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Internet phone companies face big challenges

Executives at the slew of small or start-up companies trying to make a go of it in the Internet telephony business ÷ including Vonage and 8x8 in Santa Clara ÷ can't be happy with Kate Griffin.

A senior analyst at the Yankee Group, Griffin wrote a withering assessment of the Internet phone market in which she concluded that the start-ups were going to get big-footed by the cable and telephone companies.

Griffin said that Vonage, Packet8, Voice Pulse and others will not be able to compete on brand recognition, service quality and customer service once companies such as Cablevision, AT&T, Time Warner aggresively enter the market.

In fact, Griffin says that Vonage ÷ the early leader in Internet telephony (known as VoIP) with 200,000 subscribers÷ has already lost market share to the big guns.

"As they enter, the game will change dramatically,'' Griffin writes. "With stronger brand names, proven telephony support and deeper pockets, these companies can quickly outpace Vonage's success in the market. Recent market activity clearly demonstrates the threat. Despite more than doubling its subscriber base since December 2003, Vonage has lost 14 percent market share as Cablevision, AT&T,
Time Warner and others accelerated their rollouts.''

As for Packet8, the product offering from 8x8, Grififn says it lacks a strong marketing effort, complicated by an ultra-competitive $19.95-a-month price point that is "limiting its ability to move strategically."

Alternative Internet phone providers, Griffin said, will likely have to satisfy themselves with niche markets "that include tech-savvy and price-sensitive consumers.'' But they "do not pose a significant threat to the incumbent local providers,'' she concluded.

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