VoIP Market Leaders Declare a Price War

The VoIP price war began in earnest on Sept. 30, 2004. AT&T dropped the price of its CallVantage plan to $29.99 a month to match Vonage's price. Then, Vonage upped the ante almost immediately, dropping its unlimited calling price by $5. Not to be outdone, later in the day, Broadvox Direct trumped them all by announcing a whopping $10 price cut on its monthly unlimited accounts, to $19.95. Is the industry still a bit too young to go to war?

It's official: an all-out price war has broken out in the residential VoIP world.

An announcement that AT&T would drop the price of its CallVantage Service, the company's popular residential broadband phone service, from $34.99 to $29.99 per month was followed quickly by an announcement that Vonage would drop the price on its unlimited calling plan to $25 a month from the previous $29.99.

Later Wednesday, in a sure sign that the nascent VoIP industry is in the midst of an unexpected and rapidly escalating price war, Broadvox Direct announced via its user portal that the company would be reducing its price by a full $10 a month for its monthly unlimited service — from $29.95 to $19.95.

Vonage will upgrade its Local Unlimited customers to Premium Unlimited. In addition, Vonage is dropping all customers who are on the Premium Plan's prices automatically by $5, Vonage said in a prepared statement. Vonage is simplifying its calling plans now by only offering 2 plans — a $15 plan and a $25 plan.

In a similar move, Broadvox Direct will also automatically upgrade all customers on its regional $19.95 plan to the Residential Unlimited service automatically.

Vonage spokeswoman Brooke Schulz denied that the timing of the Vonage move has anything to do with the AT&T announcement, adding that the Vonage price drop had been in consideration since May because customers were asking for more simplified billing structures.

“By all indications prices are on a downward trend, but that [trend] is still limited by [VoIP providers'] bandwidth costs and interconnection costs,' said Steven Titch, telecom analyst for the Chicago-based Heartland Institute. Titch expects more downward pricing in the future, though he doesn't expect any more quick declines.

Schulz said Vonage had been studying the market data since its May 17 price drop. Since then, she said, company officials saw that people had “increasingly become confused as to what local calling is and why we were differentiating between certain types of calls..”

“People understand that in an IP world, a minute is a minute, regardless of where you're calling,” Schulz added. “Users are validating the buckets and unlimited calling plans, and have moved away from the idea of local calling or minutes being differentiated from long distance because pricing has come down so dramatically for all minutes.”

Since May 17, the company had sold fewer of the $25 unlimited local plans, Schulz said. “The $25 plan was a small percentage of our overall base, so Vonage decided to simplify the offerings from three to two.”

“We wanted to offer the new plan for new customers, and we wanted to be fair to our existing customers, who will be automatically upgraded,” Schulz said. “Some of the older phone companies will offer new customers better rates, but leave older customers with their older [higher-priced] plans.”

“This is the third time we've adjusted our prices since launch, twice before AT&T entered the market, so it's clearly something we are willing to do once our margins allow us to do so,” Schulz added.

Schulz charged AT&T with “responding to our leadership in the marketplace by copying us, not just on pricing but strategy, distribution and features have all mirrored or followed our moves.”

The AT&T price drop brings CallVantage's price to the level of Vonage before the new cut, Voiceglo and some other VoIP providers for similar unlimited services, though still higher than other highly rated services such as BroadVoice, VoicePulse and others.

The new CallVantage pricing includes a month of free service for new subscribers who sign up before Jan. 31, 2005. The plan replaces the previous introductory promotional price offer AT&T had used since first launching six months ago.

“I think that it's great for VoIP that AT&T came into the market to begin with,” Tich says. “Having a company like AT&T in the market can only validate VoIP that much more. That they're cutting prices shows that they're serious about the market.”

Titch doubts that AT&T's move will hurt the other market players because there's still plenty of room for growth for all of the VoIP providers. He expects that the move was made because AT&T couldn't get a higher price for the brand name.

“Having a company like AT&T in the market helps build consumer awareness,” Titch adds. “That helps newer companies like Vonage because they can ride on AT&T's shoulders and don't have to build consumer awareness themselves.”

In making the announcement, Cathy Martine, AT&T senior vice president for internet telephony said: “Pricing the service for the holiday shopping season fits our expansion strategy and makes AT&T CallVantage Service even more affordable.”

Ravi Sakaria, CEO of VoicePulse, which has been offering unlimited US-calling service at $25 a month for a year, said he's “not surprised Vonage cut its price to VoicePulse levels,” but added that price is “not the only consideration” VoIP users take into account.

Noting recent reviews by PC World and others that rank VoicePulse ahead of both AT&T and Vonage, Sakaria said that “features are as important as price to the consumer.”

Sakaria contends that a major advantage VoIP has over traditional telephone service is technological. “VoIP allows us to continue to develop new features and services at this price and, ultimately, those features are what will convert the majority of VoIP users.”