Skype is killing long distance, one minute at a time

The Internet is a great deflator, squeezing out the middlemen and lowering prices. The shifting fortunes of Wall Street brokers and travel agents are good examples. However, the Internet’s deflationary impact is on full display in the international long-distance market, where Skype (s MSFT) has started to take away any and all growth from the phone companies.

Skype (now a division of Microsoft), which at its very basic level is a people-to-people connectivity service, has become everything the phone companies feared it for. The latest data from research firm TeleGeography shows that international voice traffic — typically the most lucrative part of a phone company’s business — is declining sharply. The declines are coming at a time when the prices of long-distance calls are heading south. From the TeleGeography press release (emphasis added):

International long-distance traffic growth is slowing rapidly. According to new data from TeleGeography, international long-distance traffic grew four percent in 2011, to 438 billion minutes. This growth rate was less than one-third of the industry’s long-run historical average of 13 percent annual growth.
In contrast to international phone traffic, Skype’s cross-border traffic has continued to soar. TeleGeography estimates that cross-border Skype-to-Skype calls (including video calls) grew 48 percent in 2011, to 145 billion minutes. Although the volume of international traffic routed via telephone companies remains more than three times greater than Skype’s cross-border volumes, their growth rates differ dramatically.
TeleGeography estimates that Skype added 47 billion minutes of international traffic in 2011 — more than twice as much as all the telephone companies in the world, combined.
TeleGeography analyst Stephan Beckert said: “If all of Skype’s on-net traffic had been routed via phone companies, global cross-border telephone traffic would have grown 13 percent in 2011, remaining in line with historical growth rates.”

Phone companies need to grow traffic in order to compensate for the falling prices of long-distance minutes, but Skype isn’t helping matters. And it is not just Skype. There are several others. Take me, for instance: Back in the early 1990s, when I had to call my family in India, I would sign up for plans from AT&T (s T) or MCI and pay as much as 99 cents per minute to make those calls.
That pattern of overpaying continued till Skype came around in the middle of the last decade. At the same time, companies like Vonage popped up and lowered my phone bills. Today most of my international calls are made via Skype, Apple’s FaceTime, (s AAPL) and when those two don’t work, Nimbuzz, which I use for calls to landlines. Of course, the shift in phone calling behavior means that what used to be a megabillion-dollar business is being reduced to a fraction of that.
Xavier Niel of French broadband and mobile services provider thinks the idea of charging per minute for voice calls is preposterous and crazy. Such thinking is not new to us or to our readers.  In our smartphone world, voice is an app. Skype just happens to be the most popular one: It is on our computers, our phones, our television screens and soon other devices. There will hardly be a need for someone to call long-distance!