Will VoIP Kill Per-Minute Pricing?

Charging by the minute for voice calls may soon be a thing of the past. Both VoIP giant Skype and industry analysts are predicting inexpensive Internet-based phone services will force telecom providers to look elsewhere for revenue. Your next phone call may be underwritten by advertising or blocked entirely be companies responding to VoIP.

EBay CEO Meg Whitman told analysts the growing popularity of VoIP is driving the cost of phone calls so low that per-minute pricing will soon be impractical. “In the end, the price that anyone can actually charge for voice transmission on the ‘Net will trend toward zero,” Whitman told analysts. Whitman estimates it could be three to six years before all VoIP calling becomes ‘free.’

Revenue from per-minute fees could be replaced by advertising or transaction fees, said Whitman. EBay recently paid $4 billion for Skype, a Web-based service that allows subscribers to call each other for free. While eBay expects Skype to earn $60 million this year, the VoIP service may make $200 million in 2006, according to the company.

VoIP eroding revenue
“The traditional model of time- and distance-based pricing for voice calls is being eroded by VoIP,” says Richard Webb, analyst with Infonetics Research. Webb only partially agrees that free telephone calls are on the horizon.

“Telecoms won’t kill the cash cow,” Web argues. “It will be a brave service provider that does that unilaterally—drops per-minute pricing,” says Webb.

“VoIP is an equalizer. IP levels the playing field,” he says. “Per-minute pricing will play a smaller role. Telecoms are being forced that way.”

Pricing under threat
“The pricing structure is under threat. VoIP in the enterprise is taking calls off the Public Switched Telephone Network (PSTN),” Webb says. For the estimated 57 million Skype users, “VoIP is great.”

However, free VoIP won’t be enough for some customers, Webb believes. “Enterprises will be more discriminating. Voice is too fundamental to rely on Skype.”

Voice is becoming just one part of a bundle of communications services, Webb suggests. “Voice will be bundled with data services. Voice will be used as a lever to offer full broadband.”

New biz models
Days after Webb’s comments, a group of cable companies announced a $200 million pact with Sprint Nextel, offering subscribers a wireless quadruple-play bundle of data, video, voice, and mobility.

“Next year we will see a new business model for voice services—the “new voice”—with advertising as the revenue generator and voice as the loss leader,” says Jorge Fuenzalida, Director, InCode Technology and Strategy Group.

In the U.S., search engine giant Google could become one of the first non-voice companies to experiment with advertising-based VoIP. “Google will be one of those likely to try it,” Fuenzalida says. Google recently bid to establish in San Francisco, Calif., a free Wi-Fi service. Many expect advertising to pay for the project. If this were to work it could become a clear model for VoIP.

“EBay’s recent acquisition of Skype and Skype’s deal with German wireless operator E-Plus have accelerated boardroom action,” Fuenzalida said. E-Plus is offering Skype as a flat-rate package as part of their 3G service to their 9.8 million subscribers.

Blocking threats and other storm clouds
The E-Plus announcement followed an announcement by Germany’s Vodafone (later retracted) that it would block VoIP from its 3G network.

Telecom providers aren’t likely to support free or nearly free VoIP without a fight. Foreseeing Google, Vonage, or other IP company’s need for broadband access, SBC CEO Edward Witacre fired a shot across the bow of VoIP players.

“Now what they would like to do is use my pipes free, but I ain’t going to let them do that because we have spent this capital, and we have to have a return on it,” Witacre told Business Week Online.

“Most wireless operators will adopt a defensive position, preventing access to their networks to avoid revenue cannibalization,” says Fuenzalida.

Several telecom operators in the U.S. and Europe are customers of Narus, a Mountain View, Calif. company with software that injects interference into VoIP packets traveling through a broadband network. Comcast, Germany’s Vodafone, and French carrier SFR are using—or have expressed interest in using—the service.

“VoIP has been given a free ride,” Fuenzalida believes. “Over the next year we will start to see changes. Blocking will become more prevalent. VoIP will become like Napster, and the issue will probably play out in the courts,” he says.

“Telecoms will change dramatically, or will lose customers,” according to the analyst.

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