Retailers Testing Voice-over IP Waters

NEW YORK— Circuit City's announcement that it would sell Vonage's self-installed VoIP kit marks the first national rollout of a VoIP product at retail, but it probably won't be the last.

Voice-over Internet Protocol telephony (VoIP) accounts for only a fraction of the residential telecommunications market, but it has been steadily gaining subscribers, thanks in large part to efforts by Vonage and such cable MSOs as Comcast, Cablevision and Time Warner. The MSOs have deployed large VoIP tests in several markets.

Major retailers are currently test marketing VoIP products in partnership with pure-play VoIP service providers and anticipate partnering with cable MSOs in the future.

Best Buy has been test-marketing Vonage in Minnesota, California and Florida since last September. RadioShack has been testing Vonage in the greater Philadelphia market since last June. Last month, CompUSA began test marketing Viper Network's vPhone product, a USB phone that connects to a computer to place VoIP calls.

VoIP works by converting analog voice signals to data and sending that data as packets over the Internet. That data is then reconverted to analog voice signals to travel over regular phone lines to its final destination.

The Vonage service lets consumers with broadband Internet access make local, toll and domestic long distance calls over the Internet using their regular landline home phone. The retail starter kit includes a Motorola Multi Terminal Adapter (MTA), which plugs into a cable modem's Ethernet port and into a home phone jack.

Once the MTA is connected, consumers can place VoIP phone calls over their broadband Internet connection using their existing home phones. Users go online to sign up for the service and choose calling plans.

Other VoIP solutions moving through retail, such as Viper Network's vPhone or AICO's TalkPro, are USB phones that plug directly into a computer or modem, meaning consumers cannot use their existing home phones. Those products, however, are just "niche solutions," in the opinion of Bryan Wiener, president of Net2Phone.

The lure of VoIP is low cost. Thanks to the relatively inexpensive back-end architecture involved, VoIP providers can offer caller ID, voicemail and call forwarding at no extra charge, while traditional landline phone companies charge a premium for them.

Last year, roughly 196,000 homes used VoIP, said Daryl Schoolar, senior analyst In-Stat/MDR, the Scottsdale, Ariz.-based research company owned by TWICE parent Reed Business. In-Stat expects subscriber levels in 2005 to hit about 1.26 million subscribers. The vast majority of these VoIP subscribers are using cable modems.

Those numbers are still a fraction of the overall broadband Internet subscriber universe, which Schoolar said will reach 30.9 million households by year's end and 36.2 million users in 2005.

Nonetheless, "from a retail perspective it makes sense if they want to cater to broadband customers" with services offering a recurring revenue stream, Schoolar said.

The Vonage-Circuit City partnership is a case in point. In exchange for selling Vonage's self-install kit for a $99.99, Circuit earns an activation bounty for each customer that signs up for Vonage service, as well as a residual commission, said Matthew Deatrick, Vonage's retail channel sales VP. This business model will be applicable for all of the company's prospective national retail accounts, Deatrick said.

Circuit is the first of what Vonage hopes is an expansive national retail rollout. To date, the VoIP provider has signed up most of its 115,000 users online and through reseller arrangements with cable MSOs that offer Vonage's IP telephony under their own brands. The largest of these deals is with Armstrong cable, which is reselling Vonage VoIP service under the Zoom Phone brand.

"We're pursuing retail as the best way to access the general market," Deatrick said. "People want to see new technology [like VoIP telephony] in a familiar environment."

Circuit City's Ron Baime, senior VP/GMM for of audio, video and technology, said Vonage "enables us to provide a new service to a rapidly growing base of customers who are also broadband subscribers."

Ron Weaver, president of Viking Networks, called the retail channel in North America "reasonably untapped for VoIP." He estimated the market to be in the range of $4.8 to $5.2 million this year in hardware sales.

"Retailers like us because they get a commission on the hardware and a residual commission on the service," Weaver said.

"We like the idea of selling VoIP because it's very complicated," said David Sprosty, Best Buy's VP of subscription services.

While Best Buy has not made any full-scale commitment to selling VoIP services, it's currently testing a "number of solutions" and already enjoys a "fantastic relationship" with cable MSOs, which should position Best Buy well should its MSO partners decide to bring VoIP to market, Sprosty said.

Not everyone thinks VoIP services will migrate through retail, at least not in the form of USB phones or MTAs. Net2Phone, an early entrant into the VoIP retail marketplace with a USB phone, took a hard look at the market and realized that its efforts would be better served if it enabled cable companies to offer VoIP telephony, said president Bryan Wiener.

The company pulled its consumer products to focus instead on Tier 2 cable MSOs. "The cable companies are ideally suited to drive VoIP; they have the customer base, which means they have low acquisition costs. They have the access to the house and the ability to offer all three services [video, data and voice] on one bill," Wiener said.

He added, "Will a customer buy their phone service from a start-up company or from a Time Warner or an AT&T?"

In-Stat's Schoolar agreed that the cable companies "will be the big force driving adoption."