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Vonage, AOL Not Clicking

Updated from 4:40 p.m. EDT

Vonage (VG - Get Report) isn't compatible with some broadband service sold by Time Warner's (TWX - Get Report) AOL unit, potentially shutting the Internet phone off from a group of customers at a time when it needs to add them.

AOL customers who aren't able to access the Internet without first going through AOL can't use Vonage because "AOL Broadband authenticates the connection using the software client and is not compatible with Vonage,'' the phone company says. AOL suspects that the people affected by this problem have older modems.

AOL customers who access the Internet through partnerships it has with telecom and cable providers are able to use Vonage, according to AOL. The Time Warner business doesn't provide access itself and now relies on partners to provide broadband, which it is actively promoting.

"It just won't work," says Brooke Schulz, senior vice president for corporate communications of Vonage, in an interview. "The broadband Internet connection that you get from AOL is really designed for Web surfing.''

The AOL problems will no doubt add to the litany of investor concerns about the Holmdel, N.J.-based company, whose initial public offering flopped this week. The shares last traded on Friday at $13.13, almost $4 below the $17 offering price.

Analysts and investors say Vonage, which has an accumulated deficit of $467.4 million, needs all of the customers it can get as it faces intense competition from a litany of Internet, cable and telecommunications companies.

"This may put pressure on them to develop other pipelines into the home,'' said Jon Arnold, of J Arnold & Associates, an independent Internet-phone consultant. "It's all about getting the most customers for the least amount of cost.''

Vonage, which advertises that it can save people as much as 50% on their phone bills, tells customers up front that the service won't work with AOL for Broadband, Schulz says, adding that the problems was disclosed long ago.

AOL continues to be hurt because the gains it's seen from both broadband and advertising haven't offset the declines in its dial-up business. The management of Time Warner, parent of CNN and Sports Illustrated, have made improving AOL one of its top priorities.

One AOL user says she is suing Vonage for not disclosing that its service won't work when she signed up last year. New York-based recruiter Lauren Lagasi is seeking, among other things, payment for a $3,200 cell phone bill she racked up while she was without phone service for two months.

"I've been through the ringer," she says. Vonage declined to comment on Lagasi's suit.

The phone company has been spending bucketloads of money to attract and retain its customers. In the first quarter, Vonage spent $88.3 million on marketing, up 59% from a year earlier. The company has been the largest buyer of advertising on Internet for the past two years, according to Nielsen//NetRatings.

Internet voice is increasingly becoming a commodity service as companies including Verizon (VZ) and eBay's (EBAY) Skype service either have cut prices or are providing services for free.

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