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Google has integrated its Google Voice product into its popular email client, Gmail, to allow users to place calls from within the program. It is Google's latest salvo in its battle to become a contender in the telephony world and arrives after other strategic voice moves, most prominently the rollout of Google Voice in 2009. As Google seeks to expand beyond search advertising – which comprised 96% of its revenues in 2Q10 – it has targeted voice as a key market to penetrate. However, web-based VoIP is Google's first product geared exclusively to making and receiving calls over IP and is its most significant jump to date: Google Voice had over 1 million users in 2009, while Gmail enjoys a much wider reach.

The service does not currently charge for calls placed to landlines or mobile phones inside the United States and Canada. International calls are charged "competitive" rates. Notably, Google service allows users to dial any number from inside Gmail. Google Voice users can make and receive calls from their Google Voice number. For those that do not have one, calls placed from inside Gmail appear to come from a different phone number each time. Number portability does not yet exist as a feature.

When Google throws its hefty weight behind a market, incumbents take notice. But how much does Google VoIP actually threaten its competitors? The answer: it depends. Google VoIP most directly threatens over-the-top (OTT) VoIP providers – especially Skype. It essentially copies Skype's service by initiating and receiving free and cheap calls over IP. It then leapfrogs Skype by allowing free calls to landlines and mobile phones in the United States or Canada (Skype currently charges for any calls not made to or from a computer). Google only guarantees the freebie through the end of 2010, however. It has to pay interconnection fees to US telecom carriers to route the calls, and these costs are not negligible: Skype reported that termination costs made up 65% of its cost of net revenues in 2009.

IDC believes that Google will eventually follow Skype's model and charge for calls to landlines and mobile phones. It may alternately choose to make the service profitable by introducing advertising into the mix. A crucial difference between Google and Skype, however, is that Google is diversifying into many services while Skype directly depends on revenue from calls placed to landlines and mobile phones (SkypeOut). Google can therefore afford to make VoIP a loss leader in order to create an integrated (and advertising-friendly) communications play.

If Google VoIP's threat to Skype is clear, its significance for telecom service providers is muted. Landline providers can breathe easy...for now. The current version does not permit number portability and displays a different "from" number on the recipient's caller id for each call, unless the user has signed up for Google Voice and has a Google Voice number. Any troubleshooting Google VoIP offers will undoubtedly be minimal compared with a service provider's customer support. Google VoIP is hence unlikely to spur massive cord cutting except among smartphone owners that have landlines they rarely use. If number portability is introduced, however, Google VoIP may pose a higher threat.

More worrisome for service providers is the eventual ability to call from other connected devices – namely, smartphones, the iPod Touch, and the iPad. This potentially expands Google's voice footprint from the several million who use Google Voice to the much higher number of Gmail users that own these devices. Mobile opeators may lose out on some international long distance revenue or see some customers opt for cheaper domestic calling plans with fewer daytime minutes. However, operators actually stand to gain if Google inspires feature phone customers to sign up for smartphones and a data plan.

IDC notes that Google faces multiple challenges in its drive to become a voice communications player. The capability to place calls to any number pushes Google ever closer to classification as a voice service, subjecting it to potential FCC regulation and fees. Google VoIP's ability to remain profitable would then decrease. The search giant is also dogged by privacy concerns. It has lost some luster from the botched rollout of Google Buzz and the controversy over its Chinese service. Finally, Google may be spreading itself thin. It is rolling out numerous products in its quest to grow and likely sees VoIP as only one part of its strategy to become the conduit for as much of consumer' communications as possible. It remains to be seen if the search advertiser can devote the attention and energy necessary to make VoIP succeed.

Future iterations of the Google VoIP product may more directly challenge traditional service providers' businesses. For now, however, service providers can still enjoy a good night's rest.

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