http://www.marketwatch.com/News/Story/Story.aspx?dist=newsfinder&siteid=google&guid=%7B05752601-A317-451C-9418-7782176947FD%7D&keyword=&print=true&dist=printTop

Chinese firm may have cracked Skype's code

Pirated version could blunt Chinese push by eBay's Internet phone unit
By Ben Charny, MarketWatch

Last Update: 6:56 PM ET Jul 14, 2006

SAN FRANCISCO (MarketWatch) -- A Chinese software firm may have 
replicated the popular Internet-phone software developed by eBay Inc.'s 
Skype unit, a development which, if true, could blunt Skype's growth in 
a key emerging market.

Skype is aware of the claim, but so far company officials "have no 
evidence to suggest that this is true," Skype spokeswoman Kat James said 
in an email message.

Ebay bought Skype for $2.6 billion in cash and stock in September, 
betting that its software, which allows users to make PC-to-PC calls for 
free over the Internet, would become the leading communications platform 
for Web consumers.

Typically, only people who have downloaded Skype's software onto their 
personal computers can call other Skype users on their PC.

Yet on Thursday, the chief executive of Skype rival Vozin 
Communications, Charles Paglee, posted an Internet screen shot on his 
blog that suggests a friend of his in China called his Skype account 
with software developed by the Chinese firm Hanzen Corp.

A phone call and email to Hanzen's office were not returned.

According to Hanzen's Web site, the company sells a suite of business 
applications, including products called Hanzen Office, Hanzen Word, 
Hanzen Excel and Hanzen PowerShow, that "offer users the same 
functionality and compatibility with Microsoft Office at a fraction of 
the price" of Microsoft Corp.'s offerings.

The Web site, which also states that "overseas software companies come 
to China and sell their products at the same prices they charge in their 
home country," and further calls such software "outrageously expensive," 
says the company has "a number of different software projects in the works."

Paglee, whom MarketWatch contacted for this story, wrote on his blog 
that the call he received was part of a test that an unnamed firm was 
conducting of their new Internet phone software, which he said is 
expected to debut in August.

Released in late 2004, Skype's software has been downloaded by more than 
100 million users in more than 100 countries, according to the company.

Those numbers surpass the benchmarks set in the early days of Hotmail 
(since bought by Microsoft) and the music file-swapping sites Napster 
and Kazaa, making Skype among the fastest-growing user platform in 
Internet history.

Yet for all of Skype's popularity, analysts have raised questions about 
how much revenue eBay will generate from Skype, which gives away its 
basic software and charges only for add-on features such as calling cell 
phones from a PC.

Ebay has forecast that Skype will generate about $200 million in revenue 
this year, thanks to a series of product upgrades and the addition of 
new, business-focused Skype products.

If Skype's software has been replicated without its permission, Ebay 
would not be the first U.S. company to fall victim to Chinese software 
pirates. Cisco Systems Inc. sued Chinese rival Huawei Technologies Co. 
Ltd. in January 2003, accusing the firm of reverse engineering the 
copyrighted code that controls Internet routers. Although Huawei 
admitted no wrongdoing, it agreed to stop selling products using the 
disputed software.

A report by the Business Software Alliance, a group funded in part by 
Microsoft, estimates that 86% of the software sold in China in 2005 was 
pirated, which cost global software companies $3.9 billion in lost revenue.

Skype is making a push into China through a partnership with the popular 
Internet site run by Tom Online Inc.

If Skype will face a home-grown Chinese competitor, it could siphon off 
new users and reduce the company's growth there.

Still, given that Skype is free, it may not suffer as much from piracy 
as Microsoft, for example, which charges for its products.

Even if there is a knock-off version of Skype, "the software would lack 
the feature set and reliability of Skype," said James, the spokeswoman. 
"No amount of reverse engineering would threaten Skype's security and 
integrity," she added.

MarketWatch reporter Michael Paige contributed reporting for this story. 


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