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Net phone companies in Darwinian struggle

In the latest signs of the rapid consolidation in the Internet telephony market, shuts down its services, and rival PhoneFree changes its name and strategy.

In the latest signs of the rapid consolidation in the Internet telephony market, has shut down its services, and rival PhoneFree changed its name and strategy.

Net-based phone companies burst onto the scene in the mid-1990s, offering phone calls over the Net as a cheaper alternative to traditional long-distance carriers, such as AT&T, Sprint and WorldCom. But with carriers responding by lowering their rates, analysts say the fledgling Net telephony market has begun to consolidate, and only a few companies will survive the shakeout.

"It's a question of who's better at surviving," said Yankee Group analyst Aurica Yen. "The strongest players will survive. Consumers can't keep track of 10 providers. They can remember one or two at the most."

Net2Phone, Deltathree and Dialpad Communications are among the remaining Net-based phone companies tackling the emerging market.

ZeroPlus, which offered Net-based phone services, laid off its employees Tuesday, but executives say they will continue to look for funding in hopes of keeping the company alive.

PhoneFree, which earlier this year began charging for Net-based phone calls through PCs, said it plans to get out of that business and will instead focus on voice-over-broadband services. The company has changed its name to Gemini Voice Solutions and plans to sell devices and partner with Internet service providers to offer consumers the ability to make Net-based phone calls with their regular phones.

While Gemini, Net2Phone, Deltathree and Dialpad focus on Net-based phone calls, Yen said ZeroPlus had been augmenting its original consumer-based phone service business by targeting the corporate market. For example, the company allows customers of e-commerce Web sites to click a button to talk to a live customer service representative.

In recent months, Web voice-chat companies Firetalk Communications and Lipstream Networks have gone out of business. Lipstream, which offered services that allowed people to talk online, aimed its chat technology at businesses, such as e-commerce Web sites that wanted to provide customers with online customer support. Firetalk offered free and subscription-based services, which included phone calls over the Net and instant messaging.

The Net-based phone companies still in business have begun targeting corporations and striking partnerships with traditional service providers to drum up customers.

Gemini is now targeting the new voice-over-broadband market, which analysts say could take off because high-speed Net access through cable and DSL (digital subscriber line) is growing.

Phone calls over broadband are easier and offer better voice quality than the traditional way of making Net-based phone calls with PCs, analysts say.

Gemini has joined Net2Phone, Dialpad and Deltathree in the market to offer new devices that allow consumers to make Net-based calls over their high-speed Net connections. To make a Net-based phone call, consumers simply plug a regular phone into a device and attach that device to a cable or DSL modem. The Net telephony companies are hawking the service as a second phone line for consumers.

The Internet telephony companies are trying different pricing models, including monthly subscription rates to consumers and flat fees charged directly to the service providers.

Gemini offered free, advertising-based phone calls to consumers. But when advertising fell, the company in January began charging consumers 2 cents per minute.

After two rounds of layoffs and the resignation of PhoneFree Chief Executive Jan Horsfall, the company decided to go after the broadband market, said new Gemini President Charan Khurana. The company plans to exit the PC-based phone call business within three months, he said.

"In the old model, we were not generating revenue from the consumers. The only revenue was advertising," said Khurana, who predicts the company can become profitable by year's end.

The Yankee Group's Yen said it's smart for Gemini to focus on a new market that could generate more revenue, but it's too soon to know if voice-over-broadband will be successful.

"It's too early to tell," she said. "The service providers who are getting into it just launched their services."