The attack on the mobile phone market from some of the internet’s biggest names is escalating, with Skype planning to offer free mobile calls to Britons.

The world’s biggest internet calls service is expected shortly to announce a deal with 3, the 3G mobile phone operator, to enable users of a new Skype/3 branded phone unlimited free calls to each other. 3 hopes that the service, which works by sending the calls as data over the internet, will help to lure customers. As the “challenger” mobile operator, it is seeking to stand out in Britain’s fiercely competitive mobile market.

For Skype, extending its brand into the booming mobile market could help to revive its faltering growth.

Google, the internet search giant, is also poised for an attack on the sector with the development of an entire operating system for mobile handsets. The group aims to replicate its runaway success online in the mobile phone industry, seizing a share of the potential multibillion-dollar mobile advertising market.

Apple has already swept in with its iPhone, the year’s most talked-about gadget.

The arrival of the techno-titans in the mobile domain comes months after Arun Sarin, the head of Vodafone, said that the traditional mobile operators - Vodafone, O2, Orange and T-Mobile – risked seeing their “lunch eaten” by the big names of the internet unless they moved quickly.

The developments, according to analysts, are a frightening prospect for the mobile operators, which are seeing their long-established business models completely disrupted.

Apple struck an unprecedented deal , its UK partner for the iPhone, under which 10 per cent of ongoing customer revenues will go to the American group.

Mobile companies fear that a huge proportion of the revenues that they had hoped to seize from advertising on handsets – the market for advertising on mobile phones is predicted to hit more than $11 billion annually in 2011 – is set to go into the pockets of players such as Google.

“They are nervous,” Ben Wood, an analyst with CCS Insight, the telecoms and research firm, said. “They have seen Apple come in and challenge their business model. Though they are also working with these companies, they want to keep players like Google in check and ensure they can maintain a position as the primary brand,” he said.

While the motivation of the different internet players varies, the bottom line is the same, Mr Wood said. “It is simple; the mobile is the most prolific consumer electronics device on the planet – over one billion will be sold this year – and everyone wants their brand to be there.”

The failure of 3G services on mobiles has held back the internet giants, but faster surfing speeds and lower costs for accessing the internet on the move is making them a reality.

Unlike Apple, which is seeking to push its brand into people’s pockets through a fashionable user-friendly device, Google is focused on the software powering a mobile. It wants its applications, such as search and location-based services, to form the heart of mobile devices.

Although it is expected to produce a branded handset. most likely in combination with a manufacturer such as HTC, the fast-growing Taiwanese manufacturer, the device is thought to be aimed really at providing a prototype platform to show mobile operators what Google is capable off and to encourage them to install its operating system on their handsets.

David MacQueen, an analyst at Screen Digest, explained: “Developing hardware is not Google’s core business.” Eric Schmidt, the Google chief executive, has made no secret of his ambitions. He recently said that mobile phone ads are “twice as profitable or more than nonmobile phone ads because they are more personal”.

With their core Western markets saturated and profit margins squeezed mobile operators know they must embrace new revenue-streams. Linking up with brands like Facebook or Skype can prove a key customer enticement tool helping them to stand out from rivals.

Skype is already offered on some 3 phones, but only its niche X Series, for which customers must pay an upfront subscription. Players including Vodafone are already working with Google, offering the search engine on its handsets.

The Times - 13/10/07 - Elizabeth Judge