5) Average revenue per registered user: $507.5 million / 663.6 million registered users = $0.7647
6) Revenue increase between June 2010 and June 2011: $507.5 million less $406 million = $101.5 million.
7) Estimated number of registered users in China as of June 30, 2010: 72.8 million (see above)
8) Potential lost revenues due to China ban: 72.8 million x $0.7647 = $55.7 million
9) Since revenues were growing at a 25% compounded annual growth rate. The revenue loss for the entire year 2011 from the China ban would be $55.7 million x 12.5% (25%/2) = $62.66 million
Skype generated a profit of $13.1 million for the six month period ending June 30, 2010. Skype's estimated gross revenues for the six month period ending June 30, 2011 is $507.5 million. If we annualize this for the entire year, then estimated gross revenues would be $571 million ($507.5 million * (25% / 2).
If we use Skype's profit margin of 3.22% for the six month period ending June 30, 2010, then their profit for the year ending December 31, 2011 would be about $18.38 million before the China ban. If we adjust this figure by the effect of the China ban, profits would be reduced by $2.01 million ($62.66 million x 3.22%) so estimated year end profits after the ban would be $16.36 million.
As I said early on, the above figures are raw estimates, and the actual financial affect on revenues and profits could be higher when you consider that Skype's incredible growth rate is due to China.
The actual loss to the American and Chinese consumer will be sizable because business calls between both countries would have to go over regular land or cellular lines. This is going to be ugly.
Courtesy of an article dated December 30, 2010 appearing in Fast Company, an article dated August 12, 2010 appearing in Aquarius.biz and an information about China's estimated internet usage for 2010 appearing in Internet World Stats
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Posted by: Sarah Stergaard | 02/26/2013 at 10:50 PM
I just hope that China will soon realize that its countrymen need an already reputable VoIP-based means of communication to make both local and overseas calls, especially for businesses. There are other established hosted PBX support providers out there that can serve as competent business communication partners. We all know that client support is very important for any business, so all entrepreneurs should be able to invest on and make use of the services of a highly acclaimed and award-winning IP-based communications company.
Posted by: Account Deleted | 02/01/2011 at 06:45 PM
Robert, what you say is definitely true.
Posted by: Tommy | 01/07/2011 at 07:18 AM
It is a simple strategy by some businessmen out there. It's like they're saying that their company is no good compared to other foreign companies and the only way to get rid of the barrier is to ban others to do business with their country. Why not let the Chinese people decide which company to choose from. It is also a way of knowing if a company is good enough for the people or not. People choose services that are reliable and not simply because of its popularity. That's is what they should think about.
Posted by: faxing internet | 01/06/2011 at 09:50 PM