Internet Phone Service Race

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Rivals Line Up For Internet Phone Service Race

July 12, 2004

By Urvaksh Karkaria

As Gulliver stirs, the Lilliputians in the nascent Internet phone service business are bracing for a not-so-even showdown.

Verizon Communications plans to invest about $3 billion over the next two years to beef up its broadband service, which will include launching nationwide phone service using Voice over Internet Protocol, or VoIP.New York-based Verizon could be viewed as the powerful sea captain from the novel “Gulliver’s Travels” as the company lumbers into the high-speed Internet phone business, attempting to fend off the cable competitors and Lilliputian startups snipping at its market share.

“We’re in the final stages of testing this,” Verizon spokeswoman Bobbi Henson said.

A national rollout of the service is expected to begin later this summer, but Henson remained mum on which cities might get the service first or when it would trickle down to the northeast Indiana market.

This is Verizon’s “competitive counterpunch,” said Richard Heidemann Jr., telecommunications analyst with National City’s Private Client Group in Cleveland.

By offering Internet phone service, Heidemann said, Verizon will be able to hold onto some customers who might ditch their conventional telephone connection for the more hip technology.

VoIP player vonage-forum.com/vlink6.html">Vonage, which claims to have 55 percent market share, is putting on a brave face and adopting a bring-it-on attitude.

Internet phone service is the latest way in which technology is changing the way people communicate. And judging from Verizon, it’s changing the way companies that keep us in touch operate.

While conventional calls are transmitted through a labyrinth of high-maintenance cables, switches and copper wires, VoIP uses technology that packages voice calls as data and sends them over a broadband connection such as cable modems or DSL.

The technique is less expensive because it avoids some access charges inherent in the traditional phone network. And it opens up new features, such as Web-based management of voice mail.

The standard price for VoIP packages from AT&T Corp. and Cablevision Systems Corp. is $34.99 a month for unlimited local and long-distance calling, voice mail and call forwarding – but that doesn’t include a broadband connection, which typically costs at least $30 a month.

Verizon’s local and long-distance packages for traditional calling range from $49.95 to $64.95 a month.

The Web interface offers additional features and gives users more control over how they make calls and receive messages, said Michael Kende, principal consultant at Analysys, a U.K.-based telecommunications strategy consulting company.

“It’s much more interactive,” Kende said from Analysys’ Washington, D.C., office.

The market for high-speed Internet phone service, so far, has been dominated by startups such as Vonage. The Edison, N.J.-based company, which launched VoIP service in the Fort Wayne area in July 2003, has about 200,000 customers nationwide including nearly 1,000 in Indiana. At least half of Vonage customers have cut the cord to their landlines, the company said.

So far, Vonage’s market infiltration is likely not forcing Verizon chief Ivan Seidenberg to reach for the aspirin. With annual sales of $67.8 billion, Verizon is unarguably the 800-pound gorilla in the telecommunications business.

But Vonage could be just the tip of a slippery slope. Better-financed and recognized rivals in the cable and telecommunications worlds are also stepping in to wrestle customers away.

VoIP technology “lowers the barrier to competition” in the local telephone business, Analysys’ Kende said.

Until now, offering local phone service was cost-prohibitive because it required expensive cables and copper wire infrastructure, he said. But by using VoIP, new entrants in the market can bypass the expensive infrastructure and offer local telephone service through broadband connections.

Using VoIP, cable companies such as Comcast Corp. can also offer “what’s called a triple play of voice video and data” on their cable infrastructure, which will increase their competitiveness, Kende said.

Comcast, whose cable infrastructure passes through more than 153,000 homes in the Fort Wayne area, hopes to squeeze more revenue from its customers. Comcast anticipates offering Internet phone service to all its customers by the end of 2006.

And long distance-carrier AT&T says it expects to have 1 million VoIP customers by the end of next year.

Henson said competitive threats are a reason Verizon is going down the VoIP road.

“Certainly it will help us retain customers (who) are looking for this kind of service,” she said. “And more and more customers are looking for this service.”

Verizon is also betting that Internet phone service will entice more people to sign up for its DSL connections.

“This is actually a part of our broadband strategy as much as it is part of our voice strategy,” Henson said. “Voice is becoming more and more of an application.”

Improvements in call quality and blistering demand for broadband connections have piqued Verizon’s interest, too.

“This is a technology that’s come into its own,” Henson said. “Now the technology and the market have intersected.”

Until recently, calling over the Internet – while easy on the wallet – was hard on the nerves. Callers had to deal with dropped connections, echoes and static.

But new compression technology and faster connection speeds have reduced the hassle factor.

Today the sound quality of VoIP calls are “awfully close” to that of a wireless call, National City’s Heidemann said.

The market for Internet-based calling has also expanded as more American households upgrade to fast broadband Internet connections.

At the end of 2003, about 24 million U.S. homes had broadband connections, Heidemann said. That number is forecast to climb to about 65 million in 2008.VoIP adoption is expected to reach 17 percent of broadband-enabled U.S. households in 2008 – growing from fewer than 1 million at the end of this year to 11.7 million in 2008, according to Analysys, the consulting firm.

The Internet phone service is expected to be adopted by 23 percent of broadband-enabled small businesses – increasing from fewer than 100,000 this year to 800,000 in 2008.

Together, consumers and small businesses are expected to provide almost 13 million VoIP subscriptions and $5.7 billion in annual revenues in 2008, Analysys said.

But even as Verizon trains its guns on the VoIP business, Vonage is not flinching.

Vonage will continue to compete on price and offer innovative products, Louis Holder, executive vice president of product development, said.

While the average household spends about $75 a month on conventional phone service, “with (Vonage’s VoIP service) you can get a plan as low as $15 a month or as high as $30 a month,” Holder said.

Rather than cower before the much bigger competitors, Holder welcomes it. Verizon’s entry into the VoIP business, he said, will bring brand-name cache to the fledgling technology.

The bundles of dollars Verizon will throw at marketing its service will help create awareness and benefit all service providers, Holder said.

Vonage also has a 2 1/2 -year headstart in the business.

“We’ve ironed out a lot of the bugs,” Holder said, adding the new entrants will have to play catch-up.

And Vonage’s Lilliputian size allows it to react more quickly to competitive threats and stay on top of the competition, Holder said.

The battle for this latest frontier in the telecommunication’s business will pitch the financial muscle of Gulliver against the strategic nimbleness of the Lilliputians. The bugle call, marking the start of that battle, has only just been sounded.