Jan Strupczewski

STOCKHOLM: If you can use your Internet-connected computer to make phone calls do you really need a fixed line telephone?

Fixed-line telephony, already challenged by mobile phones, will come under more pressure from cheap or free calls made over the Internet and this may force telecoms firms to change business models, industry experts say.

"I don't believe one can charge for telephony calls in the future," said Internet innovator, Niklas Zennstrom, who runs Skype, a London-based company offering free software to make free phone calls between two computers over the Internet. "The end game is that people will use the Internet to make calls."

To call free with Skype is still a relatively cumbersome affair. You need a computer with a headset or microphone and speakers and can call only other computers on the Internet.

But Skype software has already been downloaded more than 6.5 million times since the first trial version was made available in September 2003, as word spread without any marketing. It says it has 2.4 million regular users.

Zennstrom, who is also one of the creators of the highly popular KaZaa music and video sharing network, said fixed phones would fade away just as the fax machine gave way to e-mail.

KaZaa says on its website that it is the most downloaded software application on the Internet but Zennstrom believes that judging from its initial success, Skype could eclipse KaZaa.

Calls between Skype users can be free, because Skype has no infrastructure to maintain -- the calls are routed by the computers of Skype users who already pay for their Internet connection.

TECHNOLOGY MATURES

The technology that makes it possible for voice to travel on the Internet is called Voice over Internet Protocol (VoIP), and has been around for almost 10 years, but only recently matured enough to give acceptable call quality.

Also driving VoIP is the fast growing Internet broadband access in the United States, Europe and parts of Asia, which allows users to stay on-line for a fixed monthly fee.

"We believe voice over IP represents the final transition to a communication environment ruled by the internet protocol. This is significant, as it signals the end of the telephone system as we know it," said UBS analyst Uberto Ferrari. "The way a telco does business is likely to radically change."

Since sending voice over the Internet is just like sending e-mails, operators will not be able to charge for each call but should focus on selling access to the network, Ferrari said.

This could make operators such as France Telecom or Deutsche Telekom keen to integrate their Internet Service Providers Wanadoo and T-Online back into the parent companies.

"To survive, the telecoms operators have to offer all the different services: fixed line, mobile and Internet. It's their only way to make sure that they will get the communications revenues, whichever way they go," said a London banker.

ATTRACTIVE TO BUSINESSES

U.S. companies Vonage and 8x8 offer unlimited calls in the U.S. and Canada using VoIP for $20-$35 a month. They charge a monthly fee because, unlike Skype now, they can connect calls to any number on the telephone network.

Skype, too, will charge for calls from the computer to a public telephone number, fixed or mobile, when it introduces that option in the first half of this year, Zennstrom said.

The technology's substantial savings attract businesses with offices in different countries, like Volvo Cars or drug maker AstraZeneca who plan to switch to calling over the Internet network they are already paying for.

Telecoms operators say the impact from Internet telephony was still limited by the hardware people need to install and its price, but that it could become big in the future.

"I am not worried about it yet, but if they find a way for regular people to use their regular phones and get down their phone bill to something low, then it would be much more interesting for the mass market," said Karl-Johan Nibell, head of product strategy at Tele2.

"Then we will get worried, which means we will try to adapt to whatever they are selling if it becomes clearly successful."

TeliaSonera launched its own VoIP service last Thursday, charging less than current fixed line fees.

"It may grow to be as big in the future as traditional telephony is today," said Tomas Holmstrom, head of Telia's Swedish fixed-line and VoIP operations.

TeliaSonera had a 42 percent margin on fixed line voice calls in the third quarter while Tele2 had 21 percent. But Nibell said that even if VoIP became the dominant way to call, operators would not lose out.

"In the end the operators will try to get the same revenue but with different streams -- what they lose on fixed telephony they will raise on broadband," he said.

(Additional reporting by Lucas van Grinsven in Amsterdam)