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MSN Messenger caps free phone calls

Microsoft and Net2Phone plan to place limits this week on free Internet phone calls offered over MSN Messenger.

Microsoft and Net2Phone have placed limits on free Internet phone calls offered over MSN Messenger, marking the latest disappointment for consumers hoping to wipe out long-distance bills by turning to the Web.

As of Friday, MSN Messenger users have been able to make free, long-distance calls in the United States or Canada for only 5 minutes before the calls are disconnected. People can immediately log back on and make another free, 5 minute call or go to Net2Phone's Web site to make free calls.

The move to curtail free Net phone service comes as online companies are pulling back on giveaways hatched at the height on the dot-com frenzy, when growth was considered more important than profits. That strategy has since been turned on its head, with companies across the board dropping costly enticements.

The pullback has hit Microsoft before, with the company recently canceling a $400 rebate for computer buyers who signed up for three years of its MSN online service. Other Net companies to drop freebies include AltaVista, which canned its free Internet access program after partner 1stUp.com shut down.

Sources said MSN and Net2Phone can make more money off advertising by limiting calls to 5 minutes. Ads pop up on people's computer screens before and after each call, so if calls are limited to 5 minutes, the two companies can serve more ads, sources said.

The number of people who click on advertisements have increased since Friday night when the companies limited callers to 5 minutes, sources said.

Microsoft began free phone calls with Net2Phone as a feature of MSN Messenger 3.0, which launched last summer. The new version was largely seen as a way for the company to gain more popularity for its instant messenger--and to catch competitors AOL Time Warner and Yahoo, which had voice communication features on their IM services. MSN went a step further by letting people make domestic and international phone calls over the Internet.

Meanwhile, PC to phone services such as Net2Phone, PhoneFree.com and Dialpad, have created businesses centered around free Internet phone calls. Revenues are based on advertising sales and service fees. In Net2Phone's case, the company sells international phone services to its customers.

But the softening advertising market has forced some players to charge for domestic calls.

With new limits, MSN customers will need to redial every 5 minutes if they want to hold an extended conversation via Net2Phone.

After 5 minutes, "the conversation will stop, and consumers will be notified," said Sarah Lefko, a product manager at MSN. People can then "redial and still get 5 minutes free."

Lefko added that the deal rearrangement was requested by Net2Phone.

Net2Phone spokeswoman Sarah Hofstetter said the company decided to pull back because the service was too popular.

"The consumer demand was incredibly high," she said. "We thought (the new arrangement) was the best idea in order to make economics work best."

Net2Phone said that free phone services offered by its other partners, such as AOL Time Warner, Yahoo and Compaq Computer, are not affected, although they will be reviewed on an ongoing basis.

Hofstetter would not rule out going the PhoneFree route by charging for domestic calls, but she said such a move is not yet in the works.

"We evaluate it from time to time, but at this point we're making money," she said. "We're not profitable, but we're making gross margins on our calls."

PhoneFree executives say the company needs to charge its customers 2 cents a minute to cover the fee that traditional phone companies charge for using its networks. Net2Phone, however, doesn't face the same charges by phone companies because it owns its own network. Rival Dialpad also offers free unlimited Net phone calls from PCs to phones.

Net2Phone still provides free domestic calls to consumers who make phone calls directly through it.

The phone limits were first noted at ActiveWin.com, a Web site that follows Microsoft software developments.