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Hold the Phone: Calls Routed via Internet

Vonage In Print News 

July 20,2003
By Urvaksh Karkaria

That inseparable connection between the telephone and its nearest jack is showing signs of breaking up as Internet-based technologies threaten the dominance of the landline.

While more an annoyance than full-blown threat, companies such as Vonage Inc. are using technology that transmits calls over the Internet, instead of a labyrinth of cables and copper wires, to grab market share from traditional phone companies.

While the technology that companies such as Vonage use have cost and other advantages, industry watchers say their universal adoption is hardly assured.

The Edison, N.J.-based startup, which launched service in Fort Wayne last week, offers unlimited local calling and 500 minutes of long-distance calling in the United States and Canada for about $26 a month. That's after a $30 activation fee and excludes taxes. Vonage has similar plans for small businesses.

Subscribers can upgrade to unlimited long-distance calling in the United States and Canada for about $40 a month. Both plans include a shopping list of free ad-ons such as caller ID, call forwarding and voice mail.

Compare that with MCI's unlimited local and domestic long-distance package that costs about $50 a month. Verizon Communications offers a similar package for about $55 a month.

Vonage uses a high-tech approach to keeping prices low.

Instead of investing in or leasing expensive infrastructure from the traditional phone companies, it piggybacks on the Internet.

"We don't have the (high) overhead and high operational costs that the traditional (telecommunications companies) have," said Louis Holder, executive vice president of product development.

The company's operating costs are limited to customer care and a few servers in the field as compared to the tens of thousands of miles of copper wire and other high-maintenance infrastructure the traditional phone companies rely on, Holder said.

Using high-speed Internet connections, as opposed to dial-up connections, Vonage has reduced the hassles of calling over the Internet and improved call quality, said Joe Laszlo, Internet analyst with Jupiter Research, a New York-based technology research firm.

Using special hardware, Vonage allows customers to make Internet calls with a traditional phone instead of a computer that require clunky headsets or microphones.

"They finally made calling over the Internet as simple as calling over an old-fashioned phone," he said.

But the competitively priced plans come with a trade-off. If the Internet service or power is disrupted, the phone's as good as dead. The power outage problem can be addressed, however, with an external device that provides back power.

911 dialing service is not automatic and has to be activated, and emergency operators cannot see the address of Vonage customers. Also, for now, Vonage numbers cannot be listed in directories.

Most important, the phone service is limited to broadband users - a segment that while growing is not ubiquitous.

Jupiter's Laszlo estimates that at the end of 2002, there were about 16 million households with high-speed Internet access out of a little more than 100 million in the United States. By the end of 2007, Laszlo estimates that number to be up to 41 million out of about 110 million households.

Vonage, which started in 2001, has nearly 35,000 customers, up from about 7,500 at the end of 2002. The company, which employs about 150, picked Fort Wayne because it is a sizable advertising market and has a large number of high-speed or broadband connections, Holder said. The company expects to have a little over 1,000 customers in the Fort Wayne area within a year.

Ninety-two percent of the company's customers are residential, and nearly 2 million calls are made weekly using the service.

And every call being made on the Internet means one less call going through the expansive and expensive infrastructure of copper wires that Verizon Communications Inc. and other traditional phone companies are shouldering.

The technology Vonage uses is a growing threat to traditional telephone companies, said Richard Heidemann Jr., telecommunications analyst with National City Wealth Management in Cleveland.

The landline telephone connection is highly profitable and is the bread and butter for companies such as Verizon and SBC Communications, Heidemann said.

By transmitting calls over the Internet, Vonage and other Web-based telephone service operators make the landline redundant.

Nearly 25 percent of Vonage customers have replaced their landline with the Web-based service, Holder said. Before the year is over, he expects at least a third of Vonage customers to give up their landlines.

Verizon, a major phone provider in northeast Indiana, welcomes the competition.

"We think competition is good for the consumer," Verizon spokeswoman Jane Howard said. "We are not shy of competition, and we will meet it head on."

Howard concedes the new competition could poach some market share. Customers look for the best service and products that meet their needs, Howard said.

"Are we quaking in our boots and worrying about the competition taking customers? No," she said. "Our focus is on service quality and products. And if we have the superior quality and products, then we'll have what the customers want."

While Vonage and other telecommunication Lilliputians are a competitive thorn in the sides of the industry's Gullivers, the competition will ultimately benefit consumers.

As more companies enter the market, it's likely prices will drop and the quality of service improve, Laszlo said.

"It'll get easier to do things and cheaper to do things like change calling plans or add calling features," he said.

The major telephone companies are fighting back - bundling local, long distance, wireless and Internet services into a single competitively priced plan.

That one-stop approach gives consumers little incentive to stray for their telecommunications needs, National City's Heidemann said.

Some major players also are toying with the idea of Internet-based telephone service. But it might be a while before the heavyweights get into that market.

"They've had so much money invested in the traditional phone systems," Laszlo said, "that it's hard to write that off and shift to a new way of doing business."

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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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