Voice over IP enters the enterprise: Matt Deatrick, vice president of retail sales for Vonage, discusses the value VoIP brings to companies, and whether telecom regulation is in Vonage's future.

In 2003, for the first time, sales of communications servers that support IP exceeded sales of traditional Private Branch Exchanges (PBXs) that don't, according to Gartner analysts. By 2006, Gartner predicts sales of traditional PBXs will be relatively insignificant. What does this mean for the enterprise? It means Voice over the Protocol (VoIP) is fast becoming an accepted technology for telephone service.

VoIP turns voice into data packets and sends them over the Internet. The result is that businesses can avoid the long-distance charges that come with using traditional telephone networks. One company hoping to cash in on this trend is VoIP service provider, Vonage.

ADVISOR: What is Vonage's history?

DEATRICK: The company launched in January 2001. We were in development just shy of a year, doing some beta testing. We launched the Vonage voice service in April of 2002. As 2004 starts, we have just shy of 100,000 customers, and we're gaining anywhere from 2,500 to 3,000 new customers a week.

ADVISOR: Who founded the company?

DEATRICK: Jeff Citron. He was also the founder of Datek, the online trading brokerage. I think he wanted a new challenge after he sold Datek to Ameritrade. He's always been interested in disruptive technologies--technologies that put power in the hands of consumers. In Vonage's case, you're taking Class 5 functionality and handing it to the consumer via a Web interface. Customers can control everything that you now have to go through the phone company for: provisioning, updating, getting a new number. These are all things that are traditionally associated with a Class 5 system. Vonage has completely turned the relationship between a telecom company and its customer on its head.

ADVISOR: Do you offer both residential and business service?

DEATRICK: Yes, we have five plans on the residential side, ranging from US$14.99 to $34.99. On the business side, plans range from $39.99 to $49.99.

ADVISOR: How do your business and residential plans differ?

DEATRICK: The differences come from the different ways we expect people to use the service. For example, the business plan includes a free fax line. We just expect different calling patterns and different volumes, usage at different times of the day based on the expected usage of business and consumer segments.

ADVISOR: What about charges for international calls?

DEATRICK: You just dial like you normally would. You dial 01, the country code, area code, and the number. There's an additional per-minute rate, but it's low: London is 5 cents per minute; Hong Kong is 5 cents; Australia is 6 cents. There's no additional fee for calls from the U.S. to Canada.

ADVISOR: How does VoIP usually enter the enterprise? Is it coming in through the users who have Vonage at home and think it might make a good solution for their company? Or, is the service coming into companies through IT managers looking to cut costs?

DEATRICK: All of the above! In some cases, we've had CIOs of Fortune 20 companies going to their IT groups and telling them to get in touch with us. In other cases, we come into companies through IT managers who like to play around with technology and tried us out at home.

We're partnering with a Fortune 50 company to build a new product. This company came to us because the CIO discovered our technology through a small group of people he put together, called a horizon technology group. This is a group within his company that looks at emerging technologies and assesses how to cut through the red tape and bring them into the company's fold before its competitors. It's clear that many companies' top management have decided that, to stay competitive, they have to quickly take advantage of cutting-edge technologies.

One example is our ATA functionality, which is the voice adapter that lets users access our service. We're working on getting this into a much smaller form factor--something that could fit in a sales person's shirt pocket. Another interesting possibility is our soft phone, which can turn a laptop or PDA with Wi-Fi capability into a VoIP phone. All these things are great because they significantly reduce the cost of calls for anyone who's traveling.

ADVISOR: Some VoIP offerings are limited in that you can only call people who have the same service. Is this the case with Vonage?

DEATRICK: No. Vonage fully integrates with legacy systems. In fact, we're working on a piece of equipment that will let us enter the enterprise on trunking level.

ADVISOR: What kinds of features does that bring to the enterprise?

DEATRICK: It would bring all the power and flexibility of VoIP to an aggregate level. For example, if you have 24 phone lines in an office of 50 people, and they share those 24 lines via PBX, you could have 24 different area codes for specialized inbound calling.

There are a lot of features that are useful for people working from home, or for distributed users--for example, sales forces that work in different areas but have to report into a corporate office for long conference calls, maybe three or four hours. You can conference these workers in without any additional costs. All Vonage-to-Vonage calls are free, so if you deploy it to multiple corporate offices, calls among them don't count against your minutes (if you're on a limited-usage plan).

ADVISOR: What kind of equipment does a user need?

DEATRICK: You just need a Motorola voice adapter, which we provide.

ADVISOR: You don't need a special phone?

DEATRICK: Any standard analog phone will do--cordless or a regular phone that takes power from a wall.

ADVISOR: What kind of connection do you need?

DEATRICK: You need a high-speed Internet connection such as DSL or a cable connection. If you're in an enterprise, it's more than likely you have a T1, so that's plenty. We're just looking for 90 kilobits per second or better, inbound.

ADVISOR: Does the service require a fixed IP address?

DEATRICK: No, the Motorola adapter supports dynamic IP.

ADVISOR: What's involved with setup?

DEATRICK: You'd go onto our Web site and order whatever plan fits best. You'll get confirmation e-mails letting you know how the process is going, and in anywhere from two to three days, you'll receive a box in the mail containing your equipment.

There are some very simple instructions to follow. Basically, you just plug the adapter into the DSL or cable modem and plug the phone into the adapter. You can also plug your PC into the adapter. This lets you do things like check your voice messages online and play them through your computer.

ADVISOR: Although VoIP is getting a lot of attention today, it isn't entirely new technology. Several years back, many home users tried VoIP services, but they found the sound quality to be very poor. Is this still the case?

DEATRICK: Can you hear me now? [laughter] We're on it right now. It isn't any different than a regular landline, as long as you have enough bandwidth. If you're working with constricted bandwidth, we offer something called a bandwidth saver. Turning on the bandwidth saver impacts the voice quality, but the quality is still far beyond anything else that's been tried before.

ADVISOR: Minnesota recently filed a suit requesting the FCC regulate VoIP service just as it does regular telephone service. Where does that case stand?

DEATRICK: The state of Minnesota's contention was that Vonage looked like a phone service and acted like a phone service and therefore was a telecommunications company as defined by the Title 2 of the Telecom Act of 1996. So, the state ordered Vonage to go get a competitive local exchange carrier (CLEC) certificate, and start paying all the taxes and fulfilling the obligations that come with a CLEC certificate. This includes things like lifeline power sourcing, paper billing--all these things we don't do.

Our argument is that we simply aren't a telecom service. We're a data service. Our service works over the Internet, and we rely on a broadband connection. These are two hallmarks of the definition of a data service under Title 2. We went to federal court and asked the court to preliminarily enjoin the state from regulating us as a telecom service. We asked for a preliminary injunction so we could have time to work with the state to come to a reasonable solution. The court turned around and awarded us a permanent injunction, so the state is permanently enjoined from regulating us as a telecom service.

EDITOR'S NOTE: Subscribers to the Professional Resource CD will find a copy of the decision, which outlines the legal issues surrounding VoIP.

Congress has, wisely we think, purposely refrained from regulating Internet services in order to give the industry a chance to grow. We've been defined by the courts as an Internet service and so fall into a protected category.

Today, telecom service is heavily regulated; however, wireless service isn't. Chances are good Vonage will either end up classified as something closer to a wireless service, or akin to an Internet service, where there's pretty much no regulation.

ADVISOR: Do the taxes that telecom companies pay go to support the physical infrastructure, such as phone lines?

DEATRICK: Some of them do. The questions about taxing VoIP focus on two issues. One is the Universal Service Fund (USF). We already pay into USF because we have to take calls from our network, which runs over the Internet, and transfer them to regular telephone lines. So, we pay into the USF and the various 911 funds. So, it really isn't an issue of support and maintenance of the existing lines.

The USF is a rural subsidy program for building out phone service in underserved areas. We've asked the FCC to look at how this six billion dollar fund should be used. Should it be used to invest in legacy technology that's going the way of the telegraph? Or, should this money be used to invest in broadband in underserved areas? There are many places in the U.S. where you can't get broadband.

We aren't opposed to maintenance of legacy systems. We just think many existing tax mechanisms should either be revised or enhanced to include new technologies.