No Ringy-Dingy

Internet phone providers begin to ax free services

The days of the free phone ride appear to be numbered. Companies have been dropping — or at least rethinking — the provision of free calls over the Internet from personal computers to standard telephones.

The market conditions causing well-established Internet telephony companies such as Deltathree, Net2Phone and to re-evaluate their offerings also led to the recent shakeout of free Internet service providers. Both types of providers are turning to standard pay-for-service models, because advertising alone didnt pay the bills.

"We took it out behind the shed last Thursday and shot it," said Jan Horsfall, president and chief executive of PhoneFree, referring to free PC-to-phone service. In a Jan. 18 e-mail, Horsfall informed PhoneFrees registered users that the company was abandoning free PC-to-phone service and would begin charging 2 cents per minute.

Horsfall said under current market conditions, specialized media companies cant sustain themselves solely with ad revenue, and wont be able to anytime soon. A year ago, PhoneFree charged $20 for every thousand times an advertisers banner appeared on the site. By November, the company charged only $2.

Deltathree ended its free PC-to-phone service in November, and now offers penny-per-minute rates for the same service.

The two biggest Internet telephony carriers, and Net2Phone, are holding onto the free model — for now, anyway. But Net2Phone mentioned in its last quarterly earnings call that it was considering moving from the free model.

"Are we going to offer free services forever? No. Will it end tomorrow? No," Sarah Hofstetter, a Net2Phone spokeswoman, said. Right now its cheaper for Net2Phone to offer free services to existing customers than to market pay-services to new ones, she said.

Brad Garlinghouse, chief executive of Dialpad, however, is sticking to his guns with free PC-to-phone service. "We havent had any pressure to stop offering [PC-to-phone] for free," he said. "Were on a path right now that delivers shareholder value, and if we find evidence that suggests otherwise, well consider making changes."

But Aurica Yen, an analyst at The Yankee Group, said providers cant rely just on advertising or churn through financial resources, because of the market downturn and investor demand for profitability as opposed to growth.

"Advertising-supported models should never be the sole revenue driving the business," Yen said. "These companies have realized that, and changing to a fee-subscription model makes sense."

But most of these companies are looking at other avenues to gain revenue. The whole purpose of offering the service for free was to upsell fee-based services such as calling cards and Internet phone devices. Dialpad and Net2Phone have made inroads partnering with Internet powerhouses like America Online, AT&T, Microsoft, Netscape Communications and Yahoo!, packaging voice services with Internet access and instant messaging.

And all of these Internet telephony companies have broadband strategies in the works that include voice devices and applications that will be resold by broadband service providers.