By Michal Lev-Ram
June 25, 2008

By Michal Lev-Ram

Telephone companies are notorious for their price wars. But a new service from T-Mobile may spark one of the fiercest battles in recent years.

Starting July 2, T-Mobile customers will be able to make unlimited domestic calls using a regular home phone connected to the Internet. Unlike a traditional wired landline, the new service uses Voice over Internet Protocol (VoIP), a technology that converts calls into a digital signal that travels over the Internet. While VoIP has been around for years, T-Mobile’s offering brings something new to the table: At $10 a month, It costs less than half the price of comparable “digital” phone plans from Vonage (VG), Comcast (CMCSA), AT&T and Verizon.

“It’s a very, very disruptive price point,” says Michael Gartenberg, an analyst with Jupiter Research. “Ten dollars a month is pretty darn close to free.”

T-Mobile’s biggest rivals, AT&T (T) and Verizon (VZ), offer VoIP services for about $25 per month. But because both are afraid of cannibalizing their waning landline business, they’ve been cautious about cutting prices. T-Mobile, which has focused on selling access to its cellular network and Wi-Fi hotspots, hasn’t had a traditional landline business — until now. That puts T-Mobile, the fourth-largest U.S. carrier, in a prime position to undercut its competition by offering significantly cheaper VoIP rates.

The new service, dubbed T-Mobile @Home, comes with some strings attached. For starters, it’s limited to new or current T-Mobile cellular customers who spend at least $40 per month on their wireless bill. Subscribers will also need to commit to a two-year contract and purchase a $50 Internet router (broadband connection not included) which they can connect to any regular phone.

T-Mobile’s VoIP foray faces some challenges. The lengthy contract aside, more and more consumers no longer see the value in having a home phone. According to CTIA, a wireless association, mobile penetration has now reached 84% in the United States, and 15.8% of U.S. households have disconnected their home phone, up from 8.4% in 2005.

Forrester Research analyst Charles Golvin says that many potential “cord-cutters” don’t want to give up a home line and have opted for cheaper VoIP services instead. “T-Mobile’s offer is, to a significant extent, aimed at reticent cord-cutters or those without a landline who have reason to miss the service,” Golvin wrote in an e-mail.

T-Mobile is betting that most Americans will keep a home phone. The company is hoping its low-priced VoIP service will not only get current mobile subscribers to sign up, but will also attract customers from rivals.

Gartenberg, the Jupiter Research analyst, thinks it’s just a matter of time before T-Mobile’s competitors respond. “This is going to put a lot of pressure on those folks to match these prices or rethink how they’re offering these services,” he says.

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