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Vonage Versus AT&T

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David Versus Goliath? Try Vonage Versus AT&T

September 11, 2004

By Scott Goldstein

You're probably already getting calls that have traveled most of the way to your phone over the Internet instead of traditional phone lines. More and more people are signing up for Internet phone service, drawn by the relatively low cost. It's a revolution that is being launched here in New Jersey by Edison-based newcomer Vonage and Ma Bell herself, AT&T in Bedminster-The field's most aggressive marketers.

This makes them David and Goliath rivals. The two companies offer competing calling plans and are charging into stores to make the hookup hardware for their respective systems widely available.

Both companies offer residential customers unlimited local and nationwide calling-Vonage at $29.99 per month, AT&T at $34.99 per month. Such pricing can't be touched by companies offering comparable plans over the conventional phone network, partly because of the taxes, fees and tariffs system that have evolved around the system.

Internet phone technology, also know as voice over Internet protocol (VoIP), transforms voice calls into the same tiny packets of data that carry e-mails and Web pages over the Internet. Customers must have high-speed Internet access and buy an adapter to hook their regular phones to their cable modem or other Internet connection.

Vonage, a privately held company that has raised $208 million in capital, has been offering the service for more than two years. It claims 240,000 customers and says it is growing rapidly. AT&T launched its service, called CallVantage, in March and has not released figures. Executives say the response has been strong.

Though the country's approximately 1 million Internet phone subscribers represent a tiny number compared with the tens of millions of traditional phone users, analysts expect Internet phone use to explode in coming years. That hasn't been lost on AT&T, whose mainstay long distance business has been taking a beating. In July, AT&T said it would stop pursuing the traditional consumer market and focus on business accounts. Second-quarter revenue at the phone giant's consumer division was $2 billion, down 13% from the second quarter of 2003.

Now Vonage and AT&T are fighting for position in Internet calling with a growing pack of competitors, including phone companies Verizon Communications, SBC Communications, and Qwest Communications International; and cable companies Cablevision and Time Warner. America Online has began testing a service.

AT&T's CallVantage launched the field's most aggressive advertising campaign last month with a barrage of television commercials during the Summer Olympics, in addition to direct mailings and Web ads claiming: "We are not just reinventing phone service, we are reinventing your phone bill."

Vonage has long been delivering ads via cable TV, the Web and radio exhorting consumers to "Unleash your phone."
AT&T and Vonage have begun an arms race in retail stores.

AT&T said two weeks ago that the hookup hardware needed to use CallVantage will soon be available in Best Buy's 628 stores. At about the same time, Vonage said its start-up kit will be available at 700 Office Depot stores. Vonage kits are already carried by Best Buy, Circuit City and Radio Shack. carries both firms' setups as well. Vonage's equipment costs $89.99, with a $50 rebate upon signing up for service. AT&T charges $79.99 with a $50 rebate.

"To be in Best Buy and Circuit City brings credibility to our brand, because these are stores that people believe in and trust," says Matt Deatrick, vice president of retail sales at Vonage. Availability in these stores indicates that Vonage "is not a fly-by-night operation," he adds.

"What's new for AT&T is a leap from land-line to the new digital world," says Katherine Bagin, vice president of IP Telephony at AT&T CallVantage. "Now you can literally go into Best Buy, buy a box, plug it into your [Internet connection's] port and make voice calls that feel like your voice calls at home."

Still, it will be a while before the masses are comfortable with the technology. For example, AT&T's trial of selling CallVantage start-up kits at some Target stores in California will not yet be expanded, Bagin says, because Target doesn't have salespeople who can explain the service. "Target is going to be an important partner and it's clearly where we want to be, but they are more self-explanatory," she says. "It's one thing to be in an electronics showroom and another thing to be in a large department store like Target."

Vonage and AT&T CallVantage are also accidental allies. Vonage has been spreading the Voip word since 2001, helping to blaze a trail for AT&T. And Vonage officials acknowledge that AT&T's recent foray into the field, armed with a huge advertising budget and brand familiarity, will help legitimize Internet telephony. "Advertising helps build awareness for the space and it gets people looking in the space," says Vonage's Deatrick.

The service, after all, is still new. "[Internet] telephony for consumers has been around loosely since '95, 96, but it was hampered by hardware and limited to subscriber-to-subscriber calls," says Bagin. "The real revolution happened within the past few years with telephone adapters."

The pioneering Voip services offered in the 1990s by companies like Net2phone, Dialpad and PhoneFree had idiosyncrasies that limited their mass appeal: Users couldn't receive calls, or they had to use a special kind of phone, or they could call only people who were online at the same time.

Today's Internet phone users can call anywhere, to anyone with a phone. And because calls are carried over the Internet, users can pick up voicemail messages over the Internet and even forward voice messages by e-mail to other phones or e-mail addresses.

The quality of the Internet-relayed calls-always an issue-has improved, but remains variable. Some users say it's as good as calls made over the traditional phone network, while others say it's better than a cell phone, but not quite traditional quality.

Another drawback is that unlike a traditional phone, which is powered through its connection to the phone line, Voip systems don't work during a blackout. The Internet hookup is powered by the house's electricity. Also, analysts say the phones' performance can be limited by the speed and reliability of the user's Internet connection or the amount of traffic on the Internet at the time.

Still, the future looks promising. The technology continues to improve and the number of U.S. households with high-speed Internet access is 30 million and growing rapidly. Analysts expect Internet telephone services to eventually take a significant share of the market for home phone services-up to 17% by 2008, according to estimates from Gartner, an industry research firm.

A big test will be this year's holiday shopping season, when consumers fill stores like Best Buy, which will be carrying AT&T's and Vonage's starter kits. "We are expecting to ramp up significantly in December, over the holiday, when sales increase 50% in stores," says Deatrick.

In the meantime, Vonage last month closed a $105 million Series D Financing Round. The company plans to use the money to develop new offerings and accelerate the expansion of service in the U.S. and abroad, including Canada, Great Britain, the Pacific Rim and Latin America.

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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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