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Consumers See Deals in Internet Calling Sat Sep 28, 3:44 PM ET By Eric Auchard

NEW YORK (Reuters) – Telephone calling via the Internet has come a long way from the days fives year ago of crackling walkie-talkie conversations, and U.S. consumers now have a range of choices that trade higher quality for cost.

A variety of battle-hardened start-ups have staked out lucrative niches in U.S. domestic and overseas calling markets, ranging from calling cards offered by Net2Phone to full-featured phone replacements from firms such as Vonage.

Such services run the gamut in terms of the technical sophistication required. They range from simple dialing-code calling cards to software programs that must be installed on computers to modem-computer hardware combinations that make up in cost and unique features for the pitfalls of installation.

Net2Phone , based in Newark, New Jersey, counts some 1 million U.S. consumers and another 1 million to 2 million overseas customers for its primary Internet-based calling card business, spokeswoman Sarah Hofstetter said.

The company, which was founded in 1995, offers its original computer-to-phone Internet calling software that allows ultra low-cost calling — at rates of two cents a minute — but at the mercy of dial-up Internet connections that can create a classic walkie-talkie-like sound quality.

DeltaThree , another PC-to-phone software maker, boasts calls as low as 1.2 cents a minute.

The bulk — some 60 percent — of its customers live overseas and rely on Net2Phone to make discount calls internationally, either to the United States or elsewhere. Calls within the United States and Canada are 3.9 cents per minute. U.S. callers pay 8 cents a minute to Australia, 10 cents to Poland and 13 cents to Colombia.

HIGH-SPEED INTERNET CALLING, THE NEXT BATTLEGROUND

Thousands of technically sophisticated users have signed up for a next-generation phone service offered by Vonage at http://www.vonage.com. Vonage, of Edison, N.J., introduced in April a service that allows consumers with high-speed Internet connections running over television cables or phone lines to make local and long-distance calls at flat-rate prices.

The company, which was founded by Wall Street entrepreneur Jeff Citron, offers monthly service plans ranging in price from $20 for 500 minutes of calling a month to $40 for unlimited local and long-distance calls within the United States. International calls can placed at substantial discounts also.

The Vonage DigitalVoice service has drawn rave reviews from some 3,000 customers who have signed for the service.

“Feature for feature, we have everything that WorldCom is offering — plus more,” Citron boasts.

Norm Bogen, an analyst at Cahners In-stat in Scottsdale, Arizona, agrees that the service offered by Vonage is highly competitive in both price and features with integrated local and long-distance packages offered by AT&T, WorldCom and Sprint.

“Vonage has a better offer than the other long-distance competitors,” Bogen said.

A novel feature Vonage offers is the means for consumers to choose from a range of phone numbers in alternate area codes.

Thus a small business operating in New Jersey can for as little as $5 extra receive calls to a fashionable 212 Manhattan phone number. A Delaware-based software company can set up a sales and marketing presence in Silicon Valley, for example.

A retiree in Florida can set up a 516 number in Long Island, New York to allow relatives in the region east of New York City to pay just the price of a local call to talk to Florida. Vonage claims users have signed up in all 50 states.

Later this week, a spokesman said Vonage plans to introduce a new twist on its service that allows customers to switch from traditional local phone service providers such as Verizon or SBC while keeping their existing phone number.

This eliminates another big hurdle that has prevented consumers from switching to competitive phone services such as Vonage and thereby loosing touch with friends and family.

But competitors say there is little keeping them from entering the market. Analysts say that major cable and telephone companies can offer these services themselves but are waiting for the market to mature before expending the sales and marketing costs to switch over new or existing customers.

Net2Phone, with backing from cable and programming giant Liberty Media, has begun testing with several hundred Liberty cable customers in Puerto Rico of a rival broadband phone calling service. DeltaThree’s Web site promises similar services.

It also offers an innovative version of Microsoft’s popular instant messaging ( news – web sites) software that allows online users to speak with each other.

“Our long-term goal is not to have the consumer be our customer, but to have the cable company be our customers,” Hofstetter said. Net2Phone is positioning itself as the ally of cable television operators in their battle to wrest phone customers from established local phone companies.

Meanwhile, AT&T and Comcast Corp. , two of the top three U.S. cable television operators, have pushed forward with stop-gap services that combine cable connections with traditional circuit-switched phone connections. Such services do not benefit from the lower costs of running purely Internet-based networks, but allow these operators to generate phone revenues from existing cable customers.

Perhaps the biggest challenge to Internet-based phone calling services is emergence of wireless phones as a potential replacement for both local and long-distance fixed-line plans.

“How many people that have a broadband connection also have a wireless phone?” industry analyst Bogen asks rhetorically. “Many people have switched to wireless for their all their communications needs. Vonage can’t get those customers.”

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