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Phone firms to take on Internet calling rivals

Traditional telephone companies are likely to fight back as eBay Inc. acquires Skype Technologies SA and expands the reach of Internet phone service, experts say.
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Traditional telephone companies are likely to fight back as eBay Inc. acquires Skype Technologies SA and expands the reach of Internet phone service, experts said yesterday. Many competitors will offer their own version of online telephone technology, expand into broadband and television services, and work to limit upstarts such as Skype through regulation.

The free Internet phone calls offered by Skype and others are "definitely a threat" to traditional telephone companies, said Andy Belt, senior vice president at consulting firm Adventis Corp. "If the future of the business is moving toward an all-you-can-eat, download-for-free business model, obviously that's not attractive at all for the Bells."

The "Baby Bells," or regional descendants of the old Bell telephone monopoly, already see the world changing as cell phones, e-mail, instant messaging and lower-cost Internet phone providers such as Vonage Holdings Inc. provide consumers with alternatives to the plain old phone. Revenue from traditional local phone business has eroded, and companies have had to invest more in high-speed Internet and mobile-phone services.

The change in the competitive landscape is by no means a death knell for the big phone companies, because services like Skype depend on broadband Internet access that most Americans can get through only phone and cable companies.

The number of people using free Internet voice services such as Skype, Google Inc.'s Google Talk, America Online Inc.'s Internet phone service and Yahoo Inc.'s Messenger with Voice is still relatively small -- several million in the United States, compared with 178 million landline phone subscribers.

Luxembourg-based Skype logged 1.3 million U.S. users in July, and the number of users increased 178 percent in the year ended in August, according to Nielsen/NetRatings, which tracks Internet usage. With eBay's backing after a $2.6 billion purchase, Skype would gain an even greater foothold in the country -- tapping eBay's 58 million-strong monthly audience.

Free voice service also is a chance to tie in voice calling with e-mail, news and entertainment, said Brad Garlinghouse, a Yahoo vice president. It does not act as a substitute for a normal phone, just as e-mail has not eliminated the need for physical mail, he said.

Replacing traditional service
But for some users, online calling has replaced traditional long-distance service because it is free regardless of location. Skype also sells a service called SkypeOut, which allows members to call outside of the network for a per-minute fee.

For example, with 54 million users worldwide, Skype was particularly appealing to the National Democratic Institute, a District-based group with offices in 50 countries. In April, the group instructed its employees to use Skype when possible to help cut down on phone bills.

Regular phone companies will fight such threats by pushing for increased governmental oversight of their online rivals, experts said.

"There are people in Washington who are experts in killing new companies," said Timothy Wu, a Columbia University law professor who specializes in telecommunications. "The [Federal Communications Commission] and others will have to stand firm."

The FCC ruled last year that computer-to-computer phone services should not be subject to the same rules and fees as regular phone providers. But the phone companies may demand that regulators require Skype to pay into the government fund that subsidizes telephone service for rural Americans, as well as provide some 911 emergency service and ensure that federal agents can wiretap calls when warranted.

"I consider those to be public safety issues, national security issues, underlying safety-net issues, and so I just think that's something all of us have to bear as a cost of doing business," said Herschel Abbott, BellSouth Corp. vice president for governmental affairs. "I regard them as a serious competitor."

Even advocates of Internet phone systems say traditional phone companies will retain a major hold on the industry because they own the pipes that run into homes.

"In the short term, it threatens their revenue," but in the long term regional phone companies will make money by charging for network access, said Jonathan Askin, general counsel for, which runs a free Internet calling service. "They still control the single most valuable asset, which is the network."

Staff writer Jonathan Krim contributed to this report.