Line Goes Dead for a Web Caller

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In contrast, Vonage and SunRocket have spent a great deal to sign up and serve subscribers. From start to finish, SunRocket raised about $80 million from BlueRun Ventures (formerly Nokia Venture Partners), Mayfield Fund, Doll Capital Management and Anthem Capital Management. That $80 million delivered only about 200,000 customers. "I'm baffled how they went through so much money so quickly," says Beckert. "They don't have a lot to show for it."

Vonage, which has lavished hundreds of millions on advertising, recently cut back on marketing to stretch its dwindling cash. Until recently, Vonage had been spending nearly $275 on marketing for each new customer that signed up for a service that costs the company $114 a year to provide. That's a total expense of nearly $390 for an account that will generate about $340 in revenue the first year.

"Goodbye"

Compounding that mathematical challenge is the fact that there are no service contracts for VoIP, as there are in the cell-phone market, to ensure that customers stay long enough for the company to recoup its investment, says Jon Arnold, a principal at J Arnold & Associates, an industry consulting firm. SunRocket attempted to address that problem by offering customers a great deal but forcing them to pay up front for one or two years of service, a financial commitment that's now come to haunt its subscribers.

While SunRocket's Web site is still running, calls to the customer support center are answered with an automated message that says: "We are no longer taking customer service or sales calls. Goodbye." Phone calls and e-mail messages attempting to reach SunRocket executives were not returned.

Despite his experience with SunRocket, Andrew Mitry isn't hanging up on VoIP, though he says he picked his new provider more carefully. He chose Lingo, which charges just $22 a month for unlimited domestic calling. Because Lingo is a subsidiary of a larger company, Primus Telecommunications (PRTL), Mitry says he's comfortable that it won't suddenly fold like SunRocket. Mitry briefly considered cable provider Cox Communications and Verizon, but found their services, which cost about $40 a month, too expensive.

It's never been a question of demand. No doubt there are many more people like Mitry willing to take a risk for the savings that come with VoIP. But with SunRocket's failure, it's a little less clear how a VoIP company can turn a profit while offering those savings.

Rachael King is a writer for BusinessWeek.com in San Francisco.