Internet calling pressures Bells to lower rates

Competition in the phone business, intensifying this year as Internet-based calling has taken root, has reached the point where many industry experts are anticipating an era of remarkably cheap and even free calls.

That era would be built on a vast migration of phone service from traditional networks to the Internet, where the calls become just another way to use Internet connections that consumers are paying for anyway.

"People are going to look at voice communications as something they expect to get for free," said Henry Gomez, general manager of Skype, which eBay bought last year for $2.6 billion. The company usually charges a few cents a minute for calls from computers to regular phones, but in May it eliminated those fees through the end of the year for users in the United States and Canada.

New competitors, including the major cable companies and start-ups like Vonage and SunRocket, are putting intense pressure on traditional phone companies like AT&T and Verizon that have built multibillion-dollar empires by selling phone service over copper wires. On the defensive, AT&T and Verizon are discounting heavily and pushing customers toward packages of more advanced services .

Online services like Skype that offer free calls from computer to computer for users with headsets have attracted the tech-savvy and are trying to push into the mainstream. In the process, they are dragging down everyone else's prices and pointing the way toward a time when it will be harder and harder for companies to charge anything for a basic home phone line on its own.

There are signs that changes in the business of calling are also altering the way people use these voice services. Gomez said some Skype users take language classes over the phone, unconcerned about the length of their calls. He has also heard of parents going out and leaving their child with a babysitter, but using the free voice link as a baby monitor to listen in on their child's room.

"When the cost is so little, you start to see people using voice differently," he said.

The VoIP tide
Internet-based calling is not new, but the momentum behind it is growing. In 2005, the number of subscribers to Internet-based calling services nearly tripled from the year before, to 5.5 million, or about 3 percent of the overall market. By 2010, the research firm TeleGeography expects Internet phone providers to win about a quarter of the traditional local phone business.

To stem the tide, the traditional Bell operating companies have been moving into new businesses like television and strategically dropping the price of traditional phone service. In New York, Verizon recently sent letters to customers offering a calling plan that includes unlimited phone service for $35 a month, instead of $60, a 42 percent cut. For people signing up for service through its Web site, AT&T now offers unlimited local and long distance service for $40, down from $50 a year ago.

The average user of Internet voice calling, known as voice over Internet Protocol, or VoIP, pays $25 a month for unlimited calling, according to VoipReview.org, a Web site that tracks the industry. International calls are most often not included in the flat rate, but those prices are also coming down.

The Bells still control the bulk of the country's 180 million landlines and are far from giving up on what has been a giant cash cow. When pushed, they are even offering their own Internet-based calling, but these services are rarely advertised. It is cheaper to cut prices to keep customers, they figure, than to try to win back customers later from a rival.

The main reason for falling prices for phone service is that it costs less to deliver voice communications over the Internet than over the traditional phone network.

During the first quarter of this year, the number of traditional telephone lines dropped by 150,000 a week, according to TeleGeography. At the same time, the number of subscribers to Internet telephone services has increased by 100,000 a week.

AT&T, among others, says the drop in lines is not as painful for the Bells as it looks. Many customers cancel phone lines they used for dial-up Internet service, but then sign up for broadband services provided by their phone company. Other customers eliminate a phone line but buy a cell phone plan from Cingular , which AT&T owns with BellSouth.

Even so, the Bell companies' stocks have been undercut by the growing prominence of the cable companies' phone businesses and by having to invest tens of billions of dollars in new businesses like television.

The IP advantage
The main reason for falling prices for phone service is that it costs less to deliver voice communications over the Internet than over the traditional phone network.

With the old technology, phone companies use costly equipment that directs a call through complex switches to its destination. On the Internet, phone calls are broken up into small packets of data, just like an e-mail message or a Web page, and then delivered to their destination. Instead of having to build and maintain their own networks, VoIP services generally use the infrastructure of the Internet, which is far cheaper but can sometimes lead to degraded service.

Charles A. White, senior vice president of the research firm TNS Telecoms, said that down the road consumers would "spend less and less for voice" and stop paying a separate fee for calls. Instead, he said, they will "just pay for 'communications services.'"