Skype is a software application that allows user to make voice calls over the internet. Calls to other users of the service and, in some countries, to free-of-charge numbers, are free while calls to other landlines and mobile phones can be made for a fee. Additional features include instant messaging, file transfer, and video conferencing.
Skype is a Voice over IP service.
I use it. I pay $3/ month to make outbound calls to my family in the States. That means I pay $36/year for long distance outbound service.
Skype also allows uses with webcams to communicate visually via the skype interface.
Feel free to read more about skype at skype.com. You'll be able to find all the products that skype has here: https://support.skype.com/category/PROD/
Perhaps you are more interested in why Skype would be on your iphone, nokia n900, or other smartphone device. These devices allow for wireless communication. If you are able to connect to a wireless service, and have the capacity to make skype calls out, then you can use Skype's VoIP service to make your calls instead of using the cellular service. This saves minutes, which subsequently saves time.
Pretty fantastic form of communication. Free to use online from user to user. I use it on a daily basis when I am abroad!
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