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Last Updated: Tuesday, 27 July, 2004, 11:06 GMT 12:06 UK
Net calls to take on landlines
By Mark Ward
BBC News Online technology correspondent

The battle over cheap telephone calls is hotting up, with net upstart Skype launching a new service that lets you call any number in the world over the internet.

Headset and phone
Is a headset connected to your PC going to replace the phone?
The company says its SkypeOut service will let its 7.7 million subscribers use their PC and internet connections to call landlines and mobile phones at low rates.

In the past they were limited to just calling other over the internet and, due to technical issues, could not dial a traditional phone number.

Web-phoning technology, known as Voice over IP (Voip) , converts phone conversations into packets of data to be transmitted down the same wires used to browse the net.

But it is still too early to say if Voip is ready for the mainstream, say analysts.

Distant call

The reason is that the announcement by Skype does nothing to solve many of the problems that Voip must conquer if it is to take a significant share of the European and US phone markets.

To begin with Skype is merely one among many firms offering Voip, and a lot of those rivals have already overcome the problem of connecting up to the old-fashioned phone network.

In Japan, the country with the most Voip users, it was not the overcoming of this technical obstacle that drove people to sign up.

Old-fashioned phone, Eyewire
The overall quality and reliability is not comparable with the telephone service. There is very little incentive for people to move yet
Mark Main, Ovum
It was something much simpler: saving money.

Long-distance calls in Japan were historically very expensive, says Mark Main, senior analyst at research firm Ovum.

Yahoo Broadband bundled Voip in with its net service and as a result, 90% of its 4m subscribers are talking via the net for a much lower cost than via the old-fashioned phone system.

Yahoo can offer long-distance calls cheaply because it owns the network that the Voip calls travel over.

By contrast neither Skype or Vonage in the US, which is one of the leading North American Voip suppliers, own their own network.

As a result Skype or Vonage subscribers will have to pay for a broadband service from someone else.

Mobiles not money

Also the fierce competition in the UK and US over phone calls, both local and national, makes it unlikely that any Voip service will be able to offer the same cheaper, says Mr Main.

Then, says Mr Main, there is the inconvenience of sitting at your PC to make a call.

"There are other ways of making cheap calls that are more convenient," he says.

Man using mobile phone, BBC
Mobiles are more convenient for many
The big threat that most established phone firms face is not coming from Voip, says Mr Main.

Instead the pressure is coming from people using their mobile phones instead of their landlines.

They are doing this because it is more convenient for them to make calls with the phone they carry than with the one at home.

Also the emergence of services such as TalkTalk that divert landline calls on to other land networks is also draining cash from established phone firms.

So far, the only place that Voip is likely to prove tempting is in the US where all the cable companies have spent a lot of time and money to get their networks ready for the technology.

Everyone else is likely to wait.

"The overall quality and reliability is not comparable with the telephone service," says Mr Main. "There is very little incentive for people to move yet."

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