updated 9/30/2004 9:54:53 PM ET 2004-10-01T01:54:53

AT&T Corp. is trimming the price of its new Internet-based telephone service for the second time in six months, prompting a top rival to follow suit.

The latest price cuts by AT&T and Vonage for VoIP, or Voice over Internet Protocol, are meant to lasso as many first-time users as possible in a hot new market _ but also raise a question as to whether the fledgling business is rapidly caving to the same price wars which have battered the traditional phone business.

AT&T, which recently halted all its marketing efforts in the traditional consumer phone business, said Thursday it was lowering the price for unlimited local and long-distance calling by $5 to $30 a month, not including taxes and regulatory fees which can add several dollars to the bill.

That would have matched the rates charged by Vonage Holding Corp., a small Edison, N.J.-based company which has parlayed a two-year headstart into a customer base of 275,000 subscribers.

But soon after AT&T's announcement, Vonage undercut AT&T's new price by $5 with a new monthly rate of $25 a month for unlimited calls. Both companies are charging a $29.99 sign-up fee, though AT&T is offering the first month of service free.

Smaller rivals such as Packet8 from 8x8 Inc. already sell VoIP service for $20 per month and less.

To use VoIP, a customer also needs to pay for a high-speed Internet connection such as DSL and cable-based broadband, which typically cost from $30 to $50 a month.

Phone calls are broken down into digital packets similar to e-mail and scattered across the Internet before being reassembled as a voice on the other end. To use the service, a regular phone is plugged into an adapter which is connected to the broadband modem. The adapter is often provided free when customers sign up directly with the service provider.

AT&T, which launched its CallVantage service in late March, has been marketing VoIP aggressively in hopes it might pump new life into its residential business.

That operation has seen revenues slide by more than two-thirds from a peak of $25 billion, eroded by long-distance price wars, competition from cell phones, and an unfavorable court ruling which has made it less profitable to sell local phone service over leased Bell lines.

Because the technology is relatively unfamiliar for most people, AT&T is betting that consumers will sign on with a familiar name rather than a new brand, even if it means paying more.

The company has not disclosed yet how many homes have signed on for VoIP, which sports a wide range of capabilities that are not possible over a regular phone line.

These include the ability to take a home phone number on the road by plugging the VoIP adapter into any broadband connection.

"The pricing for a new technology like VoIP is certainly not an exact science," said Gary Morgenstern, an AT&T spokesman. "I think the entire industry is still gauging its value."

Copyright 2004 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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