Search giants hear voices

As the Net phone business starts to take off, can Web portals such as Yahoo be far behind?

That's one of the big questions that will be on the minds of Internet and telecom luminaries as they gather Monday in San Jose, Calif., for Voice on the Net, a conference dedicated to promoting and exploring VoIP, the fast-growing technology for delivering voice calls over Internet Protocol.

Signs of activity in the space are growing, with America Online planning to enter the crowded VoIP arena later this month with its own phone service. That move has heightened speculation that on the horizon are similar announcements from AOL's biggest Web rivals--Yahoo, Microsoft's MSN and Google.

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What's new:
Will the lure of Internet telephony draw search and portal giants Yahoo, MSN and Google?

Bottom line:
As voice over Internet Protocol attracts companies large and small--including America Online--these three giants are taking a close look at the technology.

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"We are definitely looking at the space closely," Yahoo spokeswoman Terrell Karlsten said. "We're figuring out how to enhance and expand into the voice space by leveraging those properties."

Yahoo and MSN have long offered rudimentary phone service using their instant-messaging software and a PC. Now there are signs that all of the major Web portals are exploring whether it makes sense to expand those offerings further. Yahoo has already launched a PC-based voice service in the United Kingdom. Microsoft plans to embed voice calling into its enterprise instant-messaging software. And rumors continue to swirl about whether Google is building the foundation for its own VoIP project, starting in the United Kingdom.

Google has not announced plans to offer VoIP service, and declined to comment for this story.

While none of the three has yet outlined a VoIP strategy, the technology is proving hard for them to ignore. Millions of people are signing up for cut-rate and free plans that route voice calls over a broadband connection. Dozens of competitors have jumped into the market, offering VoIP plans for as little as $14.95 a month, putting new pressure on traditional phone providers.

While that's great for consumers, it remains to be seen whether a VoIP play makes sense for Yahoo, MSN or Google. Yahoo and Microsoft could jeopardize important partnerships with telecom companies if they invest too heavily in voice services.

Despite potential risks, all of the portals have begun tentatively checking out VoIP providers to test possibilities, according to sources familiar with the talks.

Our first lovely contestant...
One company that has attracted attention among the Web giants is Skype, a peer-to-peer VoIP provider based in Europe that lets people make free international calls from their PCs. The appeal in Skype lies in its rapidly growing user base, although the company has not figured out how turn those users into a more powerful and profitable business.

Skype's Web site boasts more than 80 million downloads, 5.6 billion minutes served and more than 1 million people using the service at one time.

Numbers like that could tempt someone looking for a VoIP foothold to look at partnering with--or purchasing--the company. Skype declined to comment for this story.

Kicking the tires of Skype or any other VoIP start-up wouldn't necessarily amount to anything. Companies meet to discuss their options all the time. Few of those talks develop into serious negotiations, and fewer still culminate in a deal. While the portals' interest in VoIP has been piqued, an acquisition or partnership with an existing VoIP company is not imminent, sources said.

Still, the portals are looking at VoIP with particular emphasis, believing there's a wealth of untapped potential in these businesses, sources added.

Not everyone believes that VoIP would pay off big for the portals. Yahoo and MSN count some of the Baby Bell local phone companies as partners, discouraging big investments in the space. Yahoo recently extended its deal to bundle its services into SBC Communications' DSL customers, and it takes a cut of revenue from customers who sign up. SBC is also testing Microsoft's Internet television technology for possible use in a new broadband TV service slated for limited launch later this year.

"I don't see any real serious effort to do it from any of those guys, except possibly as a feature or an application, but not really as a standalone service," said Rob Sanderson, an analyst at American Technology Research.

Everyone's doing it
VoIP is evolving into a bigger business outside of just chatting over PCs. In the purest sense, the technology lets people talk by converting voice into digital "packets" of information that are then piped through the Internet. Anything sent though the Internet travels as packets of data that eventually become music files, e-mail messages, Web pages and video clips.

The hype behind VoIP lies in its savings both to consumers and companies offering it. Customers of Vonage, for example, can pay only $25 a month to make unlimited local and long distance phone calls within the United States and Canada.

Cable companies in particular are investing heavily in VoIP, with many of them swapping out traditional circuit-switched voice calls to IP-based services. Last year, Time Warner Cable, which never warmed up to the circuit-switched business, began trialing a VoIP service and has since introduced it to all of its markets. At the end of 2004, Digital Phone, as it's called, had 220,000 customers, while Cablevision reported 273,000. Comcast also plans to join the VoIP fray.

Even Baby Bell local phone companies, which are arguably losing customers to VoIP, plan to embrace the trend. The Bells are pouring money into beefing up bandwidth throughout their copper networks in hopes of using the Internet to deliver video into homes. With a broadband connection that can carry more data, the Bells will package their TV services with VoIP.

Some Bell executives privately say the transition to IP-based networks could one day make voice a free add-on for people who buy video and broadband Internet access packages.

Building blocks
Yahoo and MSN already have some form of VoIP in their services. For years the companies have offered voice chatting as a feature in their respective instant-messaging services. IM users click on a button on the chat window that initiates a voice exchange between two people. Both services require people to use a PC microphone and headset.

Yahoo and MSN also let people make calls from their PCs to standard phones, although a third-party company provides the software and usually charges a fee for international calls.

Yahoo has also launched ways to improve its voice chatting features with British telecom giant BT. The companies last March unveiled a voice service that's similar to its existing IM-based product, but geared toward BT customers. The service uses Yahoo Messenger to place calls from a PC to any traditional phone.

Analysts such as America Technology Research's Sanderson think the portals will likely use VoIP as a complement rather than a standalone business. While acquisitions cannot be ruled out, the eventual home for VoIP may not look too different than what's out there today.

"When we think about VoIP, most people think about traditional phone and I think it can mean a whole lot more than that," Sanderson said. "They can still get huge leverage and do great services by doing VoIP and not being a telco."