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Vonage: Spending As Fast As It Can

CEO Jeff Citron aims to keep the Internet telephony startup a step ahead of the giants now in hot pursuit

Enticing customers to switch from their tried-and-true phone service to a newfangled brand costs loads of money, and Jeffrey A. Citron is on one heck of a spending spree. Citron, the 34-year-old chief executive of telecom startup Vonage Holdings Corp., has been burning millions in venture funding to market Vonage's Net-based phone service. His message is simple: Users with broadband connections can save on their bills by hitching their phone to the Net -- through a Vonage hookup. It's called Voice over Internet Protocol, or VoIP, and customers like the economics. Vonage subscriptions have jumped 63% this year, to 700,000. Some 15,000 more jump on board every week.

The trouble for Vonage? Big cable players such as Time Warner (TWX ), Cablevision Systems, and Comcast are starting to gain traction in the same market. And they're chipping away at Vonage's industry-leading share, which was 37.5% in the first quarter, according to Halpern Capital. What's more, telecom giant Verizon Communications (VZ )just launched its own VoIP service, and SBC Communications (SBC ) is expected to plunge into the market in coming months, once its merger with AT&T (T ) is final. By yearend, the total VoIP market is expected to top 3 million. By 2008 it'll be 19 million, according to researcher IDC.