Vonage CEO: VOIP will grow, if no regulation

WASHINGTON - Voice over Internet Protocol (VOIP) services are poised to take off in the U.S., if regulators can keep their hands off this alternative to traditional telephone service, the chief executive of a major VOIP provider said Friday.

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The VOIP service offered by Vonage Holdings has attracted about 100,000 customers since the beginning of 2003 and expects to have close to 300,000 by the end of 2004, said Jeffrey Citron, the company's chairman and chief executive officer.

If the Federal Communications Commission (FCC) allows states to regulate VOIP in the same ways they regulate traditional telephone service, U.S. customers could end up with fewer voice options than customers elsewhere, warned Citron, speaking at a Washington, D.C., forum sponsored by the pro-business Progress and Freedom Foundation.

Vonage's VOIP service -- which the company calls "broadband phone" -- creates demand for broadband service, and the U.S. needs more broadband adoption to win back its technology dominance over countries such as Japan, Citron said.

"If we go ahead and bring regulation before its time, we will create a number of problems that will probably slow broadband deployment," Citron said. "We have an opportunity, if we don't mess up here ... to regain our lead."

Citron argued that VOIP should be treated like Internet service, which remains largely unregulated in the U.S. Treating VOIP like traditional phone service, which is subject to a number of state and federal regulations, would result in the fledgling industry facing a patchwork of state regulations and may discourage investment in VOIP. The FCC is scheduled to consider issuing a notice of proposed rulemaking on VOIP during its Feb. 12 meeting.

In August, the Minnesota Public Utilities Commission claimed regulatory authority over Vonage's VOIP service before a federal appeals court in October ruled against the state agency. But other states are examining whether to regulate and tax VOIP. "If we don't get some clarity from (the FCC) pretty quickly, where are we going to be?" he said. "We're going to be right back in court."

Citron addressed a number of regulatory questions that came up during an FCC forum on VOIP in December. Back then, participants raised concerns about VOIP vendors providing 911 service, but Citron said Friday that Vonage already voluntarily provides the service. Vendors should be able to choose to provide the service, with customers deciding whether it's important when they choose their phone providers, he argued.

Some participants in the December FCC forum also raised concerns about the future of the federal Universal Service Fund, which helps fund voice service to rural and poor areas. But Vonage already pays into the fund indirectly, by paying Internet providers for access, Citron argued.

Citron's presentation was part plea for no regulation, and part promotion of his company's service. Vonage service -- with 80 percent of its customers residential and most of the rest small businesses -- ranges from $14.99 for 500 minutes of residential local and long-distance service to $34.99 for unlimited residential service. Citron touted features like customer choice of area codes, no matter where they live, and voice mail that customers can access through a Web browser, in addition to their VOIP phones.

He also noted Vonage's 24-hour-a-day, 365-day-a-year customer service. "In our movement not to be a phone company, it's also about customer service," said Citron, taking a shot at his competitors. "If you have a problem or a question at 4 o'clock in the morning, call us up. Try doing that with Verizon or SBC or BellSouth."

But three telecom analysts speaking during the Progress and Freedom Foundation forum questioned Vonage's business plan. With many analysts expecting demand for residential phone service to fall over the coming years, Lehman Brothers analyst Blake Bath questioned if Vonage was aiming for the right market.

With its unlimited minutes options, Vonage should compete for customers who've switched to cell phone service to avoid long-distance charges, Citron answered. "I really do hope everyone thinks that residential telephony is unprofitable so they get out of the business," he added. "We like this market. We're going to be very aggressive ... and we're going to make a lot of money doing it."

Blair Levin, an analyst with Legg Mason Wood Walker, asked how Vonage will compete if cable providers and large telephone service providers start offering VOIP services.

By using the Internet to carry its calls, Vonage's network costs are as low as one-seventh that of other telephone providers, Citron said. Vonage also has an advantage because it focuses on VOIP, as opposed to cable providers, and Vonage has a head start on other providers, both in market share and in its own software that runs its VOIP service, Citron said.