Telcos' evolving response to Net phone services

While Verizon fights Vonage in court, Deutsche Telekom makes a strategic investment in another Internet calling company.

Deutsche Telekom's recent announcement that it will take a stake in Internet phone service upstart Jajah is the first sign that big telephone companies could see the next generation of Net-phone companies as friends instead of foes.

T-Online Venture Fund, the investment arm of Deutsche Telekom, announced Tuesday it has joined a $20 million round of investment for the company, which is being led by Intel Capital.

The deal is significant because it signals a shift in how traditional telephone companies view a crop of new start-ups that use voice over Internet Protocol, or VoIP, to deliver low-cost telephony services. Previously, major phone companies, especially in the United States, have regarded companies such as eBay's Skype, which offers free PC-to-PC calling, and others such as Vonage, which turns broadband connections into phone lines, as threats to their traditional telephone business.

Verizon Communications has even gone so far as to sue Vonage, which in March was ordered by a Virginia court to pay $58 million in damages.

But that could soon change. Jajah, which allows people to use their existing phone or mobile handset to make free or low-cost VoIP calls, is the first of the new start-ups to officially get backing from a major telephone service provider. Experts say it's not surprising that the first move toward befriending VoIP companies comes from a European carrier, where the telecommunications market is highly competitive. But they question whether operators here in the U.S. will follow suit.

"This investment marks a significant change in attitude for the carriers," said Will Stofega, research manager for VoIP services for IDC. "Phone companies have a lot to learn from these start-ups. But I'm not sure the U.S. phone companies will be as willing to open themselves up. They still look at these guys as a threat that could bleed off voice minutes."

Friends and foes
The overall VoIP market is still relatively small, but phone companies still see it as a threat. This is especially true as all-you-can-eat long distance calling plans from cell phone operators have pushed phone rates lower and lower.

As a result phone companies have been forced to expand their businesses, spending billions of dollars to build new networks to support more services like high-speed Internet access and television. But even with these new services, a significant portion of the phone company's revenue still comes from renting the old telephone lines. Even the most basic phone service, without any additional features like call waiting, three-way calling or voice mail, still costs about $20 a month. That's $20 in revenue that is generated for every customer without the carrier doing anything more than providing dial tone.

Customers using Skype can bypass all parts of the old phone network by installing software on their PCs and buying a headset and microphone, essentially turning their computer into a phone. Vonage customers can completely cut their home phone lines by using a router that hooks to their broadband connection to carry calls over the Internet.

But Jajah differs from these other VoIP services because it allows people to use their existing phone, whether it's a wired phone in the home or a mobile phone, to make low-cost calls over the Internet. Users simply go to the company's Web site and enter their phone number plus the number they want to call. Jajah calls both numbers. Then it connects the calls by finding the cheapest and most reliable IP link. The service works in 55 countries and international rates can be around 3 cents a minute. Executives claim the service can cut international long distance rates by about 80 percent from rates charged by the traditional telephone companies.

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