AT&Ts VOIP Rollout Heats Up Price War

While the telecom giant's push into the market raises VOIP's street cred, its aggressive service pricing may drive startups over the edge, analysts say.

AT&T announced June 30 that it is rolling out its consumer VOIP service in 10 more markets. The company also lowered the introductory price of the service to $19.99 a month, pitching it squarely against startup providers such as Vonage and BroadVoice.

The AT&T brand gives a great boost to VOIPs credibility among consumers, said Jon Arnold, a VOIP market analyst at Frost & Sullivan. "The more people who have a choice of [using] AT&T [VOIP], the faster this market can grow," he said.

"When youre the consumer and youre getting all these fliers and TV ads and pop-ups from all these VOIP offers, it creates confusion that makes average customers more likely to default to the name they know."

If brand awareness matters more than technology or being first to market, as Arnold and many others believe, AT&Ts VOIP service may have the best survival prospects for the long term. "The scary part is, theyre discounting so quickly," Arnold said.

"Its turning into a price game right off the bat. That kills the value proposition of what VOIP really is. Anybody can do cheap voice; thats just a commodity. The real power of IP is multimedia–data, video–all that on your PC. Thats the fun stuff."

David Epstein, president of VOIP provider BroadVoice Inc., has more faith in the telecom consumers–and particularly the broadband consumers–willingness to try something new.

"Dont underestimate todays broadband consumer," Epstein said. "People do not believe in a brand just because. People are doing a ton of research with a few mouse clicks; people are talking to their peers." Epstein said he sees AT&Ts efforts as a boon to the VOIP market as a whole. "The dollars spent by AT&T are a wonderful thing for the VOIP community," he said, "since its driving people to the Internet–where they research AT&Ts offer and look for alternatives. Keep in mind that most of the folks looking for a VOIP service want to get away from Ma Bell, not run back to her."

Arnold and many others who track the VOIP industry, including Denise Grey of Verso Technologies Inc. and Robert Rosenberg of Insight Research Corp., have noted that the barriers to entry among VOIP service providers are now very low–about half a million dollars to provide voice service to consumers who bring their own broadband access. But the days of many startups may be numbered–again.

"The hard and expensive part is customer acquisition," Arnold pointed out. "Does it pay for me to spend $200 to acquire a customer whos only going to give me $100 of revenue per year? Thats not a good business model. "

"Right now, the market is going to have to go through this price phase, where prices drop until they cant go any lower, people are driven out of business, and no ones making any money." Only then, he said, will the survivors differentiate on services—making the power of VOIP more of a driver. "Its disheartening to watch, but its inevitable."

/zimages/2/28571.gifClick here to read about AT&Ts trials of a global VOIP service.

Arnold added that AT&T is motivated not so much by the chance to offer new services but to find a more profitable way to reach customers in the face of steep line-access fees from the regional Bells.

The latest U.S. Solicitor Generals Office ruling decided that the RBOCs (regional Bell operating companies) no longer had to rent their local loops to competitors at discounts. "When the RBOCs wanted to ease into the long-distance market, that was OK," Arnold said.

"So now, of course, the long-distance guys like Sprint and AT&T are free to go into the local-access market. But if the latest rulings make it unprofitable for AT&T to do that, why should they bother? Theyll bring VOIP to the marketplace, because thats the only way they can make money at it."

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