The Marketplace Report: Web Phone Service Spikes

Subscriptions to Internet phone services in the United States have more than tripled to 4.5 million, according to analysis firm TeleGeography. Noah Adams talks to Janet Babin of Marketplace about how Internet-based phone services have become a billion-dollar industry.

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Back now with DAY TO DAY. More Americans are signing up to get their telephone service through the Internet. In fact, a new study shows the number of people in the U.S. tripled last year to four and a half million users. Marketplace's Janet Babin is with us. Janet, tell us why the boom this last year. Why?

JANET BABIN reporting:

It appears to be price and marketing, Noah. Voice Over Internet Protocol, or VoIP services, are now a lot cheaper than traditional phone service by about 50 percent, and also, a lot of marketing is having the desired affect. Vonage, an Internet voice company, spent more than $100 million on advertising last year. so analysts say these two things have really catapulted VoIP from tech novelty that it was just a few years ago to now a serious market challenge.

ADAMS: A lot of people competing to provide this. Why is one service more, is one service indeed more popular than others?

BABIN: Well, one service is more popular. The one that you use the traditional telephone handset tends to be more popular. But just a review of Voice Over Internet Protocol, it does place phone calls over a data network, and there's the Internet for that or cable services, so you have to have either a cable subscription or the broadband Internet connection.

And cable subscription is a lot easier. You know, you're familiar with your cable service, although the broadband Internet people like Vonage, they are gaining. So according to the TeleGeography analysis, cable companies now have 52 percent of the market, and Vonage, this year, will hit 1.2, has hit 1.2 million subscribers as of last year.

ADAMS: I like that word, TeleGeography. Would people be tending to add Internet phone service, and then keep the regular phone line just to be sure?

BABIN: Right. I spoke with Stephan Bechard, and he is with TeleGeography, the company that did the survey, and he says the growth in Internet phone service is really a replacement situation.

Mr. STEPHEN BECHARD (TeleGeography): Much of that growth is coming at the expense of companies like AT&T, Verizon and Bell South. So it's overall going to lead to continued competition and I think revenue erosion in the telecom business. You know, that's the disconcerting aspect of it. For people like us, who work with a lot of these phone companies, it's disconcerting. I've got a lot of friends at those companies.

BABIN: Now, it's important to remember, Stephan Bechard says, that Internet phone service is still a comparatively small part of this market overall, and TeleGeography though does predict that about another 3 million people this year will sign on to Internet phone service.

Well, coming up later today on Marketplace, there's been a huge economic boom happening in India, but still, not a lot of people there have or use toilets, so we'll find out why.

ADAMS: Janet Babin of Public Radio's daily business show Marketplace. Marketplace joins us regularly at this time for talks about money and business. It's produced by American Public Media.

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