Vonage said it was able to cut prices because it has added more customers without significantly increasing infrastructure costs. Internet calling is less expensive than traditional phone service, because the latter uses dedicated lines. Internet voice calls are sent over the Internet in packets, just like any other data, and are reassembled at the other end. Anyone with a broadband connection is able to use the Internet for telephone calls.
In addition, Vonage's cost per customer for using the lines of long-distance carriers has decreased as its traffic volume has increased, Holder said.
Vonage and AT&T are guaranteed to face a much tougher market in the near future. Qwest Communications International has also rolled out Internet-calling services, and Verizon Communications and regional Bell phone companies are expected to offer their plans later this year.
Analysts expect profit margins to narrow considerably on the consumer side of Internet calling, as companies compete with price.
"They're positioning themselves for the inevitable," Norm Bogen, analyst for market researcher In-Stat/MDR said of Vonage.
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