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VoIP providers face price war

The race for customers is leading some companies into a risky game of chicken. But how low can they go--and for how long?

Networking
Internet telephony companies already offer major cost savings over traditional telephone services, but now they're challenging one another for the title of cheapest of the cheap in an increasingly brutal battle for customers.

After nearly seven years on the fringes, so-called VoIP (voice over Internet Protocol) technology is ready to move into the mainstream. But as the market has matured, it's drawn a crowd of competitors, tempting some into a dangerous game of chicken.

"It's a little like early DSL mentality, where people are going out and losing their shirt just to get eyeballs."
--Mario Bustamante
Chief executive, DSLi
"A lot of people want to grab users, even if you don't make money," said Mario Bustamante, chief executive of broadband provider DSLi, which last month launched a stripped down $10-a-month VoIP plan. "It's a little like early DSL mentality, where people are going out and losing their shirt just to get eyeballs."

Some VoIP services are free, but they generally work only for calls between computers that have the same software installed. The current price war is erupting among VoIP providers with services that let callers seamlessly connect from an ordinary telephone handset to any phone number around the world.

Two years ago, such plans offering unlimited local and long-distance dialing within the United States to residential customers typically cost a flat rate of $45 a month or more. Now some providers are selling these services for less than half that price, although the industry average remains significantly higher.

Few plans include flat rates for international calls, which can typically be purchased by the minute at a discount to traditional phone carrier rates.

News.context

What's new:
As Net-based phoning enters the mainstream, providers are slashing prices to grab customers, with some offering calling plans for as little as $10 a month.

Bottom line:
Though customers may have it good for now, many say the low prices can't last--they're getting dangerously close to dropping below what it costs operators to run their services.

For more info:
Track the players

Vonage and Cablevision's Optimum Voice have settled on the industry average of about $35 a month for their standard residential plans, which include unlimited dialing in the United States. But broadband providers hoping to lure new customers by bundling voice dialing into their high-speed Internet offers are quickly pushing prices down.

Two weeks ago, Newton, Mass.-based broadband provider Galaxy Internet Services set a new standard for dialing plans offering unlimited long-distance and local calls by dropping its monthly fee to $20. The package includes unlimited dialing in the United States, plus voice mail, call waiting and call forwarding, among other features.

The monthly prices get even lower when VoIP providers strip away features, limit calls to one geographic area, or include buckets of minutes.

VoIP provider VoicePulse has a $15-a-month plan for unlimited local calling, while 8x8 offers unlimited dialing to any phone in the United States and Canada for $20 a month.

At $10 a month, DSLi's plan offers nothing but a phone number. Subscribers can't answer incoming calls, which are instead shuttled off to voice mail. Dialing out costs from two cents to 24 cents a minute, depending on where the call ends up.

These VoIP-like calling plans will be replicated by offerings from other lower-tier broadband providers, said a representative for Broadsoft, which is supplying the VoIP service DSLi is selling.

The representative said Broadsoft is in talks with various other broadband providers and expects them too to match the DSLi offer and price.

"You'll be seeing more of this," the representative said.

The dropping prices are also affecting the higher-quality services that VoIP providers now sell to smaller businesses, a crucial market for any provider hoping to wedge its way into the world of corporate spending. Smaller companies are nimbler in terms of technology and are usually the first to try cutting-edge gear. Six weeks ago, Vonage dropped the price for its business plan from $60 to $45 a month. That matches a similar offering from VoicePulse and other providers.

Whether these price cuts have the desired effect of converting old-fashioned dialers remains to be seen. There are only about 100,000 residential VoIP subscribers in the United States, and few services give details of subscriber numbers. Vonage, which recently reported 54,000 customers, is widely believed to be the biggest provider at the moment.

How low can you go?
It's unclear how far VoIP companies can go in cutting prices further.

Some industry insiders said the current average brings charges dangerously close to total per-customer expenses per month, including billing, marketing, customer service and connection fees with carriers that allow subscribers to dial traditional telephone company customers.

"Anything lower than $35 will have to be temporary," predicts Ravi Sakaria, president of VoIP provider VoicePulse. "I don't think that you can sustain prices much lower than we are now."

Sakaria has got some industry analysts on his side. "It does seem like it would be tricky for any provider to have a nationwide unlimited calling plan for under $30 a month," Jupiter Research telephone analyst Joe Laszlo said.

Others said they believe prices will likely stabilize following the latest round of cuts, but said there may be room to cut prices again down the road.

Meta Group Vice President David Willis said a theoretical bottom for unlimited local and long-distance VoIP dialing is about $22 a month, based on estimated expenses.

"They don't want to get to that level yet, its just too dangerous," Willis said.

Vonage Executive Vice President Louis Holder said the price could go lower, although not for a while. "We expect to drop prices over the next few years, but we can't give it away for free," he said, noting that Vonage cut its prices for unlimited local and long-distance dialing to $35 a month about two months ago.

Much of the pricing question rests in Washington, D.C., where a debate is ongoing about whether VoIP providers should as traditional phone companies. Currently, Willis said, VoIP providers pay an average of a half-penny for every minute they serve to customers. That price could double if regulatory fees, such as contributing to paying for 911 call centers, are added. To survive, VoIP providers would have to pass on these new costs to customers.

"What's happening in Washington right now will go a long way in deciding this question," Willis said.

Holder said pricing is also tied into how much traditional phone companies are charging their VoIP-provider customers for the right to use their networks. By entering into such agreements, VoIP subscribers can reach regular landline phone companies, a feature that's becoming de rigeur in the industry. Those so-called "connection fees," based on a price per minute formula, are dropping as well.

"VoIP really follows the telephone companies," Holder said. "As they lower their prices, we can lower ours."

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