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More Consumers Are Dialing Up Phone Service Over The Internet

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More Consumers Are Dialing Up Phone Service Over The Internet

January 3, 2005

By Staff

When stock analyst Frank Wagner decided to try Vonage, a low-cost provider of phone service over the Internet, his interest went beyond saving money on his monthly bill. He was curious whether the upstart Vonage could pose a serious challenge to phone giant SBC Communications Inc., the San Antonio-based company he watches closely.

Within two weeks of using Vonage, Wagner not only was sold on the $24.99 a month service, he saw first-hand that Vonage's high-tech calling plan presented a competitive threat. The value and the quality convinced him a year ago he should disconnect the SBC line at his San Antonio home, and he's used Vonage ever since.

"I still have my original phone number, and I pay a considerable amount less per month," said Wagner, who uses Vonage over his high-speed Internet connection. "We were paying about $60 a month for unlimited long distance calling with SBC, and now we're paying about $25."

By some estimates, there are more than 300 companies like Vonage, based in Edison, N.J., that use a technology called VoIP, or Voice over Internet Protocol, to route phone calls over the Internet.

Many are small operations with just a handful of users, but several are beginning to make serious inroads into the consumer market.

Time Warner Cable began offering phone service locally this summer using VoIP, and SBC said it will introduce Internet-based phone service for consumers in a few months.

With VoIP, phone conversations are turned into small "packets" of Internet data and carried through cyberspace much like an e-mail, allowing them to bypass the traditional phone networks. They're then reassembled at the other end with little discernable difference in quality from a conventional call.

Internet switching is efficient and inexpensive, meaning providers can offer users local service and unlimited long distance for a low, set rate — typically $20 to $30 a month — and provide the kind of phone features usually available only on corporate phone systems.

Many Voip providers are newish outfits like Vonage, Lingo and Packet 8, which aim to compete with conventional carriers. But established telecom companies, such as AT&T, Time Warner Cable and even SBC, also are introducing Internet calling.

"Right now, the strongest message consumers are getting is that it's a cheaper service," said Kate Griffin, an analyst with Boston-based technology research firm Yankee Group. "Price is driving the adoption rates right now. But as the service gets more mature, people will realize (telephone service) is moving toward VoIP."

Making Internet calls requires a broadband Internet connection and an adapter box that plugs into the Internet modem and translates electrical pulses from a phone signal into digital code.

Many providers offer the adapter free to customers, but one can be purchased at most home electronics stores starting at $50 or so. Phone manufacturers are beginning to introduce special VoIP-ready phones.

But because most Voip firms require users to have a broadband Internet connection — dial-up accounts are just to slow to handle the information — most current customers come from the ranks of the gadget geeks known to the tech industry as "early adopters."

Only several hundred thousand U.S. households subscribe to some sort of Internet phone service, making it far from a mainstream phenomenon.

But driven by the promise of cheaper phone rates, ease of use and the growth of speedy Internet connections, that number may explode to 17.5 million by 2008, according to Yankee Group estimates.

While still only a fraction of the 170 million U.S. wireless phone subscribers, the growth rate is impressive, analysts said.

Helping drive consumer sign-ups, Voip providers have taken advantage of the Internet-based platform to launch features previously unavailable to home phones. Since the calls they carry are turned into Internet data, they can be treated differently from standard phone calls.

Some providers, for example, allow users to access an easy-to-use Web site to forward calls or listen to voice mail much in the way they would check their e-mail.

And since Voip companies aren't bound to the traditional phone network, some allow users to choose an area code anywhere in the country. A Voip user with a cluster of relatives and friends might choose the area code of that place so callers won't rack up long-distance charges.

"Our biggest hurdle is getting people over the fear of the unknown," said Louis Mamakos, chief technology officer for Vonage, which at 350,000 subscribers is the largest consumer Voip provider. "But once they see the kind of features that are possible with VoIP, they tend to stay with us."

Even so, the requirement that consumers have a broadband connection before they can use services like Vonage will keep many from switching over, analysts warn. Despite growing interest in broadband, only a quarter of U.S. households online have speedy Net access.

Cable subscribers, however, have another option. Cable companies, including Time Warner, are using Internet calling technology to roll out phone service over their fiber optic networks, and that may introduce Voip to legions of non-broadband consumers.

Since cable carriers have lines directly into consumers' homes, their users don't need a fast connection to get phone service.

"We're finding that we can reach a much bigger universe of customers," said Jon Gary Herrera, a Time Warner spokesman. "It's not necessarily the techie crowd."

Herrera wouldn't say how many people in San Antonio have signed up for $45.99-a-month calling plan his company introduced earlier this year. But CEO Glenn Britt told reporters this month that Time Warner will end the year with 200,000 phone customers systemwide.

Big phone companies also are paying attention to VoIP.
Long-distance carrier AT&T had tried to compete in the local-service phone market until recent rulings made it more difficult for the company to buy access to the regional Bell companies' lines.

Now, it's turned its attention to using a Voip service called CallVantage that includes unlimited local and long distance calling for $29.99 a month.

"It's a cheaper way for us to provide service, since we're not having to pay those fees to access (the Bells') networks," AT&T spokesman Kerry Hibbs said. "At the same time, it's also cheaper for consumers."

And in perhaps the best indicator that Voip has arrived, SBC — the company that lost stock analyst Wagner's business to Vonage — plans to offer its version of Internet calling early next year.

SBC officials haven't released pricing details, but analysts said it's clear the company doesn't want to lose customers as Vonage, AT&T and Time Warner use Internet calling to chip away at its customer base.

Wagner said he's sold on Voip and would be just as eager to buy it from SBC as Vonage — if the price is right.

"If they can beat $25 a month, sure, why not?" he said. "I know the service works, so it's all about price at this point."

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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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