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FANTASTIC VONAGE

One Telephony editor braves New Jersey traffic, corporate lunch hour and the nebulous world of voice over IP to determine whether Vonage’s business plan is fantastic or merely the stuff of fantasy.

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The aroma of pizza hangs in the air. “The horn” is about to go off. In a nondescript red brick building about 30 miles southwest of New York City, the year's most talked about and least understood company is about to go on lunch break.

To an outsider, there's no indication that one of the most controversial telecom entities resides within. In fact, the only marking on the outside is a fading Revlon sign. (The cosmetics giant no long makes its home at this place in Edison, N.J., but the Environmental Protection Agency Web site says the location is safe, after some minor cleanup.)

At the designated moment, the air horn sounds and a slow migration of customer service reps makes its way to a makeshift cafeteria, which consists of a table, some paper plates and napkins. It's lunch hour at Vonage, and everything about it screams start-up. Getting a slice of pepperoni is like navigating through mid-town traffic: Grab, dodge, weave, rethink your position, weave, grab again. That also describes Vonage's strategy.

Depending on your vantage point, Vonage is either a smart little company taking advantage of technology to blow apart the most basic assumptions about telecom, or it's a parasite taking advantage of regulatory loopholes and deserves to be extinguished from existence. Therein lies one of Vonage's biggest problems: Vonage doesn't fit into the pre-existing square holes designated for square-peg telecom companies. It's more of a round peg, and it very well could turn into a trapezoid at any given moment.

To the outside world, Vonage is a voice-over-IP carrier providing cheap service to consumers who don't care about the underlying technology. It's also a company that scares telcos that fear it cares even less about the long established rules of the game—like being an active contributor to universal service.

At its core, defenders point out, Vonage is a technology company that provides applications over an IP network. That its only application is voice, though, is where everything starts fading quickly into shades of gray.

Vonage provides voice service by signing up customers via the Web or a retail outlet like Radio Shack or Computer City. The consumer receives a package that includes a router and a Cisco Analog Telephone Adapter (ATA). Plug the router into a DSL or cable modem, connect an Ethernet cord between the router and the ATA, pick up the phone and you have dial tone via Vonage's servers in Edison.

A phone number, supplied by a local CLEC and typically associated with an underused area code in a rural part of the country, is used to route calls to the ATA, which can be used in any location with a broadband connection.

That begs the question of who pays whom for what access charges if you use the traditional telecom model. “I can literally be in a London hotel, making and receiving calls with my Minnesota number to anywhere in the world,” said Lou Holder, executive vice president of product development for Vonage.

From a technology perspective, the company can hardly call itself bleeding edge. The majority of the equipment in its network, which was built off the dynamicsoft platform using session initiation protocol, has been around for several years. And for all the promise of VoIP to bring exciting new applications to users, the only thing new and exciting that Vonage currently brings to the table is a basic Web interface that most users don't need to know anything about.

From a regulatory perspective—where Vonage has been making headlines of late—the company is either a carrier or an information provider. In late October, a federal judge ruled that Vonage's service shouldn't be regulated like traditional telecom, upholding a permanent injunction that prevents the Minnesota Public Utilities Commission from forcing the company to register as a carrier. Unclear is what impact the ruling will have on other state PUCs that are starting to hear an uproar from traditional telcos that feel the company should be treated like any other voice provider—and pay the same fees—regardless of its technology.

In an odd competitive response, Qwest announced earlier this month that it may launch its own VoIP initiative, hoping to prove to regulators that the service can be provided while maintaining the access fee and universal service structures.

“Our objective in offering VoIP services would be to find a path toward deregulation,” Dick Notebaert, chairman and CEO of Qwest, said during a Yankee Group conference.

Vonage's defenders—and that includes most in the voice-over-IP world, though its excessive publicity is even getting to some of them—counter that just because the company provides voice doesn't mean it should be treated as a voice provider. And because it purchases numbers and connectivity from CLECs, Vonage is contributing to universal service funds. Vonage CEO Jeffrey Citron, for one, thinks regulators should look to wireless as a model.

“When cell phone service was brought to the market, it was given an exemption under the radio frequency portion of the 1934 Communications Act,” Citron said. “Cell phone carriers were freed from many of the obligations that were imposed on common carriers—such as carrier of last resort, universal service and service quality—until the technology had time to mature.”

Indeed, much of the VoIP industry is taking pains to reshape itself as more than a voice segment. At September's Voice on the Net show, a rare underlying tone of regulatory issues was pervasive with most attendees, and exhibitors were careful to highlight the future in which voice will become just another application riding on an IP network.

Jeff Pulver, founder of the VON shows and the money behind Vonage's predecessor, even asked everyone in attendance to drop the IP voice moniker and start referring to the segment as IP communications.

Perhaps it's difficult to classify Vonage because the company has never stayed put in one category very long, dodging and weaving its way to its current state.

Vonage was originally founded as Min-X, an exchange dedicated to trading IP voice minutes in the days when companies like that were supposed to be more than a curiosity. Citron, with Pulver acting as financier, took steps to reshape the company.

“We realized that in the long term, Min-X was going to be a multimillion-dollar operation, but not a multibillion-dollar company,” Holder said.

Thinking big in January 2001—at a time when dozens of start-ups were starting to tank—the company restarted as a wholesale provider of VoIP, aiming to provide private-label service to ISPs and cable operators. And while the timing couldn't have been worse to be operating as a start-up, in retrospect the nine months Vonage spent building its platform as a wholesale operator may end up being its best investment.

“We knew we couldn't go to consumers at the time, but we were talking to the top three ISPs,” Holder said. “@Home going bust really hurt. There was a big reluctance to do business with a start-up after that.”

Time for another dodge and weave.

In December 2002, Vonage reshaped itself again, this time as a consumer operation. It wasn't long before the company had signed its first significant distribution deal, inking a contract with Amazon.com. In mid-2002, the company was moving its service through Radio Shack and Computer City and had become mass market, though not fully so.

“The weird thing about Radio Shack is that their customer base tends be very high-tech oriented—it isn't the typical consumer,” Holder said. “The advantage of Computer City is you get a lot more eyeballs.”

But just as the company was heading full steam toward becoming a consumer/retail-oriented carrier—it's already in 80 of the top U.S. media markets and wants to be in the top 100 by the end of the year—cable operators started getting interested in telephony again. Again, dodge and weave.

To be sure, Vonage doesn't anticipate providing service to every cable operator — not even the biggest ones — and it has competition. It's most direct threat, Net2Phone, already signed a deal with Liberty Cable in Puerto Rico. But it's a big enough niche that it can't be ignored.

“Out of the top 100 cable companies, the top 10 are too big,” said Holder. “But from 10 to 100, a lot of those guys don't have the resources to explore doing this on their own. We're actively speaking with 30 to 40 of them.”

It also has to battle with the instinct of some cable operators to want to own as much of its own network—and by extension its customers—as possible.

“The biggest problem with the Vonage model is that the customer is no longer the MSO customer,” said Ted Griggs, founder and chairman of Syndeo, a company that sells packet switches to cable operators. “The MSOs don't want to give up that control.”

From an economic perspective, though, Holder believes MSOs are the perfect target as are small municipalities that have become frustrated with the service they're getting from Bell companies. In October, the company announced its first muni customer, the Coldwater Board of Public Utilities in Coldwater, Mich.

“All they have to do is market the product,” Holder said.

Over the course of the next year, though, the company is once again planning another shift with an increase emphasis on the small and medium business market. Currently, Vonage's customer base is about 83% consumer.

“We've started offering some basic feature sets that are attractive to businesses,” Holder said. “Early next year we'll get into the larger business market space.”

Regardless of where the company ends up, Vonage will dodge and weave its way there.

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© 2014 Penton Media Inc.

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