January 24, 2001 12:20 PM PST

PhoneFree to start charging for calls

PhoneFree.com is no longer free.

The Internet-based phone company has exited the business of providing free domestic phone calls from PCs to regular phones--and is now charging consumers 2 cents per minute.

PhoneFree, which began offering the free advertising-based service this summer, needed to start charging its customers because of slow ad sales, said PhoneFree Chief Executive Jan Horsfall. The company began billing customers last Thursday.

"Now people have to pay, so it's not something they'll cheer you on, but strategically we had to do it, given where the advertising market was," Horsfall said.

To raise revenue, Deltathree recently began charging 1 cent a minute for domestic Net-based calls from PCs to phones. Rival Net2Phone, an Internet telephony pioneer that has done well financially, has been offering a similar free service since October, but it is also considering charging its customers again.

PhoneFree and other Net phone companies have run smack into a truism that seems to be sweeping the Web: Nothing is free for long.

With ad revenue declining, many other Web businesses have pulled the plug on free services. For example, Web portal AltaVista killed its free Internet access service in December, while other free Internet service providers, such as Spinway.com and WorldSpy, have exited the business or have been acquired in recent months. Even giant Web portal Yahoo is considering a subscription-based model for premium services to help raise revenue.

"Now that venture capital is drying up, and the capital markets aren't as eager to empty their pockets, people have to find a real way to make money," said Net2Phone Vice President Sarah Hofstetter. "You'll probably see a shakeout of sorts from companies that cannot afford to give the house away."

Yankee Group analyst Aurica Yen put it more bluntly.

"PhoneFree.com needs to make money," she said. "With venture capital drying up, it's pushing all these companies to get a business model that actually works."

Net phone companies offer phone calls over the Net as a cheaper alternative to traditional long-distance carriers such as AT&T, Sprint and WorldCom. The Net phone companies offer free domestic phone service but charge for international calls. Consumers download a Net phone company's software, then dial a number on a PC and speak through a PC microphone.

But the traditional carriers responded to the new competition by lowering their rates, forcing the Net phone companies to find new ways to drum up businesses.

The Net phone companies are targeting corporations that want to save money on long-distance calls, and they've struck partnerships with traditional service providers, which can offer Net-based services to their customers. They're also touting new Web-based phone services, such as the ability to check voice calls, e-mails and faxes from a phone, computer or handheld device.

PhoneFree and its rivals still offer free phone calls when consumers make calls from a PC directly to people who answer the call on another PC. But for phone calls from PCs to regular phones, PhoneFree is billing customers 2 cents a minute to cover the fee that traditional phone companies charge for using its networks, Horsfall said.

To raise revenue, PhoneFree next month will sell a new device that attaches to cable and DSL (digital subscriber line) modems, allowing consumers to use regular phones to make phone calls over the Net. Horsfall said service providers will charge between 4 cents and 8 cents per minute for long-distance calls. Net2Phone and another Net phone company, Dialpad.com, are offering similar products.

Dialpad plans to keep its free PC-to-phone service, a Dialpad spokesman said. The company will seek revenue from other new services, such as international calls and selling calling cards that use Dialpad's service.

 

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