Home Phone Service for $10 a Month?

T-Mobile's @Home service is designed to retain subscribers, but it could deal a blow to Web-calling companies like Vonage

It's quite an attention-grabber. Starting in July, T-Mobile USA will begin offering to pay off your mortgage or make your rent payments. It'll even give away two brand-new homes. It's all part of a new marketing campaign by the wireless operator, but the push isn't to promote a wireless service. T-Mobile is making all this noise over the fact that it's now selling home telephone service.

Called T-Mobile @Home and unveiled on June 25, the service lets users quickly switch their existing home phone numbers and start making and receiving calls over a broadband connection on the cheap. Sound familiar? Vonage (VG) pioneered the so-called Web-calling service back in 2001. Nearly every cable operator has rolled out similar service since then, to compete with the traditional phone offerings from Verizon (VZ) and AT&T (T). But this may be the first time a pure-play wireless company elected to go the same route in the U.S.

T-Mobile's endgame is not to become a major force in home phone services, where margins and customers are declining. Instead, @Home is about delivering a blow to wireless competitors. With the U.S. wireless market near saturation, service providers now have to grow by stealing customers from each other with sweet prices and sweeter deals. AT&T has been dangling the carrot of being the exclusive U.S. carrier for Apple's (AAPL) popular iPhone. Earlier this year, Verizon Wireless, AT&T and Sprint Nextel (S) unveiled all-you-can-eat wireless plans. Now comes T-Mobile's parrying shot: @Home, which will become available through T-Mobile's retail stores and online on July 2.

Only for Wireless Customers

Offered only to new or existing wireless subscribers, @Home may be an effective way for T-Mobile to safeguard its subscribers from competitors' offers. At $10 a month, the service is half the cost of Vonage's lowest-priced plan and of what Comcast (CMCSA) offers in its latest promotion. T-Mobile's price is also much lower than the $65 a month an average telco phone-line user pays today. The price is so attractive, especially in an economic downturn, that some analysts believe T-Mobile could kick off a new wave of pricing wars in Web calling.

Users who sign a two-year contract with T-Mobile get an @Home Wi-Fi router made by Cisco's (CSCO) Linksys division for a subsidized price of $50. (The price is $150 without a contract.) As most people are apt to go for the subsidized price, "they'll get much greater loyalty from their subscribers," says Charles Golvin, an analyst with consultancy Forrester Research (FORR). "In today's cellular environment, it's all about reducing churn." The plan may also encourage some of T-Mobile's lower-end or prepaid customers to upgrade their plans: The service is available only to individuals paying at least $40 a month and families paying at least $50 a month for their wireless plans.

T-Mobile may even use @Home to steal competitors' customers. The company started offering its Hotspot @Home, a more limited service, last year, and since then about 45% of the customers for that service have switched to T-Mobile from another wireless carrier, says Joe Sims, general manager of broadband and new business development at T-Mobile.

Replacing the Landline

The new service is expected to hit the spot with families that still prefer to keep a home phone line, rather than going exclusively wireless. In an 84-store trial T-Mobile has run in the greater Seattle and Dallas-Fort Worth areas since March, "the take rates have been phenomenal," Sims says. He believes that as many as a third of the company's subscribers to family plans—T-Mobile's most popular offer—may eventually switch to @Home. "It's absolutely about replacing the landline in the home," he says.

And that spells trouble for the Web-calling industry. Its prices have been fairly stable since late 2004. But the T-Mobile plans could force existing Web-calling providers to either lower their prices or to match T-Mobile's bundle. "It really puts a lot of pressure from the price standpoint," says Michael Gartenberg, a research director at consultancy JupiterResearch. "At $10, you are trending down to practically free. It changes the game."

Since the offer only extends to T-Mobile wireless customers, the impact may be muted. But the service may encourage Vonage to put out a wireless-home phone bundle of its own sooner rather than later. The largest U.S. stand-alone Web-calling service is prepping to roll out a bundle, combining a home phone and broadband service from partner Covad Communications, in late 2008. "I expect that, down the road, there will be a bundle incorporating other services," says Vonage CEO Jeffrey Citron.

A Clutter of Copycats?

The T-Mobile offer may also encourage Sprint, which has long quietly provided wholesale home phone services to 14 regional cable companies, to roll out an @Home-like service of its own. The carrier doesn't offer a Web-calling service today (Verizon, meanwhile, does—it sells a bundle of home and wireless voice service for $60 a month). Cable companies may need to speed up their plans to introduce wireless as part of their existing service bundles as well. While companies like Comcast have resold Sprint's wireless service in a few markets in the past, that agreement recently ended.

Research shows that consumers like the simplicity and convenience of buying services from one provider. At the end of 2007, 75% of all Web-calling subscribers were buying so-called triple-play bundles, including voice, video, and broadband services, according to consultancy TeleGeography.

T-Mobile's main challenge: to explain to customers how the service works and to promote it effectively in stores. The company may also need to quickly roll out additional features; today, @Home is relatively bare-bones. Yes, charges appear on subscribers' wireless bills, and customers have access to T-Mobile's voice mail, ringtones, and 411 services they already use on their mobiles. But the service doesn't offer e-mail notifications of new voice mails, a feature users have come to expect from Web-calling services.

As wireless competition intensifies, @Home may help T-Mobile stand out from its rivals. "Voice is still the most sticky application out there," says Jon Arnold, principal at consultancy J. Arnold & Associates.