Google voice: Trouble calling for Skype?

Google's push into the Web phone-calling market is likely to cut into sales by Internet phone companies such as eBay's Skype unit, and could put pressure on Microsoft and Cisco, which sell online calling software to businesses.

On July 15, Google released a downloadable Google Voice application for BlackBerrys and smartphones powered by Google's Android operating system, which could make the voice service more popular. In late June, Google concluded a private test of Google Voice and began inviting consumers on its waiting list to sign up for the service. Users of Google Voice use the Internet to make phone calls, listen to voice mails and read transcripts of them, and also to get a unified phone number that can track them down based on what phone they're near.

Google hopes to make inroads in the market for so-called Voice-over-Internet-Protocol phone calls by taking a friendlier stance toward wireless service providers than other VoIP companies have done. Google has additional advantages in the market: Upcoming products, including its Wave collaboration software and Chrome OS operating system could help spur usage of Google Voice on devices from smartphones to netbooks. "Our point is to make your existing services better, not to replace them," says Craig Walker, a product manager at Google and founder of GrandCentral, the company Google acquired in 2007 that serves as the basis for its Voice software.

Skype's Hurdles in the Mobile Market

Skype could be among the first to feel the pressure. A foray into mobile phones has been at the top of Skype's agenda this year as the Web-calling company seeks to step up its revenue growth and prepare for an initial public offering next year. "It's probably the biggest current threat to Skype," Jeffrey Lindsay, an analyst with Sanford C. Bernstein, says of Google's VoIP foray. Eventually, "it could be a duopoly" between Google and Skype in the market for Web calling via cell phones, Lindsay says. Google may end up holding 60% of that market, he adds.

Google's mobile announcements come at a bad time for Skype, which has struggled to wring additional revenue from its nearly 450 million customers. Skype's sales rose 22%, to $159 million, in the second quarter, Bernstein's Lindsay estimates. But its number of users likely grew by 40%. That means many consumers use Skype for free PC-to-PC calls without paying for any extra services. Those using mobile devices may be more apt to pay, say analysts. The trouble is that Skype has had difficulty expanding its number of mobile users as carriers have limited the ease with which cell subscribers can use the service, according to Jon Arnold, principal at tech consultancy J. Arnold & Associates. Skype declined to comment.

Google's free Voice software could also compete with so-called unified communications software from Cisco Systems and Microsoft that ties together companies' phone and e-mail systems, Arnold says. Laurent Philonenko, a Cisco vice-president, says his company's security features and customer support are "not necessarily easy to replicate" and give Cisco an advantage.

Skype Is Broadly Entrenched

Startups in the Web phone-calling market could also feel pressure. Tom Carter, president of Truphone Americas, put a brave face on Google's move. "The interest of a large Google is a sign of validation that the market has arrived," he says. But competition with Truphone and such other startups as Fring and Jajah may only mount as Google prepares enhancements for Voice, including an app for Apple's iPhone that product manager Walker says is in the works.

To be sure, Skype's VoIP software is widely available, while Google still offers Voice only to customers who have signed up for one of a limited number of invitations. Skype already sells applications for iPhones, BlackBerrys, and Android phones, and has distribution with European telco 3.

But Google hopes to leapfrog Skype by leveraging other popular products and cozying up to carriers. Google could encourage its millions of Gmail users to try Voice, for example.

Google is also trying to position Voice as a service that works in tandem with a carrier's calling plans. Voice customers "are still using their mobile service provider's minutes," Walker says. The company may also consider sharing revenues with wireless carriers, he says.

Google Courts the Mobile Carriers

To win telcos over, Google decided not to let Google Voice's mobile application work via Wi-Fi connections, which circumvent carriers' networks. "We have no plans to add Wi-Fi at this point," Walker says.

Partnerships with mobile carriers could be the quickest way to recruit millions of users. Today only about 13.4 million people worldwide—mostly tech-savvy early adopters—use Web calling on their cell phones, according to market researcher IDC. But the number of VoIP users is growing by 20% a year. And Google already has strong relationships with several carriers, including T-Mobile USA, with which it co-brands the T-Mobile G1 phone. Google also invests in Clearwire, which is building a nationwide broadband service.

Prime Google targets could be to serve its bread-and-butter Web advertisements to Google Voice users and to apply its search engine to transcripts of voice mails to make the service more compelling, according to Rich Greenfield, an analyst with Pali Research.

Says consultant Arnold: "I don't think Google is in the game to be a phone company." Perhaps not, but those that are have reason to look askance at Google's expansion into their market.

Kharif is a senior writer for in Portland, Ore.