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Third-Party Providers Lead Charge Into VoIP Business


Vonage In Print NewsBY Alan Breznick, Editor, Cable Datacom News Cable operators may be waiting till next year to offer voice-over-Internet-Protocol (VoIP) service to subscribers. But not everybody is waiting that long. Tired of spending months, if not years, trying to convince cautious MSOs, phone companies and other broadband service providers to sign affiliation deals with them, IP telephony firms are striking out on their own. The firms, led by publicity hog Vonage Holdings Corp., are boldly rolling out Voip services for consumers and businesses in major markets throughout the U.S.

In just the past year, for instance, Vonage, Free World Dialup (FWD), Packet8 and several other startups have all launched service commercially. Taking advantage of broadband's growing popularity, they're using cable modem and DSL connections to offer features, functions and service plans that match those of conventional phone companies. They're also offering service reliability that approaches, if not quite matches, the quality that traditional phone companies offer over the public switched network, and that far exceeds the quality of earlier Internet phone efforts over narrowband lines. "Net telephony has gotten a lot better," writes David Rocks, who reviews IP phone service for Business Week Online. He says the sound quality of the two services that he recently tested, Vonage and iConnectHere, is "usually as good as my normal Verizon phone line," with just an occasional echo or tinny noise. Although "neither service is totally ready for prime time," he concludes, IP telephony "now may be good enough to give phone companies a run for their money." The Voip providers are gearing up to do just that. Generally, they're following the cell phone industry business model, offering free home equipment, a range of combined local and long-distance calling plans, unlimited calling options, cheap-minute rates, voice mail, caller ID, call forwarding, call waiting and other features. They're also marketing their new services very aggressively, offering free trials and money-back guarantees to entice the curious to try them out and stick with them. "There are lots of folks who are playing and trying," says Pulver.com CEO Jeff Pulver, whose Melville, N.Y.-based company launched FWD last November and claims to have signed up more than 12,000 users so far. "The market potential is hugeÉ It's this green field opportunity." He's seeking to sign up 50,000 users for his free service by next fall. The effort seems to be paying off, at least for some. Take Vonage. The early leader in the emerging Voip industry, Vonage claims to have signed up about 18,000 customers since launching service in its New York City home market last April. With their product now available in 70 U.S. markets, including 51 of the top 100, Vonage officials are spending more than $10 million marketing their product on TV, radio, online and in print this year. They aim to scale the 120,000-customer mark by the end of the year, which would put the company solidly in the black less than two years after it started service. "It's very hittable," says John Rego, CFO of Vonage. He anticipates that the Edison, N.J.-based company will deliver service in all 100 top markets and 50 states by the close of the year, making it the first company to offer local and long-distance service in the entire country since the breakup of the old AT&T monopoly 20 years ago. Much to the chagrin of the cable and phone industries, Vonage and its fellow IP telephony providers have been making these gains without any help from cable operators, phone companies, Internet service providers or anybody else actually providing broadband service. Broadband subscribers merely plug an analog telephone adapter (ATA), either supplied by the company or bought at retail or online, into their network router. Then they sign up on the company's Web site for the service level and features they want and they're ready. In most cases, they don't even need to turn on their computers. "It turns the cable guy into a bit pipe," says one cable equipment vendor. "That's their biggest fear." Undoubtedly, that fear only deepened last month when Vonage announced a revenue-sharing pact with EarthLink to offer Voip together to EarthLink's 780,000 cable modem and DSL customers. Under the deal, Vonage is setting up the second-line phone service and running the entire operation for EarthLink, but the product is being branded as EarthLink Unlimited Voice. Customers pay a flat fee of $39.99 a month for unlimited local, regional and long-distance calls, as well as such free features as voice mail, caller ID, call waiting, call forwarding, call return and repeat dialing. Subscribers also receive a free telephone adapter box, their choice of home area codes and deep discounts on international calls, among other things. "It's part of our value-added home services package," says an EarthLink spokesman. "It makes them (subscribers) more connected and more loyal to EarthLinkÉIt's pretty compelling for a second-line service." But EarthLink, which has cable broadband distribution deals with Comcast, Time Warner Cable and Charter Communications, will offer the service only to its cable modem customers on Time Warner systems for reasons that aren't yet clear. One possibility mentioned is that EarthLink's ISP contracts with Comcast and Charter don't permit it to offer telephony services. Another is that back-end integration problems must be resolved on the Charter and Cox systems before EarthLink can deliver voice service. Nevertheless, the long-rumored EarthLink deal, the first between a major national ISP and a leading IP telephony provider, has sent a few shock waves through the cable and phone industries. "EarthLink was a breakthrough for us," Rego says. As a result, cable operators are not sure what to make of Vonage and its siblings. Do they treat the IP phone providers as threats to their own prospective Voip services? Or do they see the providers as opportunities to enter the Voip business with experienced partners? Publicly, cable executives insist that Vonage and crew are no serious threats. Some, for instance, say their Voip products will easily trump such second-line services by offering full primary-line services with greater reliability, backup powering and the ability to make 911 and 411 calls. "I think our guys intend to offer something a little bit different," says one cable official, noting that most MSOs plan to offer primary-line service that can compete with conventional circuit-switched phone service. Cable officials also state publicly that they welcome any service that will attract more consumers and businesses to broadband, even if their companies don't make a penny off them. As examples, they cite such broadband content subscription products as the new ABC News 24-hour video service, which costs cable modem and DSL users an extra $4.95 a month. "I think the basic view is that anything that gets people to use more broadband is good," one official says. Cable executives, however, are clearly concerned about the new crop of phone players and are closely monitoring them. In particular, they're keeping an eye on Vonage, by far the most prominent and visible service. "It's bubbling up," says John Glieter, director of cable modem products for Broadcom Corp. "That's starting to get the cable operator's attention." VoIP providers are well aware of the cable industry's wariness towards them. But they argue that cable operators need not view them as threats. Indeed, they're seeking to sign co-marketing and distribution deals with MSOs, similar to the one that Vonage notched with EarthLink last month. "We're hoping to dispel that (image of a threat)," says Phil Giordano, vice president of sales for Vonage. "We really are a friend rather than a foe." Vonage officials, for instance, are dangling two kinds of deals before cable operators' eyes. One option is a wholesale arrangement where cable operators essentially buy the service from Vonage and run it themselves. The other is a "private label" contract like the one the company signed with EarthLink, a "turn-key" arrangement where Vonage handles everything but the distributor slaps its name on the service and takes a 25% cut of the revenue. "That's (the private label deal has) been picking up a lot of momentum because there's zero costs," says Giordano, a former Advance Newhouse and Bellcore executive who says Vonage is now in contract negotiations with a top-20 MSO. "We'll run the whole business with you. This is a way of getting you up and running very rapidly." Whether Vonage's revenue-sharing formula will work for cable operators, however, is another story. With both sides undoubtedly seeking the lion's share of revenues, some observers think the parties may have to compromise and end up splitting the receipts equally, just as cable operators and pay cable networks do, to make deals. If nothing else, the new Voip services ought to act as a spur for cable operators to get into the IP telephony business. Because if they don't, they risk losing their potential phone customers to the upstart providers, possibly forever. Brooke Schulz Vonage 732.528.2627 brooke.schulz@vonage.com Mitchell Slepian Vonage 732.528.2677 mitchell.slepian@vonage.com Michele Husak Connors Communications 212.798.1414 michele@connors.com



 
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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.

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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 www.vonage.com/911 for details.

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