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Revving the VOIP market
Vonage cuts its prices, while AT&T continues its aggressive rollout.
May 19, 2004: 2:45 PM EDT
By Eric Hellweg, CNN/Money contributing columnist

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SAN FRANCISCO (CNN/Money) - It's been a busy few days for Vonage, the voice-over-Internet-protocol company. Last week, the Edison, N.J., outfit announced a big distribution deal with RadioShack that puts its service in approximately 4,000 of the chain's stores in 38 states.

And on Monday, it announced that it has signed up 155,000 customers, is adding new subscribers at a rate of 20,000 per month, and is lowering the price of its premium calling plan by 14 percent, from $35 per month to $30.

Lou Holder, a vice president at Vonage, says the cost-cutting move was a result of "economies of scale. To build the customer relationship, you don't want to nickel-and-dime your customers. You want to be fair."

A glimpse of the future?

As a consumer, I applaud whenever a company decides to lower its prices; it doesn't happen nearly enough, even when economies of scale or new technologies reduce the cost of production (cough, music industry).

But the Vonage move is more than a laudable consumer play. For investors, it provides a glimpse at the next phase of the increasingly fevered Internet-based calling world.

Despite Holder's statement, however, there were other factors involved in the price cut. I'm not the only one who noted that the news broke the same day AT&T announced the expansion of its own VOIP program, CallVantage, into 16 Western U.S. markets.

"AT&T CallVantage service marks the beginning of an exciting new era in voice communications that gives customers another competitive choice," said Cathy Martine, AT&T senior vice president for Internet telephony, consumer marketing, and sales, in a statement.

But there's yet another competitive entity in the mix: Cable companies such as Comcast are increasing the footprint of their telephone offerings. Given that, Vonage's price cut was a well-timed, defense-minded strategic move, and I think it was a good one for the company.

Good strategy

The price cut places the rate of Vonage's unlimited premium plan well below those of similar plans offered by AT&T and Comcast. AT&T's CallVantage, for example, costs $40 per month after an initial six-month reduced rate. Comcast's plan is more expensive, depending on the consumer's bundling of cable services.

Vonage wins the first round of the price war, and thanks to its distribution deal with RadioShack, it can start to get its message out to the American public.

While the company's 20,000-per-month subscriber-acquisition rate is great for a young startup, it pales in comparison with the numbers that AT&T can rack up once its CallVantage program is nationwide. AT&T has said it will offer CallVantage in 100 metropolitan areas in the United States by year's end.

What's more, Qwest Communications has also announced it is getting into VOIP.

"150,000 subscribers can be considered successful for a startup," says Jeff Kagan, an independent telecom analyst. "But compared to 100 million telephone users in the U.S., 150,000 isn't even a rounding error."

Playing defense

This is true, of course, but AT&T's rollout is also a defensive play. Its VOIP service will not bring in the same kinds of margins as its twisted-copper-line services, and the company is expanding its CallVantage program so aggressively in part because Vonage and others are pushing the new paradigm with VOIP.

AT & T Corporation

As a result, this is a window of opportunity for the Vonages of the world to grow subscriber numbers quickly and build consumer awareness and brand recognition for their services. If Vonage continues its successful march, the logical outcome is either an IPO -- which I think is likely given the market's renewed embrace of tech issues -- or an acquisition.

Whatever the outcome for the company, the moves it announced during the past week are big steps in the right direction.

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