An Advantage for Vonage? VoIP Rival Rides Cable Pipe


Washington— Jagger Kaye, a stage and television actor living in Jersey City, N.J., wanted to trim his hefty monthly phone bill.

Six weeks ago, Kaye found a budget-friendly phone service: a company named Vonage Holdings Corp. A private startup based in Edison, N.J., Vonage offers a form of voice-over-Internet protocol telephony that hives off the investment and technology of cable operators and digital subscriber line providers, without the permission of the network owners.

Kaye pays $39.99 a month to call anywhere in the U.S., including Hawaii and Alaska, for as long as he wants. Included are numerous features, such as caller ID, call waiting and call forwarding. International calls cost extra, but come at rock-bottom prices: Try Sydney, Australia, at 6 cents per minute.

Although 911 emergency service is not yet available, Vonage offers a feature that Kaye especially likes: area-code selection. Though Kaye is based across the river in the Garden State, many of his social and professional contacts live in Manhattan, using 212 and 646 area codes. Vonage issued Kaye a 646 area code; now those in Manhattan can reach him by making just a local call.

As for service quality, Kaye says he has no complaints with the clarity of the voice on the other end. However, people calling him on cell phones often say Kaye's voice can sound loud and tinny. "I don't notice anything on my end," he said.

Kaye's telephonic bliss would have been impossible without Comcast Corp. and the cable operator's high-speed data service. To access the Vonage service, Kaye plugged his cable-modem line into a router and then connected the router to a media terminal adapter. The MTA connected to the phone with standard jacks and wires. The setup takes just a few minutes, sans the need of a technician.

Using Comcast's broadband service as a raw telecommunications input, Kaye became an IP-telephony pioneer. He dropped his local phone company, Verizon Communications Inc., and, as planned, slashed his phone bill.

The combined monthly price of his Comcast broadband service and his Vonage phone service, about $85, is 50 percent less than what he was paying alone for monthly phone service — local and long-distance combined.

With the purchase of a $49 router to go with the $200 MTA that Vonage provided for free, Kaye said he can surf the Internet and talk on the phone at the same time, without degrading the quality of either service.

"You don't notice a difference whatsoever," said Kaye, who spends about 3,000 minutes on the phone each month.

And if the cable-modem network goes down, Kaye won't miss a call. Vonage automatically forwards his calls to another number for later retrieval.

Next battleground

Vonage was founded by Jeffrey Citron, who has a history of using Internet technology to disrupt the status quo while tapping into lucrative revenue streams. Citron became a millionaire many times over after creating and selling the online trading firm Datek Online and the electronic-trading system Island ECN.

Citron's latest technology gambit appears to be a bold attempt to capitalize on the broadband investments made by cable and phone companies. Over the last few years, cable operators have fought attempts by government to require carriage of unaffiliated Internet-service providers.

Although some claimed cable feared the competition, MSOs said ISP access issues were technologically complicated and better left to the private sector. In the courts and before lawmakers and regulators, cable has largely prevailed over the ISPs.

In the view of some, IP telephony providers such as Vonage represent the next regulatory battle for cable operators that want to jealously guard their bandwidth. Right now, the threat is small. Vonage, which launched nine months ago, has enrolled just 7,000 subscribers in 32 markets, half of them cable-modem subscribers.

In the cable-ISP debate, cable holds the upper hand in the sense that ISPs need some kind of business relationship with an operator in order to reach subscribers.

But Vonage can evidently dodge a reprise of the cable-ISP fight, because its relationship is with end users. The company said it does not need to cut access deals with cable operators to serve IP-telephony subscribers.

Cable concerns, connections

Since 1996, cable operators have spent about $1,000 per subscriber to digitize their networks and enable broadband services. MSOs have always feared both regulations and services that would effectively transform their networks into dump pipes.

Vonage appears to be a dump-pipe making technology, in that IP telephony providers can get a free ride on cable networks and target the very customers to whom cable hopes to someday market its VoIP services.

"I don't have a direct relationship with Comcast," said Vonage CFO John Rego, a former vice president of finance of RCN Corp., the cable overbuilder. "My relationship is with the end user."

David Andersen, spokesman for Charter Communications Inc., said that for technical reasons dealing with cable-system data management, Vonage cannot expect to maintain service quality and build a customer base without a partnership with Charter.

Vonage spokeswoman Brook Schulz, though, insisted the company's technology can thrive on its own.

"We built a system that works today over the existing infrastructure, and if we were to partner with an MSO it would not be for technological reasons, but for marketing advantages," Schulz said.

On Dec. 31, Needham & Co. analysts Anton Wahlman and Brian Coyne, in a research report, called Vonage a form of "guerrilla IP telephony" that should be able to form cable alliances relatively soon.

"In 2003, we believe that we may see companies such as Vonage partnering with cable operators such as Advance/Newhouse that want to deploy telephony, but are not interested in much up front investment," Wahlman and Coyne wrote. Cable-Vonage deals would pose a serious challenge to phone companies that don't offer cable TV, the report added.

Still, cable companies have the technical means to terminate Vonage's access. But Rego said such a move would be akin to cutting off access to electronic-mail or streaming-media providers.

"No one has done it yet. I just don't think it's going to happen. I think the public outcry would be huge," Rego said.

Comcast spokeswoman Sarah Eder said the company did not have a lot to say about Vonage at this time.

"We are aware of it. Comcast high speed customers can use this service," Eder said.

National Cable & Telecommunications Association senior vice president of communications Rob Stoddard referred questions about Vonage to individual cable companies.

FCC focus

Cable's decision to say little about Vonage could be related to activity at the FCC. Microsoft Corp., and the Walt Disney Co., have called on the agency to impose broadband nondiscrimination rules on cable operators.

In theory, those rules would bar cable operators from using network control to drive broadband subscribers toward affiliated content providers.

Blair Levin, a media and telecommunications analyst with Legg Mason, published a report last month predicting the FCC would ultimately adopt nondiscrimination rules. But Levin said the FCC was not in any hurry and would act with caution.

"This currently obscure debate is just starting," Levin wrote. "We believe this network-access question may be the most important and overlooked issue potentially on the FCC agenda."

Apart from deciding the cable-Vonage relationship, the FCC also has to come to grips with a regulatory classification matter: What is Vonage under federal law? Is it an information service or a telecommunications service?

For now, Vonage is effectively an unregulated information service. As a telecommunications service, Vonage would likely have to shoulder a mountain of common-carrier regulations, including contributions to the federal universal-service funds and per-minute access charges levied on calls which terminate on the networks of other phone carriers, mostly likely the Baby Bells.

"It's certainly helpful that we don't have to deal with all of that right now," Vonage's Rego said.

The only regulation that Vonage currently complies with is the 3 percent federal excise tax. Vonage collects the tax each month from customers out of an abundance of caution, even though the Internet Tax Freedom Act likely exempts IP telephony providers from the tax, Rego said.

Although per-minute charges are normally the death of flat-rate pricing plans, Vonage claims it could still compete against the Baby Bells if it were regulated as a common carrier.

"We think we still would be able to beat them out on feature sets and service. It would be on slimmer margins, but we could still do flat-rate pricing," Rego said.

And Vonage's happy customer in Jersey City — Jagger Kaye — certainly doesn't want to see regulation undermine his new phone service.

"To cut companies like Vonage off at the knees would be counterproductive. They can always regulate it later," Kaye said.