The Wi-Fi handset for Skype by Belkin Corporation may hint at the future of telephones.

A move by the world's leading internet-based communication software provider to aggressively pursue paying customers in North America is being seen as another blow to major telephone companies. It's being viewed as a technological shift which is reshaping the way in which people connect.

Skype Limited said on Dec. 13 it will offer an unlimited calling plan that would let users of its SkypeOut service call any telephone in the United States and Canada for a flat rate of $35 a year starting Jan. 1, 2007. Skype's free test version of the offering that began in May ends Dec. 31.

The company, whose popular Voice over Internet Protocol (VoIP) software lets people communicate for free over the internet, already offers a prepaid service for individuals who want to call landline and mobile phones from their computers.

"The new calling plan is a response to what we've heard from our community of users — that they would like another plan in Canada and the United States," Don Albert, general manager of Skype North America, told CBC News Online. "A lot of people were accustomed to the subscription-based model."

The eBay, Inc.-owned company's service plan, which is as much as 14 times cheaper than other Voice over Internet Protocol (VoIP) providers in Canada, will continue to help fragment the long-distance market and drive prices down, according to some industry watchers.

Impact remains to be seen

Despite the dramatic price difference between Skype and VoIP offerings by other companies such as upstart Vonage Canada Corp. and cable TV and internet provider Rogers Inc., telecom analyst Lis Angus of Angus TeleManagement in Ottawa told CBC News Online she doesn't see the announcement as a significant one for the Canadian industry.

"Skype is not a big part of the landscape so I don’t think it will have a major impact," she said.

While Angus is not alone in her views — few industry watchers think that the new package will have an immediately observable effect on how competitors and big telecommunications companies such as Bell and Telus do business — at least one analyst says the plan is yet another example of how new technologies are increasingly chipping away at what was once a lucrative business for the telcos.

"The ones that lose customers are the traditional carriers that have almost abandoned their long-distance services and moved on to other businesses," Eamon Hoey, a Toronto-based telecom industry analyst, told CBC News Online. "Long distance used to be 60 per cent of telephone companies' revenues. Today, it's barely 20 to 25 per cent, now that the service has become very commoditized."

Hoey, the senior partner at Hoey Associates, said he expects that downward pressure on the big telcos to continue as they try to figure out new ways to deal with the rising popularity of services such as those Skype's software enable.

At the end of September, Skype had 136 million registered users around the world, and 11.9 million users in the U.S. and Canada. Much of that growth has occurred in the last year or so, with some 23 million new account registrations.

Little regulation

Observers say that much of Skype's success has been attributable to its easy availability — the software can be downloaded for free from its website — as well as its ease of use, and the fact that most countries are just beginning to figure out how to address VoIP technology from a legal and regulatory perspective.

VoIP service in Canada is regulated in the same way that traditional telephone service is regulated, Denis Carmel of the Canadian Radio-television and Telecommunications Commission, told CBC News Online.

The CRTC places limits on former telecom monopolies such Bell and Telus, which are classified as "incumbents." They must receive approval from the federal regulator to set prices for their services, among other requirements.

In contrast, newcomers to the Canadian VoIP market have no such restrictions placed upon them. The reason for the distinction is simple, Carmel said.

"We want to encourage competition."

Incumbent telecoms control more than 90 per cent of the country's communications market and until recently, the CRTC wanted to see 25 per cent of the country's telephone business handled by competitors to the big, traditional telecoms, Carmel said. That target is currently under review as the regulator studies recent data on how people are talking to each other, after long-distance calling rules were revised in the 1990s.

U.S. approach differs

Although that framework appears to present a prime opportunity to companies like Skype, the software firm's director of government and regulatory affairs told CBC News Online that he would prefer to see rules that are more in step with those in the United States.

Christopher Libertelli said the mixed approach to VoIP regulation in Canada stemmed from a lack of information as the technology was emerging.

"The CRTC came up with a decision that didn't fully appreciate how quickly the market is moving," the one-time senior legal advisor to former U.S. Federal Communications Commission chairman Michael Powell said.

In contrast to Canada's incumbent vs. newcomer rules, the U.S. approach makes a distinction between services that replace the telephone and those that do not, and leaves non-replacement services untouched by regulation.

A replacement service is one in which the full range of capabilities available to traditional telephone networks — including 911 emergency response — can be made using an alternative service, allowing a person to dispose of a traditional line. Non-replacement services can place calls to a traditional phone, but that is a one-way call. A traditional phone could not directly call a Skype user, for example.

"We applaud the distinction in the United States that recognizes an enhancement to an internet experience, versus a replacement to phone service," Libertelli said, stressing that Skype is not a phone replacement and the company does not foresee offering 911 access. "That reflects what we're seeing in how people are using Skype."

"Of course they say that! They don't want to get sued," Hoey said in reference to precedent-setting cases in Texas and Connecticut. The outcomes of those cases meant VoIP providers had to clearly disclose that they did not offer critical services like the ability to deal with emergencies by dialing 911.

But that doesn't change the fact that people are using services like Skype for more than just a way to avoid long-distance tolls, Hoey suggested.

Dramatic changes ahead

"Consumers have to be careful," Hoey said. "I was on a Skype call to France and I wasn't impressed." He said he had trouble getting the call to connect and after it did, the sound quality was "degraded. But other people who use Skype have told me they had no problems."

He noted the positive attitude Skype enjoys is what will help ensure its success as broadband internet penetration continues to increase and more people cut the cord on the traditional telephone.

"Skype has been the leader in price and services and will continue to dominate in both," Hoey said. "When you're in a position of leadership, you bring change with you and others adapt."

That change will be hastened as cities increasingly become blanketed with Wi-Fi wireless internet coverage, industry professionals predict.

Electronics makers like Belkin are already offering Wi-Fi telephone handsets for Skype that allow users to place a call anywhere they can get a wireless internet connection — without a computer.

It's a sign of things to come, Hoey said.

"What we're seeing is a whole change in the industry … a real evolution."

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