COMMENTARY | COLUMNISTS | PHIL BAKER

Another communication breakthrough

The best-selling book, "The Innovator's Dilemma," by Clayton M. Christensen, talks about the inability of major corporations to foster innovation, noting that major breakthroughs more often come from small entrepreneurial companies.

Vonage of Edison, N.J., is just such an example. Vonage (www.vonage.com), just 3 years old, has been offering phone service over high-speed Internet connection such as DSL or cable already in our homes. While there have been attempts for years to use the Internet for voice communication, Vonage has been the first to succeed in developing the technology and marketing an easy to install system with a simple, straightforward pricing package that sounds as good as a conventional phone. To date, Vonage has 70,000 paid subscribers who have made a total of 90 million calls. The technology is called voice over Internet protocol, or VoIP. And you know they must be successful, because the California Public Utilities Commission wants to regulate them.

Not only has Vonage solved the technical issues, it also has managed to avoid the complex and confusing pricing offered by conventional phone companies. Vonage charges $35 per month for the first line and $30 for each additional line. A fax line is $10. The price includes local, long distance and low international rates (for example, 5 cents per minute to China, 6 cents to Mexico or to Israel). There is no extra charge for call waiting, voicemail, call forwarding, call waiting, caller ID, call blocking or call return. Because it's Internet-based, you can go online to review your calls, get voice messages and even arrange to forward your voice messages to your e-mail. You can also select any U.S. area code for your number. If you have a daughter who is a college student in New York, you can get a 212 area code and her calls to you are local. If most of your customers are in downtown San Diego and your business is in Carlsbad, you can have a 619 area code.

How does this compare to conventional phone service pricing? The best prices my wife and I were able to find during a recent review of conventional phone companies was a base of about $25 for each of our three lines (one being a fax line) for local calling, and $25 more for long distance for all three lines. With additional monthly charges for call waiting, a lower international rate plan and other services, we pay about $115 per month before taxes. For similar service, Vonage costs $75, which includes additional features.

Installing the Vonage phone is simple. If you already have a router (the box with Ethernet connectors providing multiple connections from a single input), just plug in the small Vonage box, plug the box into an AC outlet, then plug any phone into the box. If your computer is connected directly to the cable or DSL modem, you need to add a router in between. For phone service throughout your home, you need to use a cordless phone system with the base unit near the computer connection. Conventional phone wiring in your home is no longer used.

When you pick up the phone you hear a normal dial tone. You call any number, but must dial 1 and the area code even for local calls. Otherwise, all calls are made in the same way as on a regular phone. The quality of the phone calls is indistinguishable from calls made over normal phones. Those on the other end noticed no difference in service.

You can also carry your Vonage box, the size of a paperback book, to other locations that have broadband access and make and receive calls. Dan Newman, a resident of Mt. Baldy, had to abandon his home during the recent fires. He took his Vonage box to his temporary housing and was able to receive calls from friends dialing his home phone number. The Vonage can also be plugged into a high-speed line in a hotel room, such as in Europe, to make and receive calls to the United States at no cost. If you move often you can keep the number and literally have one number for your lifetime.

What are the disadvantages? Unlike regular phone service, Vonage is dependent on having power and your broadband connection running. Should there be a power outage, or should your cable service be down, you would need to use your cell phone as a backup. While I had no problems installing the phone, experiences may vary. Vonage's customer service was excellent, but on one occasion I was on hold for 20 minutes.

If you expect that regulatory authorities see this as something new to control and to tax, you won't be disappointed. Vonage has been the focus of state regulatory authorities. Florida, apparently more enlightened (at least in this respect) than other states, has been the first and only state that has passed an act saying VoIP should not be regulated. Other states, such as Texas and Pennsylvania, are taking a wait and see approach. Minnesota and California, however, claim Vonage should be regulated in the same way as a telephone company. However, in a decision this past month, the U.S. District Court halted Minnesota's attempt at regulation, saying VoIP is a data service, not a telephone service. Vonage is now challenging the California PUC demands.

John Rego, Vonage's CFO, explained in an interview that he is confident Vonage will prevail because they are an Internet service that falls under the law enacted by Congress stipulating the Internet should not be regulated. That law was passed to foster the growth of new businesses and has proven successful in creating new entities that never existed such as eBay, Amazon and now Vonage. Congress has also said that traffic over the Internet is interstate, not intrastate, as the California PUC claims. And the FCC has ruled that VoIP is not a phone service.

There is little doubt that VoIP will grow rapidly as high-speed access grows. According to the FCC, there are now 22 million high-speed connections, growing to 55 million by 2006. VoIP will eventually be offered by cable companies, Internet service providers, conventional telephone companies and perhaps even your electric utility as new broadband technologies evolve.

Whether you switch to Vonage or not, this can only be good for the consumer, as it will increase competition and drive down the cost of making a phone call.


Baker has developed and marketed consumer and computer products for Polaroid, Apple, Seiko and others. He is the holder of 30 patents and was named San Diego's Ernst & Young Consumer Products Entrepreneur of the Year in 2000. He can be reached at phil.baker@sddt.com.

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