Britain's O2 tests Skype-style free VoIP calls

British mobile operator O2 is testing free voice and text services on wi-fi networks, going head to head with services like Skype that offer free calls, which many operators have sought to block.

The service, called O2 Connect, will initially be available on Apple and Google's Android smartphones to 1,000 customers, with a view to launching a commercial service next year, Telefonica-owned O2 said on Wednesday.

This trial will allow us to explore the potential of delivering VoIP (Voice over Internet Protocol) services to customers, said Richard Porter, O2's head of consumer products.

The company said that in a commercial product, some parts of the O2 Connect service would be included within existing pricing, while others would be sold as extras.

Internet protocol services, typified by Skype, which Microsoft is buying for $8.5 billion, offer free voice and video calls routed over Internet networks.

O2 said the service would not need any additional log-ins and would not require the receiver of the call to be signed up, both of which were key advantages over existing VoIP services.

Analysts at Fitch said the plan highlighted a challenge for network operators: overcoming the commoditization of voice calls -- a process that was being facilitated by declines in the rates mobile operators charge one another for connecting calls.

Damien Chew, senior director in Fitch's TMT team, said: A key barrier to free voice at present is mobile termination rates, which remain high compared to landline rates.

However, regulatory pressure has and will continue to drive these rates down. The lower they go, the more attractive free voice as a loss leader becomes to a variety of market players, beyond just Internet call companies. This will translate into more downward pressure on voice prices.

Fitch said the product could be a brand differentiator, and any negative price implications would be further mitigated by the practice of bundling voice, SMS and data for the UK's post-paid customers.

(Reporting by Paul Sandle; Editing by Helen Massy-Beresford)