In January 2005, I wrote an article for the E-Commerce Times entitled VoIP Here to Stay. In that article, I stated, “The future of VoIP is, to a significant extent, now!” It’s hard to imagine that the column was written only about a year and a half ago.
At that time, Vonage (NYSE: VG) had about 350,000 customers, and the “big guys” like Time Warner, Cablevision (NYSE: CVC) and Comcast were just beginning to focus on VoIP. Vonage was clearly the leader. Today, Vonage has over 1.5 million customers! But, the bad news for Vonage is that Time Warner now has about 1.4 million, and Cablevision has approximately 900,000 subscribers.
The Doomsayers
Vonage has been in the news of late because of its recent IPO — May 24. With that IPO, the company raised over US$500 million. Not bad — but, some people out there are saying that Vonage will never make it.
Listen to Ted di Stefano (6:25 minutes)
Their reasoning is that Vonage’s competitors are able to offer bundled services. For example, Time Warner can offer cable television, broadband connection for the Internet, regular phone service, plus VoIP — all in one package. Vonage can’t do that because it really isn’t a cable company.
Investors seem to agree. Vonage’s stock has lost about half of its value since it went public.
One analyst, Jeff Halpern of Sanford C. Bernstein & Company, was recently quoted in The New York Times as saying, “Vonage is not the company people are going to identify with voice over Internet phones six months from now.” Another analyst, Renee Shaening, was quoted in The Times as saying, “I kind of assumed Vonage would go away after a while.”
Vonage’s Strengths
Jeffrey A. Citron, a pioneer in computerized day trading, founded Vonage. My feeling is that this man should not be counted out so early in the game.
Here’s why I say this. Remember Skype, the upstart European VoIP company that basically gave away its services to its members? If you do, I’m sure that you realize that Skype was acquired by eBay for well over $2 billion dollars.
What was eBay thinking, spending such an amount on a startup that was virtually giving away so much of its services? My thought is that eBay realized that Skype had obtained a “critical mass” of subscribers — a number so large that it would jump-start the company’s entry into the VoIP field.
Well, my guess is that Vonage is after that critical mass — that “sweet spot.” In fact, much of the $500 million plus that the company has recently garnered from its IPO will go to further expand its customer base.
Here’s what Vonage said in a recent regulatory filing: “In order to grow our customer base and revenue, we have chosen to increase our marketing expenses significantly, rather than seeking to generate net income … This strategy, however, will result in further net losses, which generally have increased quarterly since our inception.”
Has Vonage somehow gone off the deep end by admitting that it will continue to lose money in the near future because of its drive to gather still more customers? I don’t think so.
My feeling is that Vonage’s business plan, though I have never seen it, stresses marketing more than technology. Its uniqueness is driven less by technology than by marketing.
Think about it. Vonage does not have a massive cable infrastructure that serves as the foundation for its VoIP business. In fact, the Vonage calls get passed through cooperating cable providers who allow the company to use their own infrastructure.
One might ask, then, what does Vonage actually own? My answer is, as of today, the customer! Yes, Vonage still is the leading provider in VoIP, competing against the big guys — and, with the proceeds from its recent IPO, it is obvious to me that it wants to “own” the customer for the immediate future.
Exit Strategy
This is purely conjecture on my part, but I see Vonage either being bought out by a large cable company, for example, Time Warner, or entering into some kind of a merger agreement with such a company. If that happens, Vonage will have the last laugh.
It’s going to be fun to see this all play out.
Good luck!
Theodore F. di Stefano is a founder and managing partner at Capital Source Partners, which provides a wide range of investment banking services to the small and medium-sized business. He is also a frequent speaker to business groups on financial and corporate governance matters. He can be contacted at [email protected].
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What Mr. Stefano fails to discuss in his article on Vonage is that focusing on marketing as part of your core strategy is fine, but only if you can keep the customer. I recently read an article by another analyst stating that Vonage is suffering from huge attrition. I AM not surprised by this since I personally had very bad experience with customer service and the service itself is not great. I’ve heard this personally from many people – just check out Amazon.com customer opinions! Price without good service is not what customers will endure. Companies forget that we the customer have choices and there are alternatives to Vonage! Skype works very well with no equipment to buy, no connection charges (nor for that matter disconnection) and no long term contract. Even when they start to charge for dialing land lines (supposedly after Dec. 31st), I doubt this smart, customer oriented company will start throwing in contracts, other charges or even be less competitive in any way.
Vonage has a grim future unless it’s CEO can stop being so arrogant and remember that customer service is king in a competitive me too company.