- The Washington Times - Tuesday, August 14, 2007

NEW YORK — Nate Williams hardly noticed when his phone company vanished.

Mr. Williams, a freelance illustrator from Seattle living in Argentina, had signed up two years earlier with the Internet calling company SunRocket Inc. so he could maintain a U.S. number and make cheap calls back home.

He said the service was great when it worked, but it was so unreliable that it took a while for it to sink in when SunRocket, the second-largest stand-alone Internet phone provider, suddenly collapsed last month and abandoned more than 200,000 customers.

Mr. Williams and many others had paid about $200 in advance for a year of service.

SunRocket was a bad situation,” Mr. Williams said by phone from Buenos Aires, his voice sounding hollow as he used EBay Inc.’s Skype phone service. “Small companies are going to have a tough time in lots of industries, especially technical ones.”

Times have grown especially tough for independent Internet calling companies as they face mounting competition from big corporations, legal challenges and new regulatory costs that erode their cheap pricing and hurt the bottom line.

With big economic trends against them, some companies are finding that once-promising business strategies have disconnected from financial reality.

“Many of the small service providers are going to go out of business. It’s not just SunRocket,” said Jeff Kagan, an independent telecommunications analyst based in Atlanta.

Consumers are increasingly embracing big bundles of services from cable and phone companies that include television, Internet access and both wired and wireless voice calling, Mr. Kagan said. He said that leaves little room for voice-only providers, which are likely to merge, be acquired or follow SunRocket into oblivion.

“That’s the chance the customer takes when they do business with a small company,” he said. “You don’t know until you try to make a phone call and it’s not there.”

Internet calling, also known as VoIP or Voice over Internet Protocol, shook up the telecommunications industry several years ago as independent start-ups offered telephone service over high-speed Internet connections instead of copper wires.

The products, with sound quality ranging from great to lousy, often allow calls to and from regular phones and include unlimited long distance and many calling features at cheaper prices.

Big corporations, initially slow to catch on, have since roared ahead, with cable providers now dominating the industry and stealing customers away from traditional phone companies.

At the end of 2006, 6.5 million homes had Internet calling service through a cable provider and 2.7 million with an independent company, said Jupiter Research analyst Doug Williams.

He said cable’s dominance is expected to continue with more than 20 million phone customers by 2012, compared to less than 5 million with the stand-alones.

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