The carriers are coming

With large telecommunication service providers and cable operators such as AT&T and Time Warner Cable entering the residential Net telephony market, smaller players such as Vonage, 8x8 and VoicePulse will likely feel the pressure.

"There's no doubt that they will take a percentage of customers that would have been ours," said Ravi Sakaria, CEO of VoicePulse. "But I think overall, it will increase the pool of people willing to switch to the technology, which could still benefit us."

Last week, AT&T announced its plans to offer residential voice over Internet Protocol (VoIP) service in 100 markets by the end of 2004. Qwest Communications International , which announced its service in November, began offering VoIP to a limited number of residential customers in Minnesota. And Time Warner Cable became the first major cable operator to announce plans to offer VoIP service. The cable company has partnered with MCI and Sprint Communications to provide long-distance connectivity.

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What's new:
AT&T, Time Warner Cable and Qwest Communications are staking their claim on the voice over Internet Protocol market, challenging smaller players such as Vonage, 8x8, VoicePulse and Net2Phone.

Bottom line:
Analysts say the VoIP start-ups will have to differentiate themselves to survive. Some of the smaller players might allow larger providers to resell their service. Others may get acquired.

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Even the Baby Bells want a piece of the consumer VoIP action. SBC Communications and Verizon Communications have already indicated interest in entering this market.

Analysts said the arrival of the big players will make life more difficult but not impossible for start-ups. Some could survive in their own right. Some might allow larger providers to resell their service. And others may get acquired.

VoIP services are currently priced to undercut traditional voice services from incumbent providers. For example, Vonage offers a flat service that includes local and long-distance calling from $14.99 to $34.99 a month. But analysts warn that competing on price alone is dangerous. In the mid- to late 1990s, competitive local exchange carriers, or CLECs, used this strategy to compete against the Baby Bells in the local telecommunications market. Many of them failed.

"If a company's strategy is totally price-based, whatever the technology, their days are numbered," said Lisa Pierce, research fellow at Forrester Research. "It's just not a good long-term strategy."

Pierce said VoIP service providers will need to differentiate themselves with advanced features, including unified messaging for using one number on a variety of phones, phone-to-PC communications technology, and integrated VoIP and wireless services.

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While executives from Vonage and VoicePulse said they will continue to compete on price, they agreed that feature-rich services will be what wins them business in the long run. Louis Holder, executive vice president of product development for Vonage, said his company already offers advanced features such as unified messaging and Internet-based voicemail so that customers can check messages online. He said the company plans to add wireless local area network or Wi-Fi support next year.

Even with innovative features, start-ups will still have a difficult time competing with the likes of AT&T, Time Warner and Qwest, which will all be able to bundle existing services with VoIP offerings. The idea is that if customers can get VoIP bundled with broadband service at a reasonable cost, why would they even consider a service from a third party?

There's "no doubt that some customers will think that way in the short term," VoicePulse's Sakaria said. "But I think customers will go with whoever provides the most full-featured and reliable service. And it's not a foregone conclusion that the incumbents will be able to do that."

Sakaria also argued that some customers may feel limited by buying all of their services with a single carrier.

Many of these smaller VoIP companies could survive simply by transforming their competitors into their customers. Net2Phone, for example, sells its service directly to customers or through partners. The company recently has been targeting the cable market, where it plans to help local cable operators offer VoIP.

"That is something that has always been in our plan," Sakaria said. "If you're a cable provider competing with Time Warner, your time frame for deploying VoIP has been accelerated. Partnering with a company like VoicePulse and offering a private label service could be the answer."