Analysis It is Faultline's firm belief that consumers are happier buying a new cheap phone service that uses Voice over IP, from a name they know and trust, but one that is not currently associated with phone services.

Step forward your ISP or other strong internet brand.

So the prospect of AOL or Yahoo or even Amazon or Google offering a VoIP service, becomes mouthwatering and as AOL announced it this week, we expect the take off to be substantial.

Our reasoning is that anyone that you already trust to handle your email and better still, your instant messaging, is likely to have your trust for phone traffic too. We admit that neither Amazon nor Google has been trusted with these services as yet, but they are highly trusted internet brands, and it is only a matter of time before at least one of them enters this market.

Our only question is why has it taken AOL so long to do something so obvious and the answer can only be that it didn't want to upset its existing partners in telco land. It's come now because it is inevitable that someone converts these customers to VoIP, so it might as well be AOL.

Another advantage is that in many cases AOL is the company that appears to be responsible for your broadband line. In many cases this is simply customer perception, and the underlying broadband line is owned by one or other of the telcos or one or other of the cable companies, including its sister company Time Warner Cable, which already has a similar service.

Time and time again we are told that price is the ingredient that will make people change their phone suppliers and that a monthly saving of at least $20 must be achievable on a bundle, before customers will overcome their inertia and swap. It's hard to be clear just how aggressive AOL has been here in pricing. It is offering its existing AOL service plus long distance and local calling for just $39.99 with $10 off that at $29.99 for the first six months, that doesn't include the cost of the broadband line and there is a certain amount of additional dial-up charging for using dial up to the service when you are not at home.

This drops to $13.99 per month for existing customers that just take the Local calling plan which rise back to $18.99 a month after the first six months. This services gives unlimited local and regional calls and $0.04 per minute for long distance calls in the US and Canada.

AOL also offers an Unlimited Calling Plan at $24.99 per month, which is virtually the same price as Vonage, and a Global plan at $29.99 which offers cheap, but not free, overseas calls. Both of these rise by $5 a month after the first six months introductory offer and AOL is currently giving away a free wireless home network base station.

The service is instigated in much the same as the original Vonage system, with a self installed adaptor for existing phones, which then plugs directly into a broadband line. Features include Call Waiting, Caller ID, Voicemail, Basic Call Forwarding, and 3-Way Calling, Sending Calls to Voicemail. There is web dashboard for call management where customers can manage account settings on call handling and call forwarding preferences, look up call logs as well as contact lists with click-to-dial function and an address book.

Customers can also pick up email messages by phone and phone messages via an internet attached PC.

In other words, the deals are okay, and quite competitive, but perhaps not quite so cheap as those offered by specialist VoIP carriers. There is probably room for AOL to drop the price over time and through continual special promotions.

It's hard to make a stab at just how many of the 22.5m AOL US customers will convert and in what time frame. Certainly over time, perhaps two to three years, there is every possibility that a large chunk, something like 25 per cent, might switch phone services, but perhaps it's better ask what would happen if AOL converted just 10 per cent of its customers to this service. That would mean it would overnight be four times the size of Vonage, a company that has struggled hard to pioneer the home VoIP service and which has around 550,000 customers.

In contrast AT&T CallVantage wracked up just 53,000 customers in the past year, which is an appalling result for a similar service. But we must ask why would anyone buy a VoIP service from a phone company, especially one that still reminds them of old, unit charging, analog lines.

Recent research suggests that there will be 26m VoIP customers in the US by 2008 and these have got to come from somewhere. A combination of Cable MSOs, Telcos, specialist VoIP suppliers and ISPs should share this, and it's not out of the question to suggest AOL VoIP sales will shortly end up being measured in millions.

Almost certainly as other internet properties, such a Google, enter the fray for internet telephony, the prize in the market will be the acquisition of private company Vonage, which has had a total of $103m in funding and which is approaching $200m in annual revenues.

A multiple of around four times revenues would make Vonage worth at least $800m and at that price, and especially as it has overseas operations too, bids for the company are bound to emerge, especially as investors worry that its high growth days are about to be curtailed by players like AOL and decide to cash out.

Our guess is that its independent days are likely to be numbered in the race to dominate VoIP in the US.

At AOL, Level 3 Communications is providing the managed VoIP infrastructure across 40 US markets plus offering Enhanced 911 services (emergency calling is a big issue for VoIP networks, because if a building loses power, the phones don't automatically stay on).

Sonus Networks is providing the VoIP technology and Linksys and Netgear will make the VoIP adaptors and home routers.

Copyright © 2005, Faultline

Faultline is published by Rethink Research, a London-based publishing and consulting firm. This weekly newsletter is an assessment of the impact of the week's events in the world of digital media. Faultline is where media meets technology. Subscription details here.

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