Google Enters Skype’s Territory

Free computer-to-computer voice calling has been around for years but using computers to make calls to landlines or mobile phones may soon be in vogue. Taking a leaf out of Skype’s book, Google (GOOG - Analyst Report) announced recently that it will let users of its Gmail service in the U.S. and Canada call landlines or mobile phones for free -- at least until the end of the year.

Google’s announcement to add the phone calling feature to its Gmail service is not likely to immediately challenge Skype’s dominance of the Internet telephony business, but is expected to ratchet up competition. The announcement of the service is also reflective of Google’s attempt to foray beyond its traditional forte, the search business. For Google, it could also be a way to tap larger audience but for services such as recently launched Magic Talk, which offers free PC-to-PC phone calling, it could be a tough task ahead.

Skype, which says it has a registered subscriber base of 560 million, charges up to 2.1 cents per minute for calls in the United States and Canada. It also has monthly subscription plans where it bills unlimited calls at $3 per month. Skype says nearly 8 million of its subscribers pay for the calls made to mobile phones and landlines. Most of the users use free computer-to-computer calling. Last year, eBay Inc. (EBAY - Analyst Report) sold Skype to a group of private investors that included private equity firm Silver Lake for about $2.1 billion. (eBay retains a 35% stake in Skype).

The service is expected to be rolled out this week and Google’s plans to launch the service abroad are also in the works. However, it did not provide a timeline for an international launch.

Google said international calls to landlines in countries such as the U.K., France, Japan, China and Germany would be charged at 2 cents per minute. Google said it expects revenue from the international calls to cover for free calls in the U.S. and Canada. The company is also planning to launch a paid service and take it beyond to businesses and government agencies.

We have a Zacks Rank of #3 (short-term Hold recommendation) on Google’s shares.

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