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Summary:

You can already hear the popping of champagne corks, as Baby Bells prepare to celebrate the self-destruction of the VoIP independents. Just when the voice-over-IP providers should be fighting tooth and nail with the baby bells, I see signs of familial discord that could jeopardize the […]

You can already hear the popping of champagne corks, as Baby Bells prepare to celebrate the self-destruction of the VoIP independents. Just when the voice-over-IP providers should be fighting tooth and nail with the baby bells, I see signs of familial discord that could jeopardize the future of the fledgling technology. In case you did not notice, AT&T and Vonage have gotten into a scorched earth fight, cutting prices and trying to hang-on to each other’s customers. Ouch!

Here is what Aswath has to say: AT&T previous promotional plan was $20 for the first 6 months. Today’s announcement terminates that program, but gives the first month free. So both the old plan and the new plan will generate $330 in 12 months. So this announcement doesn’t cost AT&T much, indeed it increases revenue in the short term; but forces Vonage and others to take a hit. Smart move, I would say.

AT&T announced that it was cutting prices to $30 a month, and Vonage countered by cutting unlimited calling to $25 a month. Is this indiscriminate price cutting the right strategy? Is this the time to sacrifice the revenues, when each one of the VoIP providers needs every single penny to lure newbies to the VoIP world? I don’t think so, and much as they would like to spin it, both AT&T and Vonage are going to suffer. Clearly, AT&T has more money to burn, and it would not surprise me to see them lower the prices even further, as they try and muscle out the small players.

When I wrote, my essay, Telecom’s Death Spiral, this was one of the scenarios I had envisioned. I think it is just the start, and things are going to get really ugly. “The low barriers to entry makes the business all the more competitive and currently all players are competing on price with very little differentiation,” UBS analyst John Hodulik said in a research note. I clearly hear an echo here, but do you!

And if that is not enough, Michael Robertson and his SIPphone are suing Vonage. SIPphone has filed a suit on “behalf of customers falling victim to deception around Vonage’s VOIP phone service.” The complaint filed in San Diego Superior Court accuses Vonage of unfair competition as well as false advertising. “Vonage is crowding out legitimate companies with deceptive advertisements for low cost crippled Internet calling devices while keeping secret that they will function only if hundreds of dollars of fees per year are paid,” says SIPphone CEO and founder, Michael Robertson. (Read the entire complaint here.)

What’s so interesting is Michael excluded Linksys, and in reality all the manufacturers of TA’s. Why? Because Vonage is a hot topic now and Michael relishes in attention that others can generate for him. While his pursuit is noble, the media coverage alone for SipPhone is worth the price of filing the lawsuit. (Andy Abramson’s VoIP Watch)

This is clearly going to create a lot of problems for Vonage, and of course pose some serious questions about the industry. This bickering in the VoIP community comes at the wrong time – Verizon, SBC and BellSouth – all are getting pretty serious about VoIP. Bells have a more careful approach to business: once it becomes big enough, and when the pesky upstarts are all done spending their money, they swoop in and feast. I have seen this movie before….in the 1990s it was the DSL providers who went down the same path as the one taken by VoIP providers, straight to bankruptcy court.

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  1. It is interesting to note that for all the publicity AT&T is receiving on this news, when it is not going to impact the first year revenue (20×6+35×6 vs. 30×12-30).

  2. Aswath I agree… but I think for the sake of readers, elaborate.

  3. AT&T previous promotional plan was $20 for the first 6 months. Today’s announcement terminates that program, but gives the first month free. So both the old plan and the new plan will generate $330 in 12 months. So this announcement doesn’t cost AT&T much, indeed it increases revenue in the short term; but forces Vonage and others to take a hit. Smart move, I would say.

  4. Om, I should know this, but what is Vonage’s hard cost for terminating calls at this point? If I make 1,000 minutes or 5,000 minutes of calls a month, they have fixed fees, sure, for maintaining equipment, relationships, staff, all the overhead stuff. But I don’t know if they pay a penny a minute for termination or 5 cents a call or what have you. Or, if they’re totally exempt.

    I currently have the local unlimited, which was just bumped to premium at the same price under this price change, and I actually don’t use the service very much because of a weird DSL problem. I’ve been tempted to cancel, but now I’m thinking I should just make it work!

  5. Glenn, this reply is not based on knowledge, but only deductions based on observation. I think only a handful of Egyptian high priests, sorry FCC focused lawyers, know the correct answer.

    Currently these service providers pay any termination charges. That is why AT&T petitioned to FCC that they need not have to pay termination charges even for PSTN calls if they carry it as VoIP. In any event we can bound the total cost (transposrt and termination charges) by looking at Skype’s charges and calling cards that are available to PSTN users – about 2 cents per minute. On top of this, Vonage et al have another source of income – termination charges for incoming calls – that are not available to Skype.

    Rationalization of settlement charges is going to be a “disruptive” event for this industry.

    At least that is the view of a 4 dimensional world by a three dimensional man.

  6. ahhhhhhhhhhhh, the ole “”TERMINATION”””” end game user and VOIP??????? Riddle me THIS:::::::: “”””What does VOIP, Sprint Dial up, Level3 Dial up, and TERMINATION all got in common?””????????????
    http://biz.yahoo.com/ap/041001/level_3_sprint_1.html

    FOLLOW the Breadcrumb trail my freinds…………COX will show you how to CONNECT THE DOTS”!!!!

    Skibare

  7. Om Malik on Broadband : » SIPphone Announces $6.0 Million Venture Capital Investment Tuesday, February 14, 2006

    [...] “There is no doubt that the price of voice calls is headed towards near zero, and companies like us need to make money off premium services and features that consumers are willing to pay for,” says Robertson. [ Read: The great VoIP implosion.] SIPphone is going to announce a new “premium offering” later this week. Robertson, who previously had started MP3.com, says he is working on creating a private label business for SIPphone as well, and is already powering a low-cost calling service called iPhox. SIPphone was rumored to be in talks with News Corp, for adding voice functionality to MySpace.com. There were rumors of a $50 million buyout offer from Rupert Murdoch. While those talks haven’t gone anywhere, this new round of funding will give SIPphone the runway it needs to get market traction. [...]

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