Vonage Now an ISP

Moving from one low-margin, high-churn business to another low-margin, high-churn business, Vonage said today it will piggyback on EarthLink Inc. (Nasdaq: ELNK)'s municipal wireless networks to provide high-speed Internet access via WiFi.

"Giving Vonage customers greater access to affordable, high-speed Internet access makes great sense, and is another way we are working to improve the Vonage customer experience," said Mike Snyder, CEO of Vonage, in a statement.

Becoming a reseller for EarthLink is at this point a low-risk move for the VOIP provider, which went public last year and has seen its share price plummet 62 percent since its debut. While EarthLink has signed contracts for half a dozen cities, and on Friday reached a preliminary agreement with the city of San Franciso to build out the WiFi network in that city, so far it's turned on WiFi networks in only a handful of towns including New Orleans and Philadelphia. The Atlanta-based ISP says it hopes to launch in 12 additional markets by the end of this year. (See The Milpitas Model.)

The three-year deal, which will allow Vonage to offer its customers broadband access over EarthLink's municipal wireless networks starting in the second half of 2007, is non-exclusive, meaning that Vonage is free to resell access over other municipal networks as well.

Providing voice service over notoriously unreliable citywide WiFi networks will be a challenge, acknowledges Vonage CEO Jeffrey Citron.

"When you look at all wireless networks, including cellular, they all have coverage and interference issues of one kind or another," says Citron. "When we bundle Vonage phone service with a municipal WiFi network, we think the customer will expect a similar level of service. As these networks become more mature, we'll be able to overcome those problems and provide a higher level of service."

Janet D. West, EarthLink's vice president of access sales and marketing, says that pricing for wholesale access on her company's networks begins at $12 per subscriber per month, with discounts according to volume. Vonage has not said what it will charge for the service at retail; Vonage officials have not yet responded to requests for comment.

Wireless Internet access will be bundled with existing telephone service from Vonage, which also said in the release that it will at some point offer a "next-generation Vonage Wi-Fi phone" that will work over the muni networks.

EarthLink has said repeatedly that it intends to offer wholesale access to companies even when they're effectively competitors -- as is the case with Vonage's broadband Internet access.

"Competition fosters growth," says West. "We've always been pro-competition and believers in open access, and now that we have the opportunity to be the network provider, we still utilize the same philosophy."

Vonage customers in range of EarthLink service in Philadelphia, New Orleans, Milpitas, and Anaheim will be able to access the service immediately. Vonage also said that it will offer customer-premises equipment, such as wireless modems, later this year.

— Richard Martin, Senior Editor, Unstrung

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