AT&T Net phone disappoints

It's got 53,000 subscribers after millions were spent on marketing.

AT&T's Internet phone service, CallVantage, had a paltry 53,000 subscribers at the end of 2004--a lesson in how millions of dollars in marketing and a well-known brand name don't always guarantee success.

AT&T has been famously guarded about divulging its CallVantage subscriber numbers, until it did so in a recent Securities and Exchange Commission filing. In the filing, the company said the results are due to an AT&T decision in July to stop mass-marketing services to consumers, the result of an increasingly harsh regulatory environment.

The long-distance telephone provider pulled no punches when it introduced CallVantage in March 2004. Last year was to be the "Year of The Giant," AT&T crowed at a major Internet telephone show, at which it trotted out seven-foot-tall basketball legend Kareem Abdul-Jabbar to drive home its point. A memorable media blitz during the 2004 Summer Olympic Games followed, and AT&T vowed to have a million subscribers by the end of this year.

Analysts don't share the company's enthusiasm at this point. "Without changes, we have doubts concerning the achievability of the 1 million figure," wrote researchers from Halpern Capital.

AT&T spokesman Gary Morgenstern said Thursday that the current tally doesn't reflect the last four months of CallVantage sales, nor subscribers who have ordered the service but have yet to turn it on yet. He added that the company no longer markets this or any other home service.

"AT&T is focused on a rational versus irrational (advertising) spend," Morgenstern said. "We can't justify high cost of (customer) acquisition like some of our competitors. We prefer to be more prudent."

The CallVantage service uses voice over Internet Protocol software that lets an Internet connection serve as a telephone line. VoIP calls are free if exclusively on the Internet, as in PC to PC--or increasingly, from cell phone to cell phone--and typically $20 to $30 a month for unlimited North American calls to cell and landline phones. Such services from commercial VoIP providers and even traditional phone companies like AT&T are about $20 cheaper a month than traditional services from local phone operators, collectively known as the Baby Bells. That's largely because VoIP calls are unregulated.

Top VoIP providers, including cable operators and Vonage, typically have hundreds of thousands of subscribers. AT&T's tally is more in line with lower-tier providers like Lingo or Packet8, which don't have the worldwide brand recognition of AT&T, the original telephone operator nicknamed "Ma Bell."

To AT&T's credit, it has been through a lot in the last 12 months. Government utility regulators eliminated key fair-competition rules that guaranteed inexpensive access to the Bell operators' mammoth local phone networks. That played a large role in AT&T's subsequent retreat from the local phone market and in local phone giant SBC's pending purchase of AT&T for $16 billion.

SBC has told federal utility regulators that CallVantage will continue to operate after the merger closes, which should be this year or next. CallVantage will also likely be a centerpiece for future generations of SBC services, once the carrier's fiber-optic upgrade of its antiquated local phone network is completed, SBC executives said.