The Internet Phone Firm Hopes a Free-Calling Promotion Nets More of Elusive U.S. Market
Washington Post - By Sara Kehaulani Goo -  May 16, 2006

Internet phone company Skype Technologies SA said yesterday that customers in the United States and Canada can place free phone calls from their computers to any land line or mobile phone in the two countries until the end of the year. The move comes at a time when millions of Americans are beginning to ditch traditional long-distance service and experiment with technology that allows people to talk using an Internet connection.

Skype already offers free international and long-distance calls to other Skype users, but it normally charges a small fee for calls made from computers to phones and for other services, such as voice mail. Executives at the firm said they hope the offer will spur growth in the United States, where adoption has been slower than in China and Europe, where Skype was founded. The firm was bought last year by eBay Inc.

Some analysts believe Skype's low customer fees will push phone companies such as Verizon Communications Inc. and AT&T Inc. to cut customers' bills by $20 a month for bundled local and long-distance plans.

Instead of picking up the telephone, most Skype users attach a headset with a microphone to a PC and download Skype's software from its Web site. The technology converts a phone conversation into digital bits that travel over the Internet. Skype then pays a telecom firm a fee to route those bits to another person's mobile or land-line phone or computer.

Skype said its customer base more than doubled in the past year, with 100 million users across the globe, including 6 million in the United States. "We like the trajectory we're on," said Henry Gomez, Skype's general manager for North America. "We took a look at the market, what our users are doing on our site, and thought this would be great to do -- to get folks on there more quickly."

Despite its growth, Skype faces major hurdles. A recent Harris Interactive Inc. poll showed that half of Americans are not familiar with the idea of placing calls over the Internet. Broadband connections required for the service are sometimes unreliable. And there is no shortage of competition, including telecom companies such as Verizon, Time Warner Inc., AOL LLC and Vonage Holdings Corp., which offer a subscription-based service for Internet calls.

"From a technology aspect, this stuff is game-changing. It's fascinating. It ruins the telecom companies' economic model as we know it," said Maribel D. Lopez, vice president at Forrester Research Inc. in Boston. Lopez estimates that about 20 to 25 percent of Americans will adopt some kind of Internet phone service by 2010, but that doesn't mean it will replace land lines altogether. "It takes time. Not everybody is going out overnight [to sign up]. Only people with compelling economic reasons are using Skype."

Skype said its free offer would extend until the end of the year, but it did not make any promises beyond that. "Maybe we extend the free period, maybe not," the company posted on its Web site yesterday. "You'll hear more about this towards the end of the year." In any case, Skype said the calls now offered for free normally cost an average of 2 cents per minute.

Some analysts said the offer would spur movement of legislation to regulate companies like Skype, which are not obligated to pay universal access fees or offer emergency 911 service. A bill offered by Sen. Ted Stevens (R-Alaska), chairman of the Senate Commerce, Science and Transportation Committee, proposes to levy fees on voice-over-Internet companies, and hearings on the legislation are scheduled later this week. But few expect the bill to reach a vote because it also includes several other measures on which there is wide disagreement.

Telecom consultant Rudy Baca, a former Federal Communications Commission official now at Rini Coran PC, said Skype's offer will be a "catalyst" for older telecom firms to push harder for some kind of regulation of such upstarts. "They're going to be a competitive force," said Baca, whose firm represents BellSouth Corp. but not in relation to the telecom bill. "How do you compete with free? That's really the problem for other companies."