Eircom plans to launch a new cut-price telephone service based on internet technology early in 2005 in a move that will dramatically cut the cost of making calls.

The firm will trial the technology with corporate customers shortly and launch a business service early in 2005.

It plans to extend the service to residential customers sometime in late 2005.

Corporate customers should enjoy savings of up to 30 per cent on their existing telephone bills when the service is launched. Eircom has signed a €10 million deal with the technology giant Cisco and another firm, NetCentrex, to deploy the new technology, which is known as VOIP (voice over internet protocol.)

VOIP services enable customers to bypass the existing telephone network by routing calls on broadband internet networks.

This enables firms or individuals to radically cut the cost of making calls when they have already signed up for broadband.

Mr Cathal Magee, managing director of Eircom Retail, said the firm would target corporate and Government customers with its new internet service in the first half of 2005.

But that this would be followed by a residential service for existing Eircom broadband customers, he added.

Eircom will spend in excess of €10 million deploying VOIP services over the next five years as part of its deal with Cisco and NetCentrex.

Cisco will provide Eircom with technology that enables the company to integrate internet voice calls into the existing public phone network.

NetCentrex, a private French firm whose backers include Intel Capital and the venture capital subsidiary of Deutsche Telecom, will supply a lot of the software and hardware for the system.

Eircom, which depends on its voice business to earn a large proportion of its own revenues, is being forced to react to a competitive VOIP offering from Esat BT.

Esat BT is already offering VOIP services to businesses in the Irish market and plans to launch a residential service in the New Year. This competition recently forced Eircom to reduce the price of calls for corporate customers by up to 30 per cent.