Cable operators looking for a "proof of concept" for voice over Internet Protocol need look no further than Vonage, the upstart VoIP provider that's generated 75,000 VoIP subscribers since its launch in April 2002.
The allure is simple for Vonage's cable and DSL modem subscribers: buy a $34.99 monthly service for unlimited local and long-distance calling anywhere in the United States.
Any high-speed subscriber whose local and long-distance phone bill combined is more than $35 is an attractive target for Vonage.
MSOs have taken notice. Part of cable's push into VoIP can be traced to the success of Vonage, in addition to the maturation of the technology and the need to have a bundle to compete.
Several RBOCs are planning to get into the VoIP business, too. Qwest Communications has targeted Minnesota, Verizon Communications has discussed launching in several markets early next year, and SBC Communications plans to offer business VoIP services.
Vonage is the brainchild of Jeffrey Citron, who as founder of Island ECN saw the natural link between high-speed data subscribers and telephony service using that Internet platform.
Citron founded Vonage in early 2001 and aimed to launch VoIP in vertical markets. That spring, Phil Giordano joined the company as vice president, national cable/MSO accounts, charged with reaching into the cable universe.
Giordano had worked for Advance/Newhouse in the old Vision Cable Fort Lee, N.J., system and also in sales at Telcordia.
Although Vonage held extensive talks with MSOs in early 2002, it decided to launch on its own, directly to consumers, in April 2002, Giordano said.
"A lot of the cable guys weren't ready to deploy voice," he said. "They weren't sure of the package. We knew our service worked and we wanted to get into the market. That gave us the experience and gave us credibility."
Vonage is pursuing three business models. One is going directly to consumers, most evident by the national TV ads that the company is airing.
Vonage also works with retailers, including Amazon.com, Best Buy and Radio Shack, where consumers can buy a preprovisioned router/switcher/modem that plugs into the homeowner's existing telephone and either their cable or DSL modem.
The third avenue sees Vonage wholesale the service under a private label. For instance, Earthlink's VoIP service uses Vonage's backend. That's similar to the arrangement Vonage has with Armstrong Utilities. Giordano has said several more MSO deals will be announced in the next several weeks.
"The private-label package is a turnkey solution, and can be up and running in 60 days or less," he said. "Vonage does everything — the provisioning, fulfillment, customer care and billing [if the customer desires]. This is a zero capital and operational expense and very low risk. This allows an Armstrong to hit the marketplace very rapidly and they can automatically go into their operation right away under their brand name."
Armstrong is marketing its VoIP under "ZoomPhone," but carries the added tagline "Powered by Vonage." That was Armstrong's choice, Giordano said.
But Giordano said Vonage is open to various business plans. MSOs could start under a private-label brand, but control the billing from the outset, or take on billing and customer care after a period of time. MSOs, for instance, might want to package private label VoIP from Vonage with their own high-speed data service.
Giordano believes small and mid-sized cable operators, who are under the gun from satellite and don't have a lot of money for capital expenditures, are prime candidates for Vonage.
How It Works
Vonage's VoIP service runs on existing cable and DSL modem high-speed platforms. The company ships new subscribers a Motorola XT1000 multimedia terminal adapter that also houses a router. "It's a plug-and-play scenario," Giordano said, with consumers plugging the XT1000 into a cable/DSL modem and their telephone handset.
Calls are then routed back through the cable-modem termination system or phone company DSLAM to one of 20 regional gateways Vonage has across the country via third-part links from such companies as Level 3 Communications and Genuity.
Vonage offers two levels of service. For $34.99 a month, consumers receive unlimited local and long-distance calling in the U.S. and Canada, plus call waiting, call forwarding, caller ID, voicemail, *67 and *69 service.
For $24.99 a month, subscribers can chose one area code to get unlimited calling, plus 500 minutes a month of call time. Any calls after the 500 minutes costs 3.9 cents per minute.
That scenario works for a telecommuter or a family that calls often to a select location where a relative may be, such as a college student or grandparent.
Of Vonage's 75,000 subscribers, 65% are cable-modem users, and 35% are DSL subscribers, Giordano said. About 60% take the $34.99 a month plan, while the remaining are on the $24.99 plan, he said.
The company plans to add yet another, lower-priced option, economy basic, for customers who don't make a lot of phone calls. New service in Canada and one European country are also in the works, Giordano said.
DSL subscribers have to keep their phone line, but 25% of cable subscribers actually get rid of their landline phone line, Giordano said, typically after a few months of service once they know it works. "Within the first 90 days, 25% of the people who can will port their phone number and get rid of their phone line," he said. Vonage also offers local-number portability, so consumers can keep their old landline phone number.
Vonage also offers two business service plans: an unlimited calling $49.99-a-month service that also includes 500 minutes of free fax line time and a $39.99-a-month service where a business receives 1,500 total minutes and 500 free minutes of fax line service. Business customers make up 18% to 20% of Vonage's subscriber count, he said.
Churn, according to a UBS Securities report, runs at 3% a month, but customers who have Vonage for six months only churn at a 2.1% rate and with those on for 12 months, churn drops to 1.8% a month.