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Taking On The Telecom Giants

Vonage In Print News

September 11, 2003
By Martha McKay

In the end, bureaucracy pushed Scott Testa to try upstart Vonage's $40-a-month phone service.
"Dealing with Verizon was like dealing with the Pentagon," said Testa, a Pennsylvania software executive who spends summers at the New Jersey shore.
Frustrated by delays installing two new phone lines in his home, Testa called on Vonage, an Edison-based Internet phone company he had recently read about.

Anyone with a high-speed broadband Internet connection such as DSL or cable can buy phone service from Vonage.

And the company's pitch is pretty compelling.

For $40 a month (state and federal taxes boost it to $43.59 for New Jersey residents) you get unlimited local and long-distance calling plus a raft of features including voice mail, caller ID, and call waiting.

So far, consumers have taken notice.

Since launching 18 months ago, Vonage has signed up nearly 50,000 customers and is averaging more than 2,000 per week.

The company was founded in January 2001 by Jeffrey Citron, a fast-talking 33-year-old who grew up on Staten Island and gained notoriety as the brains behind another company, the former Internet-based stock trader Datek Online.

This year, Citron agreed to pay a $22.5 million fine to the Securities and Exchange Commission without admitting or denying allegations that he and others manipulated trades that resulted in millions in illegal profits.

"It's way behind me," the affable and enthusiastic Citron said in a recent interview at Vonage's Edison headquarters when asked about the troubles.

These days Citron is pouring his considerable energies into 80-hour weeks to make the privately funded Vonage grow.

And he's thinking big.

"I'm going to bring telecommunications back to New Jersey," he said, a reference to the large telecommunications companies in the state, such as AT&T and Lucent, which have shrunk in recent years.

Vonage isn't close to becoming an industry giant, but it's got the industry's attention.

"They have the buzz," agreed Vijay Bhagavath, a telecommunications analyst with Forrester Research.

"They're getting into an established market and disrupting the status quo."

Instead of using a traditional phone network, Vonage sends calls over the public Internet using a technology called Voice over Internet Protocol, or Voip for short.

With VoIP, speech is broken into tiny packets of data, shipped over the Internet, and reconstructed at the receiving end of the call.

Until recently, Voip technology was known for cheap rates and often garbled and scratchy voice quality. With the quality issues largely solved, the biggest problem has been figuring out how consumers could easily use the service.

Newark-based Net2Phone Inc., a veteran Voip provider, uses several methods, including giving subscribers an access number to dial before they dial a phone number.

Vonage uses a different approach.

The company provides an adapter box about the size of a videotape. Some users also need a computer router, which Vonage sells for $40. (A New Jersey resident would pay about $129 to get started, which includes a router, the first month of service, a $30 activation fee, taxes, and shipping.)

The customer's phone plugs into the Vonage adapter box, and there are several ways that multiple phones can be connected to use the service. In most cases, consumers can keep their phone numbers, or choose a phone number in an area code they wish. Subscribers must take a few steps on the Vonage subscriber Web site to set up 911 service.
Of course, there are some drawbacks.

Unlike traditional phone service, which doesn't require a power source in your home, Vonage relies on electricity. That means a blackout will knock out service unless you provide battery backup power. And if your DSL or cable connection goes down, so does your Vonage phone.

Vonage (whose name is derived from "Age of Voice Over the Net") is targeting consumers as well as small businesses, which make up about 16 percent of its subscriber base.
Vonage has also cut some deals with several smaller cable companies looking to break into the telephone voice business and some Internet service providers. Last March, Vonage announced a partnership with Earthlink, the ISP giant, which sells Vonage service under the brand Earthlink Unlimited Voice.

Citron says his biggest competitor is Verizon, which sells local and long-distance phone service.

"They have the customers," he said.

There are other Voip entrants, including VoicePulse Inc., based in North Brunswick, Voiceglo in Fort Lauderdale, Fla., and 8x8, Inc. in Santa Clara, Calif.

Verizon, which serves about 60 million phone lines, isn't terribly concerned about Vonage eating into its market share.

But the phone giant does have its eye on Voip technology and plans to introduce some similar services next year, said Verizon spokeswoman Bobbie Henson.

Bhagavath, the analyst, believes Vonage will face competition from several fronts, including cable companies that have begun to roll out telephone service. But Citron isn't fazed.

"The industry is marching to our timetable," he claims.
One of Vonage's biggest challenges, said Citron, is growing the company quickly.

Vonage must buy equipment and install it in various locations around the country and cut deals with local phone providers to transport Vonage traffic onto the local copper wire network so Vonage customers can call people with traditional phones.

Citron won't disclose finances except to say "we're in very good shape."

Last spring, they broke through a wall at their Edison headquarters and pushed into another office space, bringing them to 40,000 square feet.

They are hiring fast and it shows - a handful of their 170 employees are using makeshift tables as desks, and the company ships in catered lunches every day to keep the youthful staff fed and eager to work as hard as their CEO.
Another challenge may come in the form of rules governing phone service.

Minnesota state regulators recently said Vonage should be regulated like traditional phone service. Among a range of requirements, Vonage would have to print its phone bills (which the company doesn't do - subscribers pay online), file information with regulators about its pricing, and more.

Citron will fight the ruling and hopes for a hands-off approach from states. He wants the service to have a chance to mature and any oversight to come from the federal level, as opposed to a patchwork of rules from each state.

He also must spend money to market the service and convince potential customers that Vonage is an attractive alternative to Verizon.

Testa says he would recommend Vonage for a second phone line, but isn't willing to cut Verizon out totally.
Vonage "isn't as consistent as your typical dial tone," he said, "but it's convenient and it makes sense - it's 95 percent there."

Lee Selwyn, a telecommunications analyst who lives outside Boston, subscribed to Vonage and was able to get a 212 number that his daughter in New York now uses to call him for the cost of a local call.

Although Selwyn likes the service, he says it's not as reliable as traditional phone service because of its dependency on the broadband connection, which still "goes out with sufficient frequency."

But, he added, the technology has come a long way.
"A couple of years ago you couldn't hold a conversation over VoIP," he said.

These days 50,000 people are chatting away using Vonage.
And if Jeffrey Citron gets his way, millions more will follow.

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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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