Does the world need another Vonage?
On the heels of one VOIP provider's ignominious IPO, much smaller SunRocket thinks it can succeed in the same market.
By Stephanie Mehta, FORTUNE senior writer

NEW YORK (FORTUNE) - Despite Vonage's ignominious IPO and fresh questions about its viability as a stand-alone provider of basic phone services, some smart executives are betting the market and possibly Wall Street will embrace another independent provider of phone calls via the Internet.

Privately held SunRocket, a two-year-old provider of Voice-over-Internet Protocol (or VOIP) calls, has raised more than $46 million from blue-chip venture investors such as Mayfield Fund and Doll Capital Management, and the company is planning to raise another round of money later this year.

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Like Vonage (Charts), SunRocket delivers its calls over a broadband pipe provided by the phone company or the cable operator, which means both upstarts rely heavily on a rival's service.

Plus, both companies are competing against deep-pocketed cable and phone companies that have begun offering a full suite of communications services: phone, high-speed Internet, wireless and television often at super cheap promotional prices and portal companies such as Google (Charts) and Yahoo (Charts) that offer free PC-to-PC calls over the 'Net.

At least Vonage had the benefit of getting there first. SunRocket, founded in early 2004, has about 120,000 customers, compared to Vonage's 1.6 million.

Lisa Hook, SunRocket's new CEO, is undaunted. Hook, who used to head up AOL's broadband business, thinks the market is big enough for at least two independent players. She's positioning SunRocket as VOIP for the rest of us the easy-to-use, mass-market alternative to Vonage with its base of early adopters and technically savvy users.

Hook draws a comparison to the early days of the Internet, when the two big consumer players were Prodigy and AOL. "Prodigy was the company that appealed to the tech users. Like AOL at the inflection point of dial-up, we're focused on the mass market."

Indeed, SunRocket's proposition is pretty technophobe friendly. Its Web site takes would-be buyers through a simple, six-step sign up process, and the company even calls the special adapter needed for their service "the gizmo."

SunRocket also is cheaper than Vonage, with a $199 annual plan, appealing to the value-conscious customer. (A SunRocket spokesman acknowledges that the company has had some customer-service complaints, partly due to an inability to keep pace with the company's growth, and executives have implemented a plan to improve subscribers' experiences.)

Hook says SunRocket can offer lower prices partly because it spends a lot less on marketing than Vonage, which spent close to $250 million in marketing last year on revenue of about $270 million.

"We have 150 employees, and I make them stand on street corners with sandwich boards," jokes Hook. (In reality, the company uses direct mail and Internet advertising to promote its service.) She says SunRocket as the newer entrant also benefits from lower equipment costs now that more manufacturers are making gear for VOIP services.

SunRocket executives are quick to give Vonage credit for pioneering VOIP services, and why not? Vonage isn't SunRocket's real competition. Nor are the free or almost free computer-based services such as Skype and Google Talk.

No, the real competition for SunRocket (and Vonage, for that matter) are the cable and phone guys who have existing relationships with consumers and boast big brands that resonate with risk-averse consumers. And for the tech luddite that SunRocket hopes to reach, the idea of buying a simple bundle of services from Comcast or Cablevision or AT&T may seem a lot more comforting than taking a risk on a lesser-known provider.

In essence, Hook is betting against the bundle. She acknowledges that the bundlers will take a big chunk of the 30 million or so VOIP households that are expected by 2009, but that a portion of the VOIP market will go to stand-alone players.

"People are interested in bundles for price reasons, and they are smart enough to pull bundles apart," Hook says. "If an independent (provider) is out there offering either a better product or a similar product at a better price, consumers will chose to buy the better product or the better- priced product."

She adds: "The notion that every one wants everything on one bill is overblown." Her investors and Vonage's shareholders, for that matter are hoping she's right. Top of page

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