Internet phone rates rising

Attention cheapskates: A free phone call over the Internet isn't going to be available this Mother's Day.

Yahoo Inc. has begun charging two cents per minute to place a telephone call over the Internet using its Yahoo Messenger instant messaging software.

On Monday, Yahoo also began charging $0.02 per minute for domestic calls routed over Net2Phone Inc.'s voice-over-Internet protocol network. Yahoo still allows free PC-to-PC voice links, and international calls will vary in cost.

Yahoo is only the latest firm to hang up on free PC-to-telephone calling. And, as the toll road version of the Infobahn gets paved, more fees are looming.

Raise rates or die

Recent years have seen a bevy of start-ups challenging traditional telephone companies with free PC-to-phone services. But as the dot-com sector tanked and free Internet services vanished along with the online ad dollars that supported them, free PC-to-telephone schemes are hurting. FireTalk, ThinLink, and VisiTalk have all shuttered, according to Mark Winther, an analyst with market research firm IDC.

"There is no business model in free," Winther says. Companies either had to start charging or go out of business, he says.

Last week, Microsoft began charging two cents per minute for domestic calls placed over the Internet using its MSN Messenger. Meanwhile, America Online has always charged one cent per minute for placing telephone calls over the Internet. In January, PhoneFree began charging customers, citing slow ad sales.

Popularity multiplied costs

Ironically, the popularity of Internet Protocol telephony services is partly to blame for the price hike, according to representatives from Net2Phone, which provides the service to AOL, Microsoft, and Yahoo.

Net2Phone says Microsoft and Yahoo customers swamped its network when both introduced the services free of charge. That drove Net2Phone's costs higher than expected. Eventually, Net2Phone was forced to renegotiate its business relationship with Yahoo and raise its rates for the service. Yahoo and Microsoft passed the cost on to consumers, says Sarah Hofstetter, Net2Phone spokesperson.

"We'll probably lose a lot of customers," Hofstetter says. "But they weren't the right customers to begin with." She says Net2Phone has experienced 25 to 40 percent quarterly growth of paying customers over the past four years.

Net2Phone still provides free domestic calls in the United States or Canada for a five-minute limit before the calls are disconnected. People can immediately redial and make another free, five-minute call.

Holdouts in a popular industry

Overall, the popularity of IP (Internet protocol) telephony will quadruple this year alone, to about 9.5 billion paid minutes by 2001. That number is expected to jump to 332 billion minutes by 2005, according to IDC.

Those numbers don't factor in free services or PC-to-PC voice communication, just paid PC-to-telephone usage.

A lone holdout, Net2Phone competitor Dialpad Communications, will continue to offer free domestic PC-to-telephone calls, says David Gilcreast, Dialpad spokesperson. However, the 40 percent of its 12 million customers who are outside of the United States will soon have to pony up 2.9 cents per minute for dialing U.S. phone numbers as part of its new "dialpadworld" pricing scheme.

This story, "Internet phone rates rising" was originally published by PCWorld.

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