Vonage Stock Trips in First Day of Trading

Score one for the skeptics.

Vonage (NYSE: VG) made its Initial Public Offering (IPO) on Wednesday in the face of analyst concerns about an ultra-competitive landscape and an unprofitable business plan for the firm. The Internet phone pioneer wound up selling stock below its issue price. Shares were initially priced at US$17 and quickly dropped. Vonage closed its first day of trading down $2.23 to $14.77.

In earlier regulatory filings, Vonage said it had expected to sell its 31.25 million IPO shares for $16 to $18 each for a total sale of over $500 million, which it planned to invest in advertising. The company succeeded in raising $531 million.

Beating the Goliaths

The fast-growth company has seen sales skyrocket from $16.9 million in 2003 to $269.2 million last year but has never been profitable. In fact, its losses have risen with its revenues.

Vonage lost $261.3 million last year, despite a subscriber base of more than 1 million. Widely recognized as the Voice over Internet Protocol (VoIP) pioneer, Skype, telecom giants AT&T and Verizon, as well as a number of cable companies, threaten to erode its market share. Vonage executives could not immediately be reached for comment.

Internet properties like AOL, Google and Yahoo have thrown their VoIP solutions into the competitive mix. Cable companies, however, are Vonage’s fiercest rivals. Time Warner added 270,000 digital phone subscribers in the first quarter of 2006. Comcast added 211,000 during the same period.

“The cable companies have an inherent advantage in that they have a large base of installed subscribers. It’s not difficult for them to add voice to video and ISP offerings, and they are having a lot of success with the bundles. In a short period of time, Time Warner has pretty much caught up to Vonage in terms of the number of subscribers,” Jon Arnold, an independent VoIP consultant at J Arnold Associates, told the E-Commerce Times.

A Losing Proposition

Vonage has a different value proposition from its competitors — it is marketed to replace regular phone service, not supplement it. The firm is not likely to replace regular phone service any time soon, even at $24.95 a month. Skype, Google and others are offering similar PC-based services for free.

“You can pay a nominal amount of money to get AOL’s phone line service, which is half the price of Vonage and does everything that Vonage does and a whole lot more,” Arnold said. “Voice is a race to zero. It’s like e-mail. It costs next to nothing to send it, so you can theoretically give it away for free. It’s hard for Vonage to make a go of it when there are so many free opportunities out there. That makes the market a challenging place for a pureplay like Vonage.”

The Future of Voice

Vonage’s long-term profit potential rests on its ability to become the best pureplay outfit on the market. It is banking on the assumption that not every customer will want to be tethered to a cable or phone company for VoIP.

The company’s fate rests with the future of voice. Will it migrate to the PC or remain with landlines and wireless services? If the market for landline service remains, Vonage could have a sweet spot. If voice goes online over the next decade, Vonage could be in for more financial woes.

“There’s only room for one Vonage in this market. No one can duplicate what Vonage has done in terms of acquiring customers and building a brand. I don’t see any of its pureplay competitors catching up to it,” Arnold said. “The only question is how Vonage will make money when it spends most of its revenue on advertising.”

That is the multimillion dollar question. According to a filing with the Securities and Exchange Commission, the company’s deficit reached $455 million as of March 31 of this year.