To most people in the UK, Tesco is synonymous with grocery shopping. But last month the supermarket company realised “every little helps” even in the consumer telephony market and jumped on the voice over IP (VoIP) bandwagon.

On top of eBay’s $2.6bn acquisition of Skype, Tesco’s Internet Phone launch is a clear sign that consumer VoIP services are moving into the mainstream and could threaten incumbent residential telephony providers.

While only 550,000 UK consumers used broadband connections to make free or cheap calls over the internet last year, that could rise to 8.76m by 2010, with other VoIP service providers entering the market, says Ovum analyst Mark Main.

In the UK, BT and Wanadoo lead the market with 80,000 subscribers each. But with Tesco, Vonage and DSG International – the owner of PC World and Dixons – all launching VoIP services, competition could be hotting up.

“Slow broadband adoption in the UK has meant slow growth for VoIP. But that’s changing, meaning VoIP could grow quickly in the next five years and get to one-fifth or a quarter of the fixed line telephony market,” says Mr Main. “The telco market will not be killed by this, but their services will continue to change.”

France Telecom, which owns mobile operator Orange and internet service provider Wanadoo, has already witnessed this change. Last month it warned of a slowdown in fixed-line telephony sales in France, saying VoIP could equate to 40 per cent of the French voice market by the end of 2006.

In the UK, however, the company is prepared and is seeing a significant uptake of its own Wireless & Talk VoIP service, says Wanadoo chief executive, Eric Abensur.

“We can hide behind the walls and pretend it will not happen, but we know that it is going to and we need to embrace this. In the UK it is still in the early stages, but it will grow like it already is in France, the US and Asia,” he says.But, for VoIP to gain a grip in the home phone market, operators need to ensure user experiences are similar to existing services that consumers have known for decades, says Mr Abensur.

He believes that while VoIP services such as Skype are free they are going to appeal only to “teenagers and techies”, who are happy to spend time booting up computers and then don headsets before having a conversation.

Mr Main agrees that paid-for VoIP services, such as Wanadoo’s and BT’s, that use handsets plugged directly into a wall rather than a home computer, could appeal more to users in terms of convenience, but says consumers will balance this with cost, depending on their needs. “There is the attraction of saving money with free VoIP calls, but people often overlook that a fixed line is still needed for the broadband connection. Other people want a service where you have a phone with a dial tone and know who to call when the service goes wrong,” he says.

Fluctuations in call quality experienced with certain free VoIP services may also hinder uptake. “I use VoIP at home and have had some outages. There will be some degradation, clicks and drop-outs but you get what you pay for,” says Mr Main.

BT consumer group managing director Gavin Patterson disagrees, saying technological advancements will see VoIP quality surpass that of traditional phone calls this year.

But while most people think cheap calls will fuel most of the growth of internet telephony services, Mr Patterson believes flexibility and added functionality will be bigger attractions, with fixed-line telephony moving from being a household to a personal service. “You will have your own number and a single depository for all your contacts. By blending voice with other digital communications, such as email and instant messaging, you will be able to decide on how you are contacted depending on where you are and who is contacting you,” he says.

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