In a report released this week, research firm In-Stat/MDR says Vonage Holdings Corp. owns the largest share of the market for voice-over-IP (VOIP) service to U.S. residences and small offices with broadband connections. But the report also warns that Vonage and other pure-play VOIP providers face risks from regulatory uncertainty and price competition.

The report, Hear This: Broadband IP Telephony, says Vonage is adding 22,000 new lines per month and currently provides service to 66 percent of U.S. households and small offices that have a broadband Internet connection and subscribe to a VOIP service (see Vonage Claims VOIP First). The total number of subscribers will grow from 114,000 last year to 6.1 million in 2008 at a compound annual rate of 134.2 percent, the report adds (see Residential VOIP Will Boom, Says Study).

But the nascent VOIP business still faces some hurdles. For one thing, it’s not clear whether state and federal regulators will treat VOIP as a data service or a telecommunications service (see VOIP to Star at FCC ). If the latter, then VOIP service providers may have to contribute to the Universal Service fund and pay additional fees for routing calls over the public switched telephone network (PSTN). Such requirements could add costs to VOIP providers’ businesses.

Daryl Schoolar, an analyst at In-Stat/MDR, says added costs could make investors wary of funding young, pure-play VOIP providers like Vonage, which, unlike incumbent phone and cable companies, rely only on sales of VOIP service for revenues (see Vonage Raises $40M). “Until a lot of this regulatory uncertainty is taken care of, a lot of people are going to be hesitant about putting money into a company that could lose its competitive advantage by an arbitrary ruling from the federal government,” Schoolar says.

Pure-play VOIP providers already compete fiercely against incumbents that sell not only VOIP service but also bundled local and long-distance service at rock-bottom prices (see AT&T Sets Aggressive VOIP Target and BT Disses VOIP Upstarts...). Vonage last month dropped the price of its flagship Residential Premium Unlimited Plan -- which provides unlimited local, toll, and long-distance calling throughout the U.S. and Canada -- from $34.99 per month to $29.99 per month. In addition, VOIP providers must compete against cellular service, calling cards, and peer-to-peer VOIP software programs.

Jamie Serino, a Vonage spokesman, says regulations will affect all VOIP providers equally, including incumbent phone companies, and won’t put pure-play providers at a disadvantage. Vonage already pays access fees to carriers for PSTN termination, he says, and those fees include taxes and contributions to the Universal Service fund. “If we were taxed directly, we would pay directly, and not to phone companies, probably the same amount as we pay now,” Serino says.

Serino says Vonage’s multi-tiered calling plans -- which offer different levels of service at rates ranging from $14.99 per month to $49.99 per month -- help it avoid competing purely on price. “Vonage is structured in a way that we have pretty high margins,” Serino says. “If we had to compete on price, it wouldn’t put much pressure on us.” The privately held company is not yet profitable, but Serino attributes that to the company’s aggressive spending on marketing.

Serino and Schoolar agree that pure-play VOIP providers will compete most effectively against incumbents by offering features that don’t come with traditional phone service. “It’s important for a lot of these companies to not make broadband IP telephony just a replication of existing phone service,” Schoolar says. “They need to really personalize the service with a number that follows you wherever you go, where you can access your home number and messaging while you’re at work or at a WiFi access spot.”

Vonage already offers some advanced features, like the ability to add call-forwarding numbers through a personalized Web page. It plans to add features like call hunt, which will allow a call to ring different numbers in succession until it reaches a live person. Other forthcoming features include Web access to voice mail, email notification of voice mail, and fax service to a unified messaging inbox.

— Justin Hibbard, Senior Editor, Light Reading