The state of the state? "A train wreck," says one official.

If the world’s eighth-largest economy were a member of the proper religious order, it’d be time to call in a priest to administer last rites.

Name almost any serious malady and the state of California has it: the nation’s highest marginal tax rate coupled with an abysmal public education system; the most home foreclosures; a free-falling commercial real estate sector; lame-duck governor with no legislative support and a disdain for an annual budget process that he refers to as kabuki theater; unemployment somewhere between the official number of 12% and the whisper number of 18%; a 20% drop in year-over-year revenue; municipalities that have either declared bankruptcy (Vallejo) or are on the verge (Los Angeles); and a black-box permitting process that scares away business investment even while every week, 3,000 more taxpayers migrate to greener pastures.

Californians may be a can-do lot, but faced with all that evidence and much more, the political and economic leaders who spoke at the Milken Institute’s annual “State of the State” conference held yesterday at the Beverly Hilton could hardly have been more dour. “It’s a train wreck, and it’s getting worse,” said Bill Lockyer, California State Treasurer. Added former Assembly speaker Bob Hertzberg, now co-chair of governance reform group California Forward, “A high-speed train wreck.”

What’s this got to do with technology? Nothing, unless you consider that California is home to the many of the biggest tech companies on the planet (and 51 members of the FORTUNE 500), the bulk of the venture capital industry, many leaders of green-tech, two of the most patent-producing universities in the world in Stanford and UC Berkeley, and top thinkers across all spectra.

“California represents 10% of the population of the United States,” said Eric McAfee, chairman of McAfee Capital and CEO of AE Biofuels. “but probably 50% of innovation.”

Tech into ploughshares?

Ironically, Silicon Valley has built the tools and infrastructure to allow talented people to work anywhere in the world they choose, and as the state circles the drain, the fear is that businesses, entrepreneurs, and students will no longer feel the pull of the Golden State.

From a political and budgetary perspective, California has myriad problems – from Proposition 13 to direct-democracy ballot initiatives to abysmal credit ratings. But the biggest problem may be girth. The state increasingly seems too big not to fail.

“States were never intended to be the size of the entire eastern seaboard,” said Hertzberg. “What is the commonality between the folks in Calexico and Crescent City? This manifests itself in a politboro style of government in Sacramaento.”

None of the speakers–including gubernatorial candidates Gavin Newsom and Steve Poizner–offered a magic bullet, but there was some consensus on where to start.

Many called for an adjustment to the mandate that 2/3 of the legislature must approve a budget or a repeal of term limits that seem to enslave legislatures to special interests.

Others craved less (or more, take your pick) taxes and a lessened (or at least consistent) regulatory structure. Chevron's (CVX) John Watson, who will assume the CEO role in January, said the permit process for an upgrade to the company's Richmond, California, refinery took four years while an Indian company built its own entire refinery in half the time.

Still others offered hope that things will somehow work themselves out–because California has been in the dumps before and that the state will continue to be a magnet for the brightest immigrants.

“The combination of great science and great local universities and venture capital money started not just Genentech in 1976, but an entire industry,” says former Genentech president and current UCSF chancellor Susan Desmond-Hellmann, showing a slide of California tech companies that were either founded by immigrants or where immigrants played key roles in the early days, including Yahoo (YHOO), Sun (JAVA) , eBay (EBAY), Intel (INTC), Google (GOOG), Viewsonic, SanDisk (SNDK), and Nvidia (NVDA). “There’s something special about California: the atmosphere, the diversity, a wish to be curious and ask questions. The secret sauce behind Genentech, the Googles, Yahoos, and Amgens is the combination of entrepreneurial spirit, great universities, and a willingess to marry business and science.”

Desmond-Hellman warned, however, that Genentech has remained a biotech powerhouse because it has never lost sight of where its power comes from. “We always believed that the company would be no better than the people we recruited and we keep," she said. "We never took for granted that people had to work at Genentech. They have choices.”

So do the 3,000 Californians leaving the state every week.

Photo books are replacing 4x6 prints as the most important products in the printing business. Photo: Shutterfly.

Photo site offers lens into the post-print world.

At lunch on a recent afternoon in Silicon Valley, Shutterfly CEO Jeffrey Housenbold is remarkably upbeat, considering the miserable year the overall photo business is having.

Almost any way you slice it, people are making fewer glossy prints in a rough economy. The numbers are off for at-home printing (down 2%), photo-counter printing (down 6%) and kiosk printing (down 12%), according to the Photo Marketing Association. The only big growth category? The under-the-table printing that people do for free at work. (That’s up 42%.)

Fortunately for Housenbold the photo recession hasn’t hit online photo finishers like Shutterfly (SFLY) as hard as some other parts of the industry. In fact, Shutterfly and rivals like Eastman Kodak’s (EK) Kodak Gallery and Hewlett-Packard’s (HPQ) Snapfish are still growing – partly because they’ve embraced ideas like photo books, social networks and smartphones to push their business beyond the old-fashioned glossy print.

The expansion beyond prints isn’t new, but it’s accelerating.

Though photo sites have offered items like custom books, and stationery for nearly a decade, those items have recently become a major driver of sales. A few years ago, Shutterfly got 80% of its revenue selling prints. Last year it was just 39%.

“The 4×6 print has evolved,” Housenbold says. “Now it’s a photo book.”

Say goodbye to that box of unsorted photos

It should come as no surprise that 4×6 prints aren’t exciting anymore. They’re commodities that sites often sell for little or no profit in hopes of attracting new customers. Plus, though they have long been a mainstay of family photo albums and shoeboxes, loose prints are a pain to manage and store; bound photo books are far easier to handle, and far more profitable.

CEO Jeffrey Housenbold is looking for ways to hook new customers, and make it easier for existing customers to buy. Photo: Shutterfly.

That sea change is critically important for Redwood City-based Shutterfly. Unlike some of its rivals, which are subsidiaries of large companies with healthy war chests, Shutterfly is a standalone public company. If its business depended on simply selling 4×6 prints cheaper than the competition, it wouldn’t stand a chance.

As more complicated items like photo books gain popularity, Housenbold and his team are under pressure to dream up new ways to attract customers and entice them to spend more money – a challenge that the former eBay executive relishes.

One way to do that is to make photo books less intimidating. Surveys show that most people who start making one abandon the process before it’s printed – a simpler process could be worth millions in added sales.

With that in mind, Housenbold challenged his engineers to invent a way for consumers to make a photo book in less than 5 minutes for less than $15. They came up with Simple Path, a service that automatically lays out digital photos on photo book templates, saving customers the hassle of organizing a book themselves.

It’s an approach that analysts applaud. “The core consumer is likely to be a time-starved mom who may even get a guilty conscience about not printing,” says Liz Cutting, imaging analyst at NPD Group. “If you can make it easy, you will be her savior.”

Web-only albums?

Housenbold is also chasing customers who might not want to print at all – at least, not yet. In this age of cell phone cameras and social networks, there are more and more of those: The percentage of camera owners who don’t bother printing rose from 19% in 2007 to 24% last year, Cutting says. (NPD is readying this year’s survey, and she wouldn’t be surprised to see the percentage of non-printers rise again.)

To hook those customers, Shutterfly has embraced social networking. New closed groups on the site allow people to share photos with a specific circle of acquaintances – say, a Little League team or an elementary school class – rather than share everything with everyone. Housenbold says the feature is proving to be an effective way to attract customers who might otherwise use a competitor’s service.

Housenbold has some other plans to attract younger users who are likely to avoid printing and simply upload their photos to Facebook. He says Shutterfly will soon experiment with simple gifts young people can send each other in the mail, and might even dive into the market for “virtual goods” – digital items that people can buy and exchange in social networks.

But in the short term, he’s focused on the last three months of the year, Shutterfly’s make-or-break season. Not only does Shutterfly do more than half of its annual sales in the fourth quarter, it does more than a third in the three weeks after Thanksgiving, as people use the service for holiday cards and photo book gifts.

Lately Housenbold seems to be feeling optimistic. The last time Shutterfly reported earnings, he said to expect full-year sales of between $205 million and $220 million, a sunnier outlook than he gave three months earlier. Can he hit those numbers? We’ll see – but the photo industry could certainly use the good news.

All you 480 million Skype users out there should be rejoicing today, now that the Internet calling and video service has been freed from the clutches of eBay.

As was announced this morning, eBay is selling a 65% stake in Skype for $1.9 billion in cash to a group of private equity shops and venture capitalists. The deal also includes a loan from eBay of $125 million.

So let’s call it $2 billion. That’s about what eBay CEO John Donahoe said he thought Skype was worth when he announced in April that he was looking to take Skype public. Both the intention to spin Skype out (or sell it), and the price tag were points of data that investors have had months to digest. That is why eBay investors reacted fairly calmly today. This wasn’t a surprise  – good or bad – and the market reflected it. Shares of eBay (EBAY) were down about 2% on the news.

The question some eBay investors may have is whether Donahoe got far less for Skype today, rather than waiting for an IPO tomorrow? The short answer is not a satisfactory one: maybe, maybe not. Are valuations low today? Yes, but they are better than they were six months ago, and there is no guarantee that six months from now they will be better, or that Skype could get a warm welcome in the public markets. As soon as Donahoe announced his plans to take Skype public the for-sale sign also went up. The sale happened first.

Clearly the investors in the deal – which include Silver Lake, newly-formed venture capital fund Andreessen Horowitz (a source close to the deal says Andreessen Horowitz put up their fund’s maximum $50 million), London-based venture capital firm Index Ventures and the Canada Pension Plan – have their own designs for a payday which likely includes an IPO at some point in the future.

What would have made an eBay IPO of Skype in the near-term almost impossible, is that Skype's founders Niklas Zennstrom and Janus Friis, who left the day-to-day operations of the company in 2008, are currently suing eBay over the use by Skype of a key bit of technology they still own. The case, which is based in a London court, isn’t due to be heard until June 2010. Without a resolution to the lawsuit and/or a satisfactory replacement technology cooked up by Skype, there wasn’t going to be an IPO.

Moving Skype into private hands, lessens the leverage that Zennstrom and Friis had when they were essentially holding the IPO hostage. Expect a speedier, perhaps easier resolution to the case now, especially since Index Ventures, one of the early Skype investors, is a frequent co-investor with Zennstrom and Friis in their own venture capital forays. But don’t expect an IPO anytime soon, that is not going to be on the front-burner for a while.

Why Skype users should be happy is that eBay didn’t screw the company up during its stewardship. Forget the talk of “synergies” that then eBay CEO Meg Whitman spouted when she paid $2.1 billion in 2005 for Skype (plus payouts that ballooned the deal to north of $3 billion). There was never any synergy. To eBay’s credit, it didn’t try to force them, and create one bad company out of two good ones.

Skype, which in on track to post $600 million in revenue this year, is still a growth machine  – especially under the stewardship of new CEO Josh Silverman. Silverman will continue in that role, according to comments by Skype’s new owners. And while eBay didn’t ruin Skype, there is reason to believe that as an independent company Skype might be able to run faster and farther than it could from within eBay – Skype that to your buddies.

In that case, eBay investors also benefit, because the company still has a 35% stake in Skype, and presumably a board seat. If Netscape founder Marc Andreessen (who also sits on the eBay board) and the new owners can turbo-charge Skype as it comes up against increasing competition, most notably from Google (GOOG), they may be able to unlock growth and value that eBay simply couldn’t. Maybe they won’t be able to, but that is certainly their plan.

In the meantime, eBay will get to bank $1.9 billion in cash, and focus its efforts on reviving its core auction business. Skype will have to grow up and, if possible, go public without eBay, which was the way it always should have been.

Alibaba.com expands staff, launches ad campaign in a bid to sell wares to American small businesses.

You might not be in the market for mass quantities of biodegradable flower pots or fly masks for horses, but chances are there’s someone out there who is. Both are for sale–along with hydraulic briquette presses and canned sweet corn in bulk–on Alibaba.com.

Never heard of Alibaba?

The Chinese e-commerce site has sometimes been likened to eBay (EBAY), with a distinct focus on serving the nation's small- and medium-sized enterprises. (Alibaba also has a store on eBay.) Since it was founded a decade ago the Alibaba Group has operated two sites: an international site in English–Alibaba.com, and one in Chinese—Alibaba.cn. As of March, the Chinese site had 32 million registered users, four times as many as the international site.

But the English-language site contributes the lion’s share of revenue –more than 63%, or $84.2 million, in the most recent quarter.

A push to reach U.S. customers

To raise further awareness of the English-language version of Alibaba, the company this week launched a $30 million marketing campaign, encouraging small business owners to connect with wholesale suppliers through their online marketplace.

And while the marketing drive is billed as a global initiative, the $439 million-a-year Alibaba Group clearly has its hopes set on penetrating the vast U.S. small business community.

The company has purchased advertising in American television and print outlets, and it is sponsoring contests, events and promotional partnerships here. A microsite features fictional small business owners whose success was aided by finding sourcing partners on Alibaba.com. (The creative is earnest and funny—you may even laugh out loud at Dave, the action figure proprietor.)

The company also is bolstering its employee presence in the U.S., with plans to double its  Santa Clara, Calif.-based staff of 60.

Alibaba certainly could benefit from greater visibility in the states.  Only 1.4 million of the 8 million users on the international site are U.S. based. That leaves plenty of room to grow. The Small Business Administration estimates that there are 27 million firms in the U.S. with less than 500 employees.

Snagging 'net-savvy entrepreneurs

Unlike eBay or Amazon (AMZN), which broker transactions on their sites, Alibaba takes an approach similar to dating site Match.com, connecting enterprise buyers and sellers. U.S. vendors pay an annual membership fee of $3,000 in exchange for verification and promotion, but deals take place outside Alibaba’s walls.

Sellers can also list their products for free on the site, but 85% of buyers mostly do business with the paying “Gold Suppliers,” which currently number 480,000.

Alibaba’s business-to-business core makes it difficult to identify competitors. Sites like Liquidation.com and Overstock.com are far smaller than Alibaba and focus more on overflow goods in the U.S. And while eBay does dabble in B2B, Lazard Capital Markets analyst Colin Sebastian says it’s not really set up to serve the enterprise customer. “B2B requires more touch points and value-added services like a sales force geared toward enterprise buyer which eBay doesn’t have.”

Alibaba’s biggest competition may actually be offline. Alibaba’s general manager in the U.S., Kelly Sang, said that a lot of product sourcing still takes place at trade shows. “We want them to know there are alternatives to find what they are looking for that are cost effective,” says Sang.

Another obstacle for Alibaba may come from the fact that U.S. small business owners are already fairly Internet savvy. The importance of e-commerce and Internet marketing is widely recognized and most entrepreneurs possess the means to set up at least rudimentary websites. Not so in China, where Internet capability though growing is still less available, contributing to Alibaba’s success there.

Since its founding in 1999 by CEO Jack Ma–now somewhat of a cult figure in China—Alibaba has grown into an empire. Today the Alibaba Group includes an online payment service (Alipay.com), a classified ads platform (Koubei.com), and an online shopping site (Taobao.com), among other businesses. The company is also responsible for running Yahoo China, thanks to a 2005 deal that gave Yahoo (YHOO) a 40% stake in Alibaba Group.

According to a FORTUNE article the $1.7 billion initial public offering of Alibaba.com, spun out of the group in 2007, was the biggest IPO since Google went public in 2004. On the first day of trading on the Hong Kong Stock Exchange the stock shot to $5.13 with a market value of $26B. Revenues for 2007 hit $182 million, climbing to $439 million in 2008.

Today the stock hovers around $2.56, giving it a market capitalization of $12.9 billion.

Alibaba's growth-stock status could return if Alibaba’s recent push connects with U.S. small business owners. Ultimately, though, Alibaba will have to offer entrepreneurs more than just charming advertising.

Says Lazard’s Sebastian: “It’s incumbent upon [Alibaba] to show potential buyers what they have that you can’t get anywhere else.”

Don't give up on eBay yet. Despite posting a second quarter drop in earnings for the second quarter, the company beat analyst estimates.  Merrill Lynch and Bank of America upgraded it to neutral on the news, while Goldman Sachs and Credit Suisse raised their earnings targets. Since the announcement yesterday evening, eBay’s stock has jumped over 10% to $21.52.

eBay (EBAY) CEO John Donahoe helped explain that show of faith today at Fortune's Brainstorm Tech conference.

But to do so required clarifying an important point: eBay is no longer just an online auctioneer. In fact auctions are only a quarter of its revenue today. Instead eBay has shifted its focus to broader ecommerce and most important, to growing PayPal, the leading online payment provider.

PayPal now accounts for 35% of revenue, but Donahoe predicts that in four to six years, it will eclipse the entire eBay business. The nascent ecommerce industry is still only 5% of offline retail. Donahoe believes the sector could grow as large as 20%, and the opportunity for processing those payments is enormous.

"Payments is a winner take all business," he said.

Today eBay announced that it's opening PayPal up to third-party developers, enabling them to more easily build the payment service into their applications. For example, Twitter users can now use the service to transfer money between PayPal accounts using a third-party application called TwitPay.

Donahoe believes PayPal is well positioned to defend its leadership in payments since it already has assets like foreign banking licenses and risk detection programs. "Evidence would say that you have to be part financial services company and part Internet company — you need both," he said. Anyone seeking that evidence need look only as far as Google's failure to gain traction with Google Checkout.

Still Donahoe acknowledged there is work to be done in the marketplace business, the unit responsible for eBay's fixed-price and auction sales.

“We’re still the most trafficked Web site with most active users in the world,” but he said the company is going through a “growth inflection point.” Reinvention will be required to get “marketplace back to the growth rates we’d like to see.”

How did eBay get here? While it succeeded in scaling around the world, Donahoe explained that "you can get so focused on expanding current business models that innovation slows down." As a result the user experience didn't keep pace.

"We thought fun could overcome less than optimal user experience," Donahoe admitted. "Now we're restoring trust and layering fun on top." This includes hiring more senior software architects and including them in product design.

The evolution also includes transitioning away from auctions toward ecommerce. Over half of  what’s sold on eBay now is brand new, but not the latest generation. “We’re focused on a wider selection of inventory than anyone else can offer,” said Donahoe.

As for Skype, the Internet telephony service eBay acquired in 2006 and intends to sell, Donahoe resisted calling it a fumble. Rather, he emphasized that it was growing but simply “doesn’t have synergies with the other businesses.”

Tech gathering brings together best of tech and digital Hollywood.

Next week Fortune Magazine continues a nearly annual tradition, its mid-summer Brainstorm conference. We'll gather some of the smartest, most connected and powerful people we know in the technology and entertainment industries to talk about where we are and where we're going. Check out the agenda to see who'll be with us.

We began almost a decade ago in Aspen, Colo., then moved for a year each to San Francisco and Half Moon Bay, Calif. We'll convene this year in Pasadena, close to CalTech, NASA's Jet Propulsion Lab (whose director, Charles Elachi, will appear), the Idealab-Overture axis of the Internet world and yes, Hollywood, no slouch when it comes to using technology. A brainchild of the consummate technology writer and networker David Kirkpatrick, Fortune started this conference as a way to literally brainstorm with our community of sources and the companies we cover about what should appear in the magazine. We liked the format so much that now there are two Brainstorms, Tech and Green. We appreciate the power and privilege that come from bringing together a unique group of the some of the mightiest companies in the industry alongside some of its smallest — the biggest spenders and sellers, if you will, rubbing shoulders with the trend setters.

You'll be hearing a lot more on this site and in the pages of the magazine (and on Twitter: #brainstormtech) about our brainstorming exercise in southern California. As a co-chair of the event — together with Kirkpatrick and Fortune Assistant Managing Editor Stephanie Mehta, who oversees technology coverage – I have a full plate of panels and interviews. Here's a sneak preview of what I'm planning to cover. I'd value your input before, after or during the conference on email (alashinsky@fortunemail.com) or on Twitter (@adamlashinsky).

Marc Andreessen. I'll interview Fortune's current cover boy on the conference's opening afternoon. Andreessen is a survivor. Having co-founded Netscape, he easily could have been a tech-industry one-hit wonder. He isn't. He's a deep thinker and a big personality to boot. I plan on asking his thoughts on a few topics you wouldn't think he'd have strong opinions on, like economics. He does.

Startup Idol. Okay, we're not the first conference to borrow the concept from the popular TV show. But we're going to be the best. Three prominent VCs (Bill Gurley, Ron Conway and Dana Settle) will comment on and question five entrepreneurs who are “singing” for their supper. The audience will crown the "Idol" that's most deserving of funding. The startups are going to be interesting and surprising. And newsworthy. Oh, and controversial.

eBay CEO John Donahoe. He goes by the handle Dennis the Menace in eBay's fun-ish culture that harkens to its beginnings as a marketplace for tradables. Yet Donahoe has had the grownup job of repositioning an Internet phenomenon that lost some of its shine along the way. In his nearly 18 months at the helm of eBay Donahoe has begun to sell off some of predecessor (and California gubernatorial candidate) Meg Whitman's acquisitions, including the planned spinoff of Skype. He has largely kept a low profile in the press, given his long list of things to do. Until now.

Twitter's Biz Stone. Right after last year's Brainstorm I wrote about Twitter when it was still in its gee-whiz phase. More recently I've argued that all the noise about prodding Twitter to reveal its money-making plans is just that, noise. For all that, Twitter actually is making progress on being a business. It just hasn't spoken out much about it. Co-founder Biz Stone is a deceptively clever and wryly humorous spokesman for the company. We'll see if he's ready to live up to his nickname, which, though it doesn't stand for “business” is what we're going to talk about Thursday afternoon.

Jeffrey Katzenberg of Dreamworks Animation and Mark Hurd of Hewlett-Packard. The odd couple of the conference? Perhaps. One is a storyteller and dream spinner, Hollywood to the bone. The other is a by-the-books sales and finance man, a GE type (who never worked at GE) transplanted to Silicon Valley. The common thread: Dreamworks has built its animation-creation system on HP technology. We'll find out how the entertainer and the technologist see the future – and the economy.

A year ago this week Apple opened the floodgates and began letting software developers sell software for the iPhone, and geeks everywhere caught iPhone fever.

Since then Apple's iTunes App Store has swelled to more than 50,000 titles, logged more than 1 billion downloads, and inspired an entrepreneurial surge that's reminiscent of the dot-com gold rush — only without the illusion that everyone is making tons of money.

In fact, aside from Apple and AT&T, it's hard to point to many folks that are raking in a pile of iPhone cash quite yet. Matt Murphy, a venture capitalist at Kleiner Perkins Caufield & Byers, guesses that as many as 95% of the developers building iPhone apps "aren't trying to build a company on the iPhone" — they're just hobbyists making a little money on the side, or companies using fun iPhone apps as marketing vehicles.

The world is still waiting for the equivalents of eBay, Amazon, or Yahoo — the groundbreaking new companies that will redefine and inspire the mobile ecosystem.

Not that people like Murphy are discouraged.

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On NBC's Press: Here, I talk with a panel about the latest issue of Fortune, the Fortune 500 list, and changes to the tech landscape. (AAPL) (MSFT) (INTC) (CSCO) (GOOG) (TIVO) (EBAY) (YHOO)

Skype, the world's most popular program for making free overseas phone calls over the Internet, was released as a free download to Apple's (AAPL) iPhone and iPod touch on Monday. You can get it here.

This could be big. How big? Let's look at the numbers.

• In 2008, Skype users spent 33 billion minutes talking to people in other countries, representing 8% of all international voice traffic, according to TeleGeography Research. (link)
• That makes it the world's No. 1 provider of cross-border voice communications, according to the same report. By comparison, Verizon (V), iBasis (IBAS), and Tata (TCL), each provide about 20 billion to 30 billion minutes of international traffic each year. (link)
• Skype ended 2008 with 405 million user accounts, a 47% increase from 2007.  (link)
• Skype is adding new users at the rate of 35 million subscribers per quarter. (link to pdf)
• Skype usage hit an all-time peak on March 23, 2009, when more than 17 million users were online at the same time. (link)

Despite all this, Skype is said to be a disappointment for EBay (EBAY), which acquired the Luxembourg-based company in 2005 for $2.6 billion. EBay had hoped that buyers and sellers on its online auction site would use Skype to chat about their purchases. When that service didn't click with users, EBay had to write off nearly $1 billion of its Skype investment, according to Businessweek. (link)

Adding to EBay's disappointment is the fact that revenue from Skype users isn't growing as fast as its user base. As Businessweek points out, its 2008 Q4 sales of $145 million were up just 1.3% sequentially, even though registered users increased 10% in the same period. (link)

So now Skype is making a big push into what's expected to be the real engine for future growth: VOIP (voice over Internet protocol) calls made over cell phones, a field Google (GOOG) is also exploring.

In January, Skype became available on phones that run Google's Android operating system, including T-Mobile's (DT) G1. In February Skype announced that Nokia (NOK) will be selling smartphones with a Skype client pre-installed.

Late Monday, shortly before midnight, Skype came to the iPhone and iPod touch — an installed base of 30 million users. In May the company plans to release a client for selected models of the Research in Motion (RIMM) BlackBerry.

There are already several VOIP clients available on the iPhone, including Fring, Truphone and Nimbuzz, but none has the name recognition of Skype.

iPhone calls between Skype accounts are free, but in deference to AT&T (T), its U.S. partner, Apple will allow them only to be made over Wi-Fi connections, not over AT&T's cell phone network. [UPDATE: 9to5Mac reports that when run on a beta version of iPhone 3.0, the Skype app allows calls to be made over AT&T's 3G network.]

Skype calls to landlines and cell phones not running the Skype client are charged a fee. These are usually considerably lower than overseas rates, but higher than charges made for calls within networks.