At the end of 2005 I made some predictions about the VoIP industry which I will review further in a day or two. While a couple of my predictions have already proved correct, perhaps the most interesting was:
6. The Skype protocol will be reverse engineered by August 2006 and application code will be offered for license.
Today I received a call through Skype from a friend at a company in China, except he told me he was not using Skype to call me. His company has successfully reverse engineered the Skype protocol and he wanted to call me in the United States to see how it worked between physically distant IP addresses. We talked for a little over nine minutes before the call dropped. Then I called him back using my Skype and we spoke for another three minutes.
The first time we talked there was a noticeable echo on my end. The second time the voice quality was good ol’ Skype crystal clear. At present they only support placing Skype peer-to-peer phone calls and they have not yet implemented presence. They have plans to add presence, instant messaging, and a host of other features. Their end goal is to create a client 100% compatible with Skype. They sent me a screen shot of their software (below) and my IP address was 100% correct.
One of their engineers told me the news a few days ago, but I wanted to wait until I had actually seen the software or at least received a call before I wrote about it. They say their software is not stable enough to release to the public, but they are working night and day on a demo which they hope to launch before the end of August.
The advent of the release of this software raises many interesting issues. According to their CEO, their software will not support Skype’s Super Node technology. Right now every computer with Skype installed on it can be used as a relay to carry data between two other computers when both of those computers are only allowed to make outgoing TCP calls. This means that very soon Skype users will have an alternative client which will not hijack their computer. This could eventually have a very negative effect on the Skype network if too many people choose not to act as Skype Super Nodes and the network starts to deteriorate.
This could also have a terrible effect on eBay should they choose to leverage their Skype client to host advertisements. Now that there is the prospect of a competing client available there is little doubt that there will be an ad free alternative to Skype should advertisements on Skype appear in the future.
From a legal standpoint eBay is out of luck. First, Skype itself is not viewed as “legal” in China. Chinese regulatory authorities have even looked into ways to block Skype in various regions of China. The Chinese telecom giants are not at all pleased with Skype ’stealing’ IDD revenue from their pockets. They will enthusiastically support a domestic Chinese company with the engineering talent to reverse engineer Skype. I wouldn’t be surprised if a major Chinese telco ends up licensing this technology to produce a competing Skype client for use in China.
What’s more, there is nothing at all illegal or even morally wrong with what this group of engineers has accomplished, especially from the Chinese perspective. They reverse engineered a protocol that was not protected by patent. They will be seen as heroes in China and it is unlikely the government will ever take action against them. Skype has been playing dodge ball with the law all over the world in an effort to arbitrage third world telcos that charge high prices. While I support Skype’s efforts it is almost poetic justice that they get a taste of their own medicine.
This adds even more bad news on top of Skype’s legal trouble in the United States. Earlier this year Skype was sued by Streamcast for RICO violations and then yet again by Net2Phone because of patented technology usage. Now the core technology upon which Skype is based has been reverse engineered, and their crown jewels are vulnerable.
Indeed the Chinese company’s understanding of Skype’s technology seems to be one of their most powerful strategies to protect themselves in case Skype tries to retaliate. They have developed Skype blocking technology which they claim is fool-proof and extremely effective. (See VoIP Predictions for 2006 number 4.) They hold in their hands the key to enabling telcos to block Skype in China, all of the Middle East and Africa. Zap! Forty Million users vanished without a trace! The Chinese would rather make money by extending Skype to new applications rather than restricting the freedom of others. Admirable, but maybe I have lived in China for too long.
So what will be Skype’s response? Perhaps with all the other troubles they are having right now they will hope that this news just fades away. Maybe they will decide to open the Skype protocol to allow others to freely develop applications to work together with the Skype network like Google’s Jingle Protocol for Google Talk. Maybe, but I doubt it. Maybe eBay will use a few of their Millions of dollars to buy up this Chinese company.
And what effect will this have on eBay’s stock price? Maybe now is a good time to short? For those who invest in this space, the company is looking for investment. If you would like more information feel free to contact me. I know of at least one communication software that plans to implement their technology and offer Skype compatibility. I am sure there will be others.
Oh, and for those who are wondering where my Blog has been for the past few months, I have been working on something very big. More news to follow.
