Vonage’s decision last week to cut the monthly price of its unlimited calling package by $5 to $29.99 may spark a price war in the Internet telephone business.
While no operator has said it would reduce prices on nascent voice-over-Internet Protocol phone services — which cost subscribers about $35 monthly — Cablevision Systems Corp. chief operating officer Tom Rutledge said the MSO could cut the $34.95 monthly subscription fee for Optimum Voice and still maintain a profit margin with the service.
“From a price opportunity perspective, there is significant margin in the VoIP business that we have established, so we have to be willing to change our pricing,” Rutledge told reporters at a Cable Television Laboratories Inc. event in New York last Tuesday when asked about the Vonage price cut.
But Rutledge added that Cablevision’s “goal is not to get into a commoditized price war.”
When Vonage debuted in April 2001, it marketed the Internet telephone service to cable-modem and DSL customers for $40 monthly. Last year, it cut the rate to $34.99 for unlimited local, regional and long-distance calls.
Vonage now counts about 155,000 customers, with 60% running the service off of a cable modem, according to vice president Phil Giordano.
A handful of small cable operators and telephone companies — including Armstong Cable and Mid-Hudson Cablevision — have cut deals to market Vonage to their subscribers in exchange for a cut of monthly phone revenue. But Time Warner Cable and Cablevision have opted to deploy the service on their own, and Comcast Corp. is planning a nationwide rollout of Internet telephone service in 2005.
Giordano said Vonage decided to reduce its price for two reasons: its costs for terminating calls have decreased, and the company wanted to take a leadership position in driving the market for Internet telephone service.
“We look at Vonage as being the leader and we’re setting the standard,” Giordano said. “If you’re a cable company, Vonage has set the standard on what the retail price is going to be.”
If MSOs respond by matching or undercutting Vonage’s new $29.95 monthly fee, the company may cut its price further, according to Giordano. But he said the company currently has no plans for a further rate reduction.
While Vonage has failed to secure distribution deals with major cable companies, the company believes it has forced operators to accelerate their own VoIP rollouts.
Some cable executives have acknowledged that Vonage has drawn attention to Internet phone service. “Vonage is interesting because they’re creating a market, and competition in that sense is very good when it helps to create a market,” Time Warner Cable vice president of engineering and technology Liliane Zreik said last week at the CableLabs briefing.
Zreik maintained that Time Warner Cable’s Digital Phone service is better than Vonage’s. She noted that, while Vonage phone calls are transmitted over the Internet, Time Warner Cable has more control over the quality of its phone calls since they are sent over its own network before being routed through telephone interconnects.
As of March 31, Time Warner offered its Digital Phone service in seven divisions: Portland, Maine.; Raleigh and Charlotte, N.C.; Rochester, N.Y.; Kansas City, Kan.; Western and Columbus, Ohio. An additional seven divisions launched the service two weeks ago, according to Zreik.
The MSO’s Maine division, the first to launch the phone product, now counts 15,000 Digital Phone subscribers and has penetrated 10% of homes passed in the market. Zreik said about 75% of the phone customers also subscribe to digital video and high-speed Internet access, and 80-85% of the customers have ported their local phone numbers to the Time Warner service.
The MSO would like eventually to add new features — including the ability to check voice mail through the television — and is considering an a la carte price model for the phone service.