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Price War Hits Internet Calling

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A Price War Hits Internet Calling
Competition And Low Cost Of Service Spur Array Of Deals In Nascent Telecom Sector

August 26, 2004

By ShawnYoung

Fierce price competition is hitting the fast-growing Internet phone-calling business.

Consumers are used to prices of many new technologies eventually falling. But with Internet phone calls, the industry has begun to lower its rates at a remarkably early stage, reflecting the low cost of providing the service and the cutthroat nature of the phone business.

AT&T Corp. recently extended an introductory offer of $19.95 a month for its CallVantage service, which offers unlimited local and long-distance calling, through the end of September. Earlier, Vonage Holdings Corp., the pioneer in Internet calling, shaved $5 off the price of its primary service, which is now $29.99 a month.

Meanwhile, Primus Telecom, whose $19.95 a month Lingo service includes unlimited free calling to western Europe, recently added a feature allowing customers to pick an overseas number from any of 12 countries, meaning friends and relatives in those countries can reach a Lingo customer in the U.S. with a local call.

Internet calling, known as VOIP, short for "voice over Internet protocol," is also fairly easy to set up. Customers are able to use their standard phone, which they plug into an adapter that links to their computer. The computer routes the calls over the Internet.

From start-ups to phone giants to cable businesses, companies are scrambling to get in on the ground level of the fast-emerging industry. Earlier this week, cable provider Mediacom Communications Inc. announced plans to make Internet calling available in smaller cities in 23 states at rates cheaper than standard phone service. Major cable players from Time Warner Inc. to Cablevision Systems Inc. also offer the service. On the phone side, even conventional local phone companies like Verizon Communications Inc. and Qwest Communications International Inc. are getting into the act.

Prices are likely to keep dropping in the months ahead because it is so much cheaper for companies to run an Internet phone service than a conventional phone network. They no longer have to buy and maintain hundreds of millions of dollars worth of telephone equipment. For consumers, making calls over the Internet can cost a third to two-thirds less than a traditional phone plan.

One reason is that the assorted taxes and fees that traditional and cellphone companies tack onto their advertised monthly rates generally don't apply to Internet calls. That's because the government classifies Internet calls as "data" rather than phone traffic, meaning regulatory fees aren't levied on the providers. The net effect is that with Internet plans, the advertised rate is often what consumers end up actually paying.

Internet calling comes with some trade-offs. For starters, your phone service is only as reliable as your Internet connection. Fluctuations in the quality of the connection that may be barely noticeable when you surf the Web can undermine the sound quality on the phone. And, while most Internet calling services will connect to 911, the operator often won't be able to automatically link the call with an address. That's because with Internet phones, as with the Internet in general, location is irrelevant. Callers generally have to tell a dispatcher where they are.

Carriers, though, are rushing to improve their 911 service, and some already alert emergency operators to a caller's location. Another drawback: Like cordless phones, Internet service also won't work if there's a power outage.

Despite these hurdles, using the Internet to make phone calls is quickly graduating from a niche for geeks into a bona fide mainstream consumer technology. A few years ago, just about the only users were hard-core techies or those whose phone bills were high enough to make the balky technology worthwhile. Users had to strap on a headset or talk into a microphone, and had to put up with phone conversations that were often time-delayed and garbled.

Now, tens of thousands of people a month are signing up for what is a much-improved service, and companies are stepping up the marketing. AT&T is advertising Internet-based service that works with a regular phone to prime-time audiences watching the Olympics. Cable provider Cablevision Systems Inc. registered 3,400 customers of its Internet service each week during the second quarter.

"I've got cousins in England and I've called them clear as a bell. To me it's a no-brainer," says Peggy Coyle, a retired State Department employee who lives in Alexandria, Va. Ms. Coyle signed up for the Lingo service about a month ago and says it is already changing her habit of making calls sparingly.

Internet calling allows you to keep your old phone number. It also allows for some tricks not available with traditional phone service such as sending all calls from your ex straight to voicemail or picking a trendy area code even if you live in the boonies. Many providers also offer a "find me" feature that lets you forward calls to several different numbers if you don't answer.

By the end of this year, more than 800,000 people in the U.S. will have Internet phone subscriptions, according to Yankee Group, an industry consultant. And that number will jump to 10 million by the end of 2007, it says.

Internet phones plug in to high-speed Internet connections, which are offered by either cable or DSL providers. Behind the scenes, your conversation is broken into bits of digital data and routed over the Internet or over privately managed data networks, and reassembled into speech at its destination. The high-speed Internet connection generally costs somewhere between $25 and $40 a month.

Because you need to plug the Voip phone into an adapter that's connected to a modem -- and there's usually only one modem per family -- it isn't feasible to hardwire phones all over the house. Some people solve that problem by getting a cordless phone with multiple handsets. AT&T will rig up the whole house with Voip for a fee of $135, while Cablevision will do it free. Most Voip providers charge cancellation fees ranging from $30 to $60 if you drop the service after the 30-day trial period.

The quality of Internet calls can vary by provider because some companies, such as phone and cable providers, can manage the call mostly or entirely on their own privately run networks. Smaller carriers whose calls travel across the public Internet for all or most of their journeys sometimes have more trouble, analysts say. Those calls are jockeying for space along with the millions of Google searches, purchases, eBay bids and other random daily Internet traffic. While the problems may not be any worse than a cellphone at a bad moment, they can intrude on sensitive business or personal calls. Most carriers claim to have enough access to networks that quality isn't a problem, which makes it tougher for customers who are shopping around for a provider to anticipate potential problems.

Some people are wary of Internet calling simply because it is unfamiliar. Ford Cavallari, an analyst at market research firm Adventis Corp., tried Vonage service with a Boston area code while he was working in London, an option offered with most services. That meant friends and family in Boston could reach him with a local call.

"My parents kept asking 'Do we need to use the computer to call you?"' Mr. Cavallari says. Even when they understood that they didn't, they still shied away at first on the unfounded fear that calling an Internet-based phone would somehow affect their computer.

The recent spate of price cuts and introductory offers has made it cheap for anyone who has a high-speed Internet connection to experiment with the service. Michael Kelty recently signed up for AT&T's introductory offer of $19.95 a month, which comes with a full menu of perks like caller ID. The retired New York City police detective estimates that he saves about $60 a month using the Internet to make calls.

Although many people are trying Internet calling as a second line, companies have been surprised at the number opting for it as a primary line. "The majority replace their conventional phone," says Vonage founder and Chief Executive Officer Jeffrey Citron.

Replacing a conventional phone with an Internet phone connection can be a particularly big money saver for people who get their high-speed connections from a cable company. That's because those customers are able to ditch their traditional phone lines -- that's often not the case for people with DSL connections.

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†AK and HI residents pay $29.95 shipping. ††Limited time offer. Valid for residents of the United States (&DC), 18 years or older, who open new accounts. Offer good while supplies last and only on new account activations. One kit per account/household. Offer cannot be combined with any other discounts, promotions or plans and is not applicable to past purchases. Good while supplies last. Allow up to 2 weeks for shipping. Other restrictions may apply.

1Unlimited calling and other services for all residential plans are based on normal residential, personal, non-commercial use. A combination of factors is used to determine abnormal use, including but not limited to: the number of unique numbers called, calls forwarded, minutes used and other factors. Subject to our Reasonable Use Policy and Terms of Service.

2Shipping and activation fees waived with 1-year agreement. An Early Termination Fee (with periodic pro-rated reductions) applies if service is terminated before the end of the first 12 months. Additional restrictions may apply. See Terms of Service for details.

HIGH SPEED INTERNET REQUIRED. †VALID FOR NEW LINES ONLY. RATES EXCLUDE INTERNET SERVICE, SURCHARGES, FEES AND TAXES. DEVICE MAY BE REFURBISHED. If you subscribe to plans with monthly minutes allotments, all call minutes placed from both from your home and registered ExtensionsTM phones will count toward your monthly minutes allotment. ExtensionsTM calls made from mobiles use airtime and may incur surcharges, depending on your mobile plan. Alarms, TTY and other systems may not be compatible. Vonage 911 service operates differently than traditional 911. See for details.

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