Net2Phone to Discontinue Free Web Calls

In what is considered a major shift in strategy, Voice Over Internet Protocol (Vo-IP) telephony play Net2Phone Inc. announced it plans to stop offering free PC-to-phone calls. However, PC-to-PC calls would still be free.

In a conference call with investors, Net2Phone’s CEO Howie Balter said the company will gradually wind down free PC-to-phone services in coming months. Having cornered the marketplace for Web-enabled telephone calls, Balter now believes that customers are willing to pay for domestic and international calls that are routed through the Internet.

“We are confident that the free services were a very good way to attract customers, but we have to become profitable,” Balter said. Net2Phone has not yet finalized details on the new calling models or how it will convert free users to paid ones.

It is a tricky subject for dot-coms operating in the free Web phone service. Companies have fought hard to convince customers to use the PC-to-PC calling service rather than the PC-to-phone service because the IP provider has to absorb a termination fee which is paid to the telco network provider.

For instance, PhoneFree.com, which styles itself more as a media company, has forged alliances with broadband ISP providers to install hardware into the end user’s computer to encourage the pay-as-you-call service.

In an interview with atNewYork this morning, Alley-based PhoneFree’s CEO Robert Jan Horsfall said it was inevitable that Net2Phone would adopt a fee-based service. PhoneFree competes for marketshare in the telephony space.

“We have to, at the end of the day, sell enough media or commerce to outstrip the cost of terminating the phone call. And, since Net2Phone is not necessarily a media company, it makes sense for them to discontinue the free PC-to-phone service,” said Horsfall.

The termination fee paid is between one-and-a-half cents to 2 cents per minute, Horsfall said.

PhoneFree.com, New York-based Deltathree, DialPad, HotTelephone and a host of other telephony plays are battling for a position in the lucrative telephony space and Horsfall concedes it is “always difficult” to be totally dependent on offering free calls.

“We are trying to get away from the standard fare of offering a free phone call. If that is the core of your business model, it will be difficult to turn a profit. We are always looking at some different paid services model to write off that termination fee that we have to absorb,” Horsfall said.

“At the end of the day, this is a good move for Net2Phone,” Horsfall said of his competitor. “They’re more of a calling card company and the goal of offering free calls to bring in users at a ferocious pace doesn’t pay off and they obviously realize that.”

DeltaThree has also moved away from the free service, explaining that the termination fee is indeed a financial burden. Last month, DeltaThree stopped offering free telephony calls to destinations in the USA and Canada.

“From November, we started implementing a flat fee of $1.99 per month for domestic long distance calls. We have changed directions completely,” DeltaThree spokesperson Sharon Tolpin told atNewYork this morning.

“The real value is in offering paid services, not in obtaining free users. We are putting most of our resources behind a hosted communications solution,” she said, noting that DeltaThree essentially sells IP telephony services to third-party companies offering free calls.

This week, Horsfall said PhoneFree would be introducing ExpertZone, a fee-based service to offer advice on key topics. ExpertZone will make use of video and audio to allow PhoneFree customers to interact and ask questions, similar to the services of Keen.com, Horsfall said.

In their fiscal first quarter earnings statement released this week, Net2Phone reported that total paid minutes of use for its service grew to 214 million minutes for the quarter, a 150 percent jump over 85.3 million minutes for the same quarter a year earlier and a 28 percent increase over the prior quarter’s 167 million minutes.

Net2Phone, which is backed by AT&T Corp. and a slew of big-name investors, has managed to trim its net losses, which stood at $5.2 million (9 cents per diluted share) in the first quarter, against losses of $8.4 million, or 17 cents per share, in the same period a year ago.

Ryan Naraine is an assistant editor at atnewyork.com, an internet.com property.

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