Internet Phone Start-Ups Look Past Low Prices

Internet phone service -- it's a hot idea and it has a strong selling point: It's cheap.

Hundreds of new companies have cropped up to sell the service in the past few years, and venture capitalists are pouring hundreds of millions of dollars into the industry. All that was appealing enough to entice former America Online Inc. executive Lisa Hook out of early retirement and into the job she started last week as chief executive of SunRocket Inc., a two-year-old Vienna firm offering phone service over the Internet.

And the prospects sound promising, except for one word creeping into the vocabulary -- bundling.

That's the term describing the way communication services are expected to be sold in the future. Rather than buying cable from one company, long-distance phone service from another and Internet access from a third, customers are increasingly able to buy all three from a single provider. Many analysts say large telecom and cable companies that already have relationships with huge groups of customers -- companies such as Verizon Communications Inc. and Comcast Corp. -- have a big advantage in the market.

That doesn't scare off Hook and SunRocket's investors, who are betting that if the firm acts quickly to build a loyal base of customers, it will be able to survive the pressures of bundling.

The companies springing up to sell Internet phone services are reminiscent of the hundreds of dial-up Internet firms that emerged in the late 1990s with hopes of becoming kings of the industry -- or at least growing big enough to fetch a decent price in a sale. Of course, most of those companies simply fizzled as a handful of giants came to dominate the market and broadband superseded dial-up service.

Analysts say companies like SunRocket that offer only Internet phone service -- and there are at least 1,100 of them according to Sandvine Inc., an Ontario firm that sells equipment to broadband companies-- may face a similar fate.

"Over time, this type of service is likely to be absorbed by the larger vendors," said Bern Elliot, an analyst at Gartner Inc. who studies the telecom market.

But Hook, who made a name for herself as an executive skilled at marketing new technologies to consumers, is betting there is room for both.

"We're at the very front end of this market," she said last week. "We can be one of a handful of new brands that are winners in this category."

At AOL, Hook, now 48, led the company's broadband division, which went from 300,000 subscribers to 5 million in two years. Before her four-year stint at AOL, she was a partner at a private equity firm focused on the telecom and media industries.

"We were looking for an executive with experience in the consumer marketplace," said Joyce Dorris, SunRocket's co-founder.