Telefónica's O2 hits back with free Wi-Fi calls

Telefónica's O2 UK is launching a challenge to Skype and Google Voice with the launch of O2 Connect, which will offer free calls to handsets and landline phones using O2 UK Wi-Fi hotspots via the company's own VoIP platform.

The O2 Connect service, which is running as a trial until going commercial in January, will initially only work with iOS and Android smartphones, although other platforms and devices will subsequently be supported. O2 UK said the VoIP service will use technology it acquired with the purchase of Jajah, a VoIP developer Telefónica purchased for $207 million (£131.4 million) in 2009.

According to the Financial Times, O2 UK said that some elements of Connect will be included within existing tariffs, while other features will be sold as add-ons to customers to rival networks. Calls between O2 Connect users are likely to be unlimited, similar to the Skype and Google Voice offerings.

The Connect service is the first to be launched by the new Telefónica Digital unit, which was established last month to drive the company's growth using new digital services over the Telefónica networks. The company said that it is looking to offer Connect to its worldwide customers at a later date, believing that the uptake potential in emerging markets is significant.

Commenting on this announcement, Damien Chew, a senior director in Fitch Rating's TMT team in London, said that a key barrier to free voice at present is mobile termination rates which remain high compared to land line rates. "However, regulatory pressure has and will continue to drive these rates down," he said in a statement. "The lower they go, the more attractive free voice as a loss leader becomes to a variety of market players, beyond just Internet calling companies. This will translate into more downward pressure on voice prices."

Overall, Fitch believes there are no negative revenue implications for O2 with the launch of Connect. The product, if successful, could be a significant brand differentiator, attracting customers to O2's data offering rather than to competitors.

For more:
- see this Financial Times article (reg. req.)
- see this Reuters article

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