How much will Skype pay EU carriers for the success of its iPhone app?

Skype’s iPhone application, which lets users make cheap or free calls over their phone data plans, is a raging success. Barely a week after its release at the end of March, 2 million users had downloaded the application, representing almost 10 percent of iPhone users.

But phone carriers, fearing the service will eat into their already declining voice revenues, have either restricted its use over Wi-Fi networks (AT&T has), or banned it (T-Mobile in Germany). These carrier actions have triggered support in the media and elsewhere for something called “net neutrality” — the right to use data without restriction or additional fees. For example, if you get broadband or a mobile data plan from Verizon, network neutrality dictates that Verizon should provide you with a free and mostly unfettered Internet experience. Blocking VoIP calls would counter this right.

But today the EU Parliament stepped into the debate with a move that would counter net neutrality. It has reached a broad agreement over a telecom reform package, although it’s delayed its actual adoption. The EU bill would create a new telecommunication regulator in Europe and enable smaller national regulators to separate dominant phone companies from their networks if needed, a step opposed by giants such as Deutsche Telekom and Telefonica. It appears the EU thinks governmental pressure on the carriers — and not net neutrality — is what is needed to lower consumer prices, a goal of the bill.

Observers point out that the bill specifies “conditions limiting access to and use of services and applications,” and gives operators the legal permission to block services and applications, or restrict the use of them, at their discretion. All they have to do is tell the subscriber in the small print of the contract. Today the EU Parliament gave carriers even more power when it scrapped Amendment 138, which protects Internet users’ rights against being cut off of the Internet by operators.

According to VoIP industry expert Garrett Smith, the bill “will in turn lead telecommunications and cable providers to impose tiered service models and control certain traffic as they see fit.” Although Smith’s opinion remains speculative, and the exact repercussions of the bill remain unclear, such a scenario would likely send shock waves to Internet businesses like Skype or Google.

In any case, if adopted, the bill’s initial restrictions could be bad for Internet companies that rely on net neutrality for their business, such as Google and Yahoo, which count on Internet service providers to let users interact with their sites without extra charge. Google and Yahoo, like Skype, are championing net neutrality by lobbying against efforts to curtail it.

To attendees of February’s Mobile World Congress in Barcelona, the writing was already on the wall. Said Larry Lang, Cisco, Vice President and co-lead of the SP Mobility Board, “We [at the conference] are worried we’ll become victim of our own success. Mobile Internet is taking off . . . many people are excited about the new smartphones, the iPhone, Android phones and so forth. But they are really worried because that traffic comes without the adequate revenue. The carriers don’t really have a business yet. We need to come up with solutions that balance these costs — and that’s the number one topic this week.” At the Mobile and the World Economy panel, Jon Fredrik Baksaas, President and CEO of Telenor Group, said, “Our industry and the authorities must work together to find sustainable business models for mobile broadband.”

The panelists of Key Technical and Business Aspects of Network Evolution session explained in more detail how carriers envision getting more revenue. Juan Cambeiro of Telefonica suggested that in the months to come, carriers would need to depart from flat-rate packages and increase prices, a measure that the world’s first 4G network, TeliaSonera, recently implemented. Arndaud Cauvin from French carrier Orange suggested clear data limits on “unlimited” data plans be set to protect carriers from “abuse” by consumers who may “excessively overuse” bandwidth, something AT&T recently did.

Another suggestion that got a lot of affirmation was that content providers that reduce voice revenue and/or cause a lot data bandwidth costs be asked to subsidize data bandwidth costs. To me this sounded like a direct warning to VoIP providers like Skype, as the Skype VoIP approach does both: It goes over WiFi, clogs the data channel and doesn’t do anything for operator revenue. Another victim of such an approach could be Google. Google’s YouTube takes up 20 percent of bandwidth from a typical operator in Europe, I learned from Anastassia Lauterbach, Executive Vice President for Strategy at T-Mobile at last year’s Mobile 2.0 Europe conference.

At a Skype press conference I attended in February, CEO Josh Silverman did not address any of these points. Rather he declared that it’s “application providers like Skype that are driving demand for the next generation of access,” implying that the carriers need Skype. I found this a curious spin on the rocky relationship between VoIP companies and carriers.

During the nominations for VentureBeat’s MobileBeat 2008 conference last July, we took a closer look at the VoIP segment. In the end our panel ruled out several players submitted from this area — including Jajah, Fring and Eqo. Panel members had a difficult time understanding how any of these mobile VoIP offerings could really hit it big as businesses when there are so many players, prices continue to head toward zero, and technology is getting commoditized. “Mobile VoIP is a useful service, but there’s no evidence there’s a breakout winner in this category . . . let’s hope they can prove the panel wrong and turn into break-out successes,” we wrote at the time.

One reason break-out successes were missing, a panel member with close carrier ties explained to us, was that carriers had blocked any VoIP services that would ignore carrier interests. Success in mobile, he went on to explain, requires cooperation with carriers — and mobile services would have to be done in a carrier-friendly way. An example of VoIP done right, from this perspective, was iSkoot. With iSkoot the call is sent through the voice channel, coming out of a customer’s voice minutes and therefore making carriers happy. That was one of the reasons UK carrier Hutchison 3 used iSkoot to power its Skypephone and its backers recently pumped in another $19m. That kind of thinking about optimising relationships with carriers, though, was missing at most VoIP startups. To the panelists, VoIP was — although it had attracted some great talent and VC backing — another mobile category that Silicon Valley had got burnt on in the wake of the 2004 and 2005 VoIP hype when Skype investors saw a 1000x return when eBay bought the company for $4.1 billion.

Skype’s ability to use the traction of its iPhone app with customers to explain its case to the media in recent weeks made me wonder if success in mobile really does require cooperation with carriers as it did before. While it appears the success of the app has shifted the power between Internet companies and operators to some extent, that shift hasn’t affected the EU bill.

For now, relations appears to have become more antagonistic. Recently, AT&T public policy executive Jim Cicconi told USA Today that AT&T has “every right” not to promote the services of a wireless rival (Skype) and that they “absolutely expect our vendors” — i.e. Apple — “not to facilitate the services of our competitors.” If that wasn’t clear enough, he added, “Skype is a competitor, just like Verizon, or Sprint, or T-Mobile.”

The EU ruling will likely strain relations even more.