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May 06, 2005

As the Phone World Turns Part 8 – Vonage Strategy

Unlike Skype which used “free” service to build a valuable closed network, Vonage has had a revenue-generating model from the beginning.  The strategies of these two VoIP heavyweights couldn’t be more difficult.  Each successfully (so far) targeted a different market.  However, within the next year I expect to find them in full-blown competition to wean residential customers from the traditional carriers.

Because initial Skype subscribers could only talk to other subscribers, the service had very little value until there were many subscribers.  That’s why it had to be free to get to critical mass.  Vonage subscribers, on the other hand, have always been able to use their Vonage service to call any phone in the world.  Vonage’s prime appeal from the day that it started has been lowering the cost of calling the people you are already calling.

Vonage uses a subscription pricing model.  Unlimited calls to the United States and Canada are available for $24.99/month plus a few dollars in annoying add-on fees.  A “basic” plan includes 500 monthly minutes for $14.99/month.  Vonage provides the equipment required to connect the phones in your house to your broadband service so that you can use your existing phones to make or receive calls the way you have always made or received them.  Your computer is not involved in these calls although the Vonage web interface is very useful for configuring service options like voice mail.

Vonage’s low price also includes caller ID, call waiting (if you want it), call forwarding, and voice mail – features that traditional phone companies usually charge extra for.  Please note that I am using Vonage as the poster boy for this business model because, with over 600,000 lines  activated, it has been the most successful company in the US at implementing it.  Vonage’s many competitors including offers from Verizon, AT&T, and Primus have similar features at similar prices.

Calls between Vonage subscribers no matter where in the world they are located are “free” but this has not been a primary selling point for Vonage.  Offnet calls outside the US and Canada by North American subscribers are charged usually reasonable per minute rates. 

Initially, a Skype subscription did you no good if you didn’t know anyone else with Skype because you would have no one to talk to.  But, even if you are the first person you know who has Vonage, the Vonage subscription immediately saves you money on calling all the people you know with ordinary landline and wireless phones and on call handling features like voice mail that traditional carriers traditionally overcharge for.  These economics do depend, however, on the fact that you already have broadband Internet access because you want it for other purposes.

From the beginning Vonage has been in head-to-head competition with traditional carriers.  I suspect that most initial customers did what we did and kept a single line from their local phone company for their alarm system, satellite TV, and 911 service -  except for younger customers, of course, who never had a landline to begin with and consider their cell phones primary.  Even though we kept one line with our old number, we quickly saved over $50/month by switching to Vonage.  We call-forwarded this phone to Vonage so we could drop Verizon voice mail and other features.

As Vonage matures, however, there is less and less reason to keep even a single traditional line. With more or less difficulty, your phone number can be ported to Vonage.  Vonage has recently announced a deal with one alarm company and it is possible to configure Vonage to work with most alarm services and with Tivo.  Vonage has been providing e911 service for a while and just announced a deal with Verizon to make this better.  Vonage reliability, although not as good as traditional phone companies, has improved and is good enough for most residential use – especially in an age when we’re carrying mobile phones anyway.  Vonage customer support has gone from OK to sucks to OK again as Vonage has apparently now staffed to deal with a flood of new subscribers.  Most changes to your service – call forwarding numbers, for example, or the number of seconds to wait before sending a call to voice mail – can be made WITHOUT a call to customer service.

Vonage has made a successful initial foray into the “traditional” phone market based on price.  So far most of its customers are technically savvy early adopters.  To build on this success, Vonage will need to keep its initial customers – those who came for price can leave for price as well – and broaden its appeal to those who don’t think plugging a new box into their Internet connection is a fun thing to do with an afternoon.

Here’s the VoIP heavy weight score card so far:  In this corner is Vonage with over 600,000 lines GENERATING RECURRING REVENUE.  In that corner is Skype with over THIRTY-FIVE MILLION registrants, most of whom have paid nada to Skype although over a million and a half SkypeOut users have prepaid at least once to make outbound calls. More to come on the upcoming battle as well as other heavyweights like Sofbank in Japan.

I’ve already blogged about some of the Vonage features which do distinguish it from traditional phone service and about the value of having “local” numbers in different locations as provided by Vonage and now SkypeIn but I’ll reprise and update some of that in a future post.  I’ve also blogged about the downs and ups of Vonage service.

The first post in this series is everything you ever wanted to know about legacy access charges.

The second is about the cost of “free”.

The third explains Metcalfe’s Law of network value.

The fourth is about how Skype built huge network value.

The fifth is about Skype’s first paid service SkypeOut.

The sixth is about SkypeIn which makes Skype users callable from the outside world.

The seventh is a summary of Skype features.

The ninth asks whether we need phone companies.

The tenth asserts that we won’t need traditional mobile carriers either.

A related post contains a very short abstract of what Skype founder Niklas Zennstrom said at VON (Voice On the Net) Canada and a way to download the slides of my talk there.

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