By MATT RICHTEL and KEN BELSON
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. Mr. 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.
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.
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 cellphone 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 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.’ ”
There are some hurdles to adoption of the new services. To use most of them, consumers must first have a high-speed Internet connection, which can cost $15 to $70 a month. Some of the lowest-cost services, like Skype, require people to download software, and users generally talk through a headset plugged into the computer.
Services like SunRocket, Packet8 and Vonage sell unlimited calling plans that let customers use ordinary phones. Internet-telephone plans from cable companies are often only a few dollars cheaper than comparable offers from the Bells, but are typically more reliable than service from the start-ups.
One recent convert to low-cost calling is Walter Andrews, 66, a retired language teacher in Cambridge, Mass., who signed up for SunRocket early last year, paying up front for a year of unlimited phone service at $16.50 a month. He signed up again this year, but when his annual contract expires in 8 months, he plans to consider other options. SunRocket itself recently had a promotion offering unlimited service for $8.29 a month.
“I’m certainly not going to pay even $16, as cheap as that sounds, if the price drops to nothing,” said Mr. Andrews, who spends part of the year in Scotland and uses the technology to communicate with his wife, who lives overseas year round.
In a world in which everyone placed and received calls over the Internet, the cost of transmitting the calls would, in fact, be virtually nothing. But there are government-regulated fees of a fraction of a penny per minute for transferring calls onto the regular phone network, which most people continue to use. VoIP services also have their own costs that they must either pass along to customers or find a different way to subsidize, including administration, marketing and technology.
For example, 8×8 Inc., a company that sells an unlimited Internet telephone service called Packet8 for $20 a month, figures it spends around $7 a month per user to connect calls. The company spends another $4.50 a month on customer service and $4 to cover customer acquisition costs, bringing its expenses to around $15 per user, said Huw Rees, vice president of sales and marketing for 8×8.
In this way, Internet-based calls may often be free, but there is a cost of entry. “Voice calls will never be totally free,” said Jeffrey A. Citron, the founder and chairman of Vonage, the largest Internet phone provider with 1.6 million customers. “If you want voice mail, you pay. If you want a phone number, you pay. Suddenly, free is $15.”
Still, $15 is one-third of the typical phone bill. As they cope with falling prices, some companies are experimenting with ways of subsidizing calls, either through advertising or by giving away basic phone service and charging only for additional features like caller I.D. EBay sees Skype as a way to help buyers and sellers on its auction site close deals.
Verizon is concentrating on selling a suite of products to customers in its faster-growing markets and is considering pulling out of markets where it sees little profit potential in upgrading its older network for the new technologies. These markets may include Vermont, New Hampshire and Maine, according to people with knowledge of the company’s strategy.
AT&T hopes it can offset the loss of land-based lines with gains in wireless phone service, and by shifting the core of its business to the high-speed Internet connections known as digital subscriber lines, or D.S.L., a technology that divides old phone lines into two parts: one for voice and one for data.
“We view D.S.L. as the access line of the future,” said Mikal Harn, vice president of consumer marketing for AT&T. As for consumers paying for calls by the minute or the distance the call travels, “I don’t think you’ve seen the death if it,” he said. “But there’s a point where you drive to that.”
New competitors keep jumping into the phone business. The nation’s biggest cable companies, including Time Warner Cable, Comcast and Cablevision, are using phone services — which are relatively cheap to offer — as a way to draw consumers to their high-speed Internet and television services.
Earthlink, the Internet access provider, last month opened its first retail store in Seattle, where it is testing out a new service plan: $70 for fast Internet access of up to 8 megabits per second, along with unlimited phone service. It plans to offer the same service soon in San Francisco and Dallas, and then to more cities.
“We’re an Internet company and we didn’t really view this as us getting into the voice business. It’s that the voice business is becoming an Internet business,” said Stephen Howe, vice president of voice services at Earthlink.
Perhaps a perverse indication of widespread expectations that phone prices will continue to fall was the botched public offering of Vonage last month. Vonage, an Internet telephone pioneer whose name has become synonymous with the concept, watched its share price fall sharply on its debut.
But Wall Street analysts and industry executives said this was hardly a rejection of the technology, but rather a reflection of the stiffening competition and relentless price pressure.