Vonage calls itself "an all-inclusive phone service" and offers to replace your current phone company. But Vonage doesn't call itself a phone company, does it? Vonage uses the term phone service rather than phone company in its top-level marketing material. While routing phone calls over your broadband internet connection rather than a pair of copper wires may not seem like a huge leap of technology, the "service" part of the slogan hints at something new and interesting.
By keeping voice calls on their own internet-based network as long as possible, Vonage bypasses distance limitations and eliminates the long distance call. Only when slowing down and jumping onto the traditional telephone network to connect to non-Vonage customers is Vonage forced to pass along distance-related costs (mostly long distance fees for connecting to other countries). Expensive telephone company features, like Call Waiting and Call Forwarding, cease to be expensive using a modern, internet-based telephone network.
The modernization of telephone service--driven by Vonage and hundreds of competitors, including all the former Ma Bell companies--is transforming voice communications as we know it.
Vonage established its brand name the old-fashioned way: they blindsided consumers with so many advertising impressions they drove the odd name Vonage into everyone's consciousness. Super Bowl TV ads on one end, balanced by Google AdWords on the other, make sure no one escapes the Vonage marketing blitz. The Vonage marketing department obviously got their hands on the venture capital money before any other department.
The name Vonage has no specific meaning but was created for worldwide use to ensure easy trademark establishment. Throwing bucks into advertising works, and many people now seem to think Vonage means "broadband phone" in some European language.
Splashing costs money, however. Most reports peg the venture capital investment in Vonage at around $600 million. At $25 per month for Vonage's highest-price consumer subscribers, the red ink will be sloshing around for some time.
Vonage uses the phone-centric internet telephony model (don't feel bad if you've never heard that term, because I made it up to help explain things in my Talk Is Cheap book). Your telephone, the very one you have now, can remain your telephone if you wish. But instead of plugging the phone into the wall, you plug it into the router Vonage sends you when you sign up for their service (or the router you buy at a retail outlet and take home to install).
Your telephone remains your "interface" to the modern world of Vonage voice communications. You dial your telephone like you always have, and you answer your telephone when it rings. You need a computer in order to configure your service and maintain your account via your Vonage web page, but you don't talk into or through the computer (see What Is Skype if you want to talk through your computer). With Vonage, the traditional telephone remains the focus.
Connecting to another Vonage customer means never having to say hello to Ma Bell or her departed phone companies. When one Vonage subscriber calls another, neither will notice a difference from a "regular" phone call. The sound quality may be slightly higher, because the Vonage-to-traditional-phone-company network crossover introduces noise into the call, but that's it. Nothing will tell you the call started and ended over broadband connections.
Connecting to a non-Vonage customer means the call passes from Vonage's internet-based network to the traditional telephone network, often called the PSTN (Public Switched Telephone Network). Neither the caller nor the callee can tell which network originated the call, or which network terminated the call.
Vonage relies on a variety of partners to connect to the PSTN in all local area codes in the United States and Canada. They must connect locally to the traditional telephone network close to your call recipient to avoid long distance charges.
This hodgepodge collection of partners needed to reach the traditional telephone network brings us to one of the few mistakes Vonage made: 911 calls. They trumpet the replacement of all phone services, but didn't have full 911 support for their customers. Part of the reason for poor 911 support we can blame on Vonage, but part of the blame goes to traditional telephone companies who control access to 911 service centers. The 911 service centers, nearly 6,000 of them across the country, also receive some blame because they use antiquated technology that can't support modern network connections.
However, this 911 mess cost Vonage some lawsuit publicity and encouraged the U.S. Congress to get involved. Now, all broadband phone vendors must provide 911 service that passes the caller's address to emergency services. Congress also pushed the traditional phone companies into working with broadband phone companies to make this happen.
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.
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.
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