Vonage Cuts Prices For Internet Calling

Internet phone company Vonage Holdings on Monday cut the price of its unlimited calling plan by 14 percent, in an attempt to attract as many customers as possible in an increasingly competitive market.

The Edison, N.J., company, which is adding 25,000 new Internet phone lines a month, dropped its price for unlimited calling to $29.99 from $34.99. Vonage currently has 155,000 phone lines.

The company insisted it was not launching a price war in a market that is just starting, saying that the price cut reflected its decreasing costs in doing business.

"You need more competition in the space to have a price war," Louis Holder, executive vice president of product development for Vonage, said. "It's too early to compete on price."

Nevertheless, Vonage made the move about six weeks after AT&T announced its CallVantage plan, which will cost $19.99 a month for the first six months, jumping to $39.99 a month after that. AT&T plans to offer its unlimited plan in 100 cities nationwide by year end.Vonage said it was able to cut prices because it has added more customers without significantly increasing infrastructure costs. Internet calling is less expensive than traditional phone service, because the latter uses dedicated lines. Internet voice calls are sent over the Internet in packets, just like any other data, and are reassembled at the other end. Anyone with a broadband connection is able to use the Internet for telephone calls.

In addition, Vonage's cost per customer for using the lines of long-distance carriers has decreased as its traffic volume has increased, Holder said.

Vonage and AT&T are guaranteed to face a much tougher market in the near future. Qwest Communications International has also rolled out Internet-calling services, and Verizon Communications and regional Bell phone companies are expected to offer their plans later this year.

Analysts expect profit margins to narrow considerably on the consumer side of Internet calling, as companies compete with price.

"They're positioning themselves for the inevitable," Norm Bogen, analyst for market researcher In-Stat/MDR said of Vonage.Bogen agreed it was too early to say Vonage was launching a price war. "It isn't really a war yet, but there are some skirmishes," he said.

The competition, however, is expected to get very intense when cable companies enter the market, Bogen said. They're expected to offer Internet calling in a bundle with standard Internet service and cable TV, giving telephone companies a serious challenge for consumers' wallets.

Besides clashing in the market, Vonage and AT&T are also fighting in court. Vonage sued AT&T after it launched CallVantage in March, claiming the name was too close to Vonage and AT&T was trying to leverage the smaller rival's success. The suit is pending.