PhoneFree no Longer Free, a telephony company which built its brand by burning phone bills on TV, has started charging for PC-to-phone calls routed over the Internet.

“We probably won’t be burning bills on TV in the near future,” PhoneFree CEO Jan Horsfall told atNewYork this morning, one week after the company started charging a flat fee of 2 cents per minute for PC-to-phone calls throughout the U.S.

“It is a simple matter of economics. We are exiting the free business because the online ad market has tanked on us,” said Horsfall, a former marketing executive at Lycos who remains a believer in the advertising on the Internet.

Like its competitors offering free Web-based calls, Horsfall said PhoneFree was finding it difficult to absorb the termination fee — approximately 2 cents per minute — which is paid to the telecommunications network provider.

However, PC-to-PC calls (which does not include the telco termination fee), will still be free.

“We could not cover that termination fee through selling media. In the end, this is a business so it wasn’t really a difficult decision to make,” Horsfall added. “I’m a big believe in online marketing but it’s going to be another 12 months before we ride out this storm.”

“This is still the best vehicle to sell media but the ad market online is not going to get healthy in the next year or so. We have funding to get us well into 2002 but, if you can’t offset your costs, why continue with the effort?”

Since last Thursday, PhoneFree customers began asking users to pre-pay for the service by setting up “fuel tanks” that bills the users’ credit card.

Additionally, PhoneFree is teaming up with broadband ISPs to bundle its Gemini hardware, which sells Voice-Over Inter Protocol (Vo-IP) services.

“Strategically, we’re moving to get out in-home devices as part of a trial where our hardware gets sent into the customer’s home when they sign up for broadband service,” he explained.

PhoneFree is partnering up with Colorado-based broadband ISP WideopenWest to roll out a flat-rate telephony service sometime in March. PhoneFree plans to charge between 5 cents and 8 cents per minute for calls anywhere in the U.S.

International rates on a per-minute basis would be 90 percent lower than the rates charged by the legacy long distance providers, Horsfall said.

Last December, Net2Phone Inc. also announced plans to gradually wind down free PC-to-phone services. Having cornered the marketplace for Web-enabled telephone calls, Net2Phone said it believes that customers were willing to pay for domestic and international calls that are routed through the Internet.

“We are confident that the free services were a very good way to attract customers, but we have to become profitable,” Net2Phone CEO Howie Balter said.

But, how do these companies plan to convert free users to paid ones?

“We’re going to lose some users. There is nothing we can do about that. But, we are going to hang on to some users who appreciate the quality that we offer,” PhoneFree’s Horsfall said. “Our goal is to convert 10 percent of our existing users and we have already signed up 6 percent so I’m not really worried.”

“We’re shooting for 3 percent of the entire Vo-IP market. If we can sign up 35,000 broadband voice users by the end of this year, we’ll do fine,” he added.

The move by ‘Net telephony companies to discontinue free PC-to-phone services could be the trigger for others to follow suit.

Jeff Pulver, an telephony expert who publishes the popular Pulver Report, believes the days of free Web-based phone calls are at an end.

“There’s an inherent cost to make the phone calls certainly both in local access as well as in transit an

d there is somebody who is paying for it whether those costs get passed through to the customer or not, but at the end of the day the only people who have paid for free today are the existing shareholders and investors because it does cost money to make phone calls around the world,” Pulver said.

“People are finicky when it comes to free, free is a good price point. (But) this sort of reminds me of the banks — when someone changes interests rates and everyone follows the lead. Net2Phone’s says its okay to charge for PC-to phone, this may very well signal an end to free PC-to-phone services around the world and may actually give reason for people to follow suit to charge something rather than give it away for nothing.”

* Ryan Naraine is a senior editor with
* Brian McWilliams, an editor with InternetNewsRadio, also contributed to this story.

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