What Is Vonage
Pages: 1, 2

How Vonage Differs from Traditional Telephone Service

The first big difference, and it's huge, is that Vonage et al. escape federal and local regulations applied to traditional telephone companies. Officially, Vonage sends data streams that just happen to contain voice packets, rather than sending voice traffic. But as we just saw with the 911 situation, regulators are targeting broadband phone companies and trying to treat them like traditional telephone companies, and that push will continue.

Second, Vonage gains enormous flexibility by using its internet network to carry traffic rather than the traditional telephone network. Ma Bell built the phone network to control everything with huge, expensive telephone office switches. Upgrading these costs a fortune and takes years. The internet was built for control at the end points, such as your computer when browsing the Web, making incremental changes and improvements inexpensive and easy to roll out in small numbers.

Features that many people want, such as Caller ID, Call Waiting, Call Forwarding, and Voice Mail, all expensive from your phone company, are free from Vonage. Integration with other internet services allows Vonage to provide services the phone companies can't, such as forwarding all your voice mail messages as sound files to whatever email address you prefer. Many users told me that single feature sold them on switching to Vonage.

A critical disadvantage for Vonage and other broadband phone companies is their lack of a network they control. Unlike traditional telephone companies, Vonage doesn't own any networks. They must make deals, and pay, for access to the public telephone network.

Now that every traditional telephone company (through their DSL service offerings), as well as every cable TV provider, are selling their own broadband phone services, Vonage must compete with companies who own their networks. Expect court fights as network owners reduce Vonage access to their networks (it's already been done illegally) while raising the price for that limited access.

Vonage in the Future

I believe Vonage claimed enough mindshare in the public marketplace with its advertising blitz that it will survive the inevitable market consolidation. The company may, in fact, find it cheaper to grow by absorbing competitors rather than by keeping up such high advertising outlays.

When broadband phone companies merge, customers will be affected little. They should be able to keep their current equipment and phone numbers, and about all that will change are billing details from their new service providers.

The future for Vonage has three options, all of which will cause considerable corporate upheaval that users will probably not notice. First, Vonage may be bought, much as Skype was bought by eBay. One of the national cable providers could buy them, or some surprise group wanting to integrate the million Vonage subscribers into some other consumer enterprise, such as a Wal-Mart, Best Buy, or even Microsoft.

Second, Vonage can go public with an IPO. Rumors already swirl to that effect. The upheaval would come because Jeffrey Citron, the Vonage CEO who pumped them from a tiny player in a new market to the leader of the broadband phone world, had some "disagreements" with the SEC over an earlier company. Whether Citron could convince the Feds to let him run another public company is questionable. If not, when Vonage goes public, Citron will take his money and go as well.

Finally, might Vonage continue to stay independent and private? I doubt things will continue the way they are, because venture capital money comes with strings attached, and those strings demand a big payoff. Going public or being sold for $5 billion or so pays off the venture capital groups quickly. Staying private and independent puts the payoff years into the future. Venture capital groups lose patience quickly when a company gains a huge market value, and pressure starts for their payoff. Expect something, rather than nothing, to happen sometime in 2006.

No matter what happens to Vonage, the telephone business will never be the same. Customers, fed up with Ma Bell raising prices but not innovation over the past 30 years, now see what telephone improvements are possible. Internet and telephones now belong together, even if only a small percentage of telephone customers have switched already. The spotlight shines on voice communications now, and customer patience runs thin waiting for more features and lower prices. That's what Vonage brings to the market, and the market will never return to the traditional dull status quo.

James E. Gaskin has been solving computer and network problems for businesses small and large since 1984. He writes books, articles, and jokes about technology and real life. In 16 books and hundreds of articles, network consultant Gaskin tells people faster, cheaper, newer, and smarter ways to connect to each other and the world. He also maintains the site for his newest book, Talk Is Cheap.

Return to the O'Reilly Network