Internet phone fee cut by 2 providers

Vonage, AT&T reduce monthly charges by $5

`The price war has begun'

October 05, 2004|By KNIGHT RIDDER/TRIBUNE

Drops in pricing for two major Internet phone services signal the start of a price war as providers struggle to attract consumer attention, according to some analysts.

The rate cuts raise the question of whether anyone will ever make money selling Internet-phone service, which is also known as voice over Internet protocol, or VoIP. But AT&T Corp. and Vonage Holdings Corp., the two providers who slashed monthly fees by $5, have differing takes on whether further cuts will be necessary.

"We think it's probably pretty much bottomed out," AT&T spokesman Kerry Hibbs said. "We can't go down $5 every month."

Vonage spokeswoman Brook Schulz, meanwhile, says future adjustments are probable. "This is our fourth price decrease since inception, so it's a pretty regular thing for us," she said. "As we scale up, anything's possible."

Late last week AT&T said it would cut its monthly charge to $29.99, and Vonage countered by speeding up announcement of a planned reduction to $24.99.

Both services offer unlimited local and domestic long-distance phone service with advanced features, such as call forwarding, which are managed over a customer's broadband-connected computer.

Vonage, which has pioneered commercial applications for VoIP, has reduced its charges twice this year by a total of 30 percent.

The leader in this fledgling market with about 275,000 customers, Vonage now charges $14.99 a month for 500 minutes of local and long-distance calls throughout the United States and Canada. The company's $24.99 monthly plan is for unlimited calling in the same region and is similar to the AT&T CallVantage plan that is available in 170 U.S. regions.

AT&T has not released VoIP subscriber figures.

Cable companies, VoIP specialists such as Vonage and established telephone service providers are attempting to attract Internet phone customers. The quality of voice transmissions is varied, and it often falls short of that available in cellular plans. And, analysts said, for a large segment of the population the technology is confusing.

VoIP requires a computer with a broadband connection and some additional hardware, but because voice traffic is treated like data, the service can be provided much more cheaply than on traditional land lines.

"Right now it's really for a more advanced technological person," said Bill Hardekopf, head of the phone-rate comparison Web site SaveOnPhone.com.

"There are a number of people who still don't feel comfortable on a computer," he said. "This will never be for them. But I think in the next five years it will become a very significant plan in telecommunications."

Those most attracted to current VoIP options are traditional phone service customers who make a high volume of long-distance calls each month, said Vamsi Sistla, an analyst with ABI Research. "Consumers want it, but they're not completely confident about the technology," he said.

As a result, VoIP companies will have to continue to reduce prices to tempt consumers to give them a try, Sistla said.

ABI Research estimates that VoIP rates could drop from 2 percent to 6 percent each year, and Sistla predicted another reduction before Christmas.

"The price war has begun, and it was to be expected," Sistla said.

The actual cost of providing the service is far lower than VoIP services are currently charging, he says. As subscriptions increase, rates can drop substantially, he says. Meanwhile, traditional phone service prices are rising.

At some point, Hardekopf says, VoIP service will become attractive to a wider range of consumers, who will perhaps consider using VoIP in addition to cellular and land-line service.

"Some consumers will love it, but most will still want to have a low-priced long-distance plan in their arsenal of telecommunications options," Hardekopf says.

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