February 10, 2006 4:00 AM PST

Vonage--An IPO filing like it's 1999

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Do executives at Vonage think it's 1999 again?

Like the founders of many an Internet company in the late 1990s, executives at the Holmdel, N.J., upstart--which has widely marketed its low-cost voice over Internet Protocol (VoIP) service--seem to believe that profits can wait.

"We are pursuing growth, rather than profitability, in the near term to capitalize on the current expansion of the broadband and VoIP markets and enhance the future value of our company," Vonage said in a filing Tuesday with the Securities and Exchange Commission that lays the groundwork for an initial public offering.

No one denies that Vonage is targeting a potentially hot market.

But now that the 5-year-old company has filed for an IPO that could raise $250 million, that "invest now to make money later" strategy is going to be harder and harder to justify.

In fact, Vonage's filing offers eye-popping insight into a company that's captured lots of attention among the technorati without turning that interest into profits. In the first nine months of 2005, Vonage lost $189.6 million against $170 million in sales. It cost the company $213 in marketing dollars to acquire every customer--up from $137 per subscriber the year before. That means, based on Vonage's most popular, $24.99 monthly residential subcription, it would take roughly nine months to break even on marketing costs for each new subscriber.

It gets worse. The average revenue from the company's various pricing packages has dropped to $26.63 per subscriber--from $30.99 a year ago. Vonage officials would not comment for this article.

While Vonage has increased sales at a respectable clip--from $18.7 million in 2003 to $174 million for the first nine months of 2005--its losses have also mounted. The company has lost about $310 million since it started selling its service to consumers back in 2003. Vonage readily acknowledges that its losses, largely due to marketing costs, have increased every quarter and will likely continue for the foreseeable future.

Of course, no one denies that Vonage is targeting a potentially hot market. Forrester Research expects 14 percent to 15 percent of all households in the United States to switch to a VoIP phone service as their primary phone service by 2010. Today, the firm estimates that 4 million of the 107 million households in the U.S. currently subscribe to VoIP.

Cable isn't the only competition for Vonage to worry about.

That's a big target for a small company like Vonage, which has rapidly been signing up new customers. The company more than tripled its subscribers in 2005, and as of Wednesday, it said, its VoIP service had more than 1.4 million subscribers.

But Vonage isn't the only company chasing the VoIP dream. Cable operators have aggressively pushed voice service as part of their service bundles, which also include television programming and high-speed Internet access. And they've already seen huge success. Time Warner Cable reported 1.1 million subscribers at the end of 2005. Cablevision brought its total to roughly 600,000 in the first nine months of last year.

And cable isn't the only competition for Vonage to worry about. EarthLink and AOL are also offering IP telephony services to replace traditional phone service with products that are very similar to Vonage's service. Wireless operators also plan to enter the VoIP market with dual-mode phones that support 3G and voice over Wi-Fi. Sprint Nextel has already joined forces with several cable companies to get this underway.

CONTINUED: Attracting early adopters…
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7 comments

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Consumers will demand better quality
I run a small internet access and hosting business in the midwest. When Vonage came to town a year ago I relished the thought of using new technology to cut costs and give new features to our phone service.

I got Vonage service, (it took 3 months to transfer my business phone number to Vonage) and I have worked with it since then.

This week I finally decided to return to the copper connections of Qwest because the quality of Vonage was becoming unacceptable.

On many, many occasions, the call simply broke while I was talking to customers. One of us would need to call back to the other. It is a common experience that an odd echo/breaking of the sound occurs and you lose about 3 seconds of the conversation causing you to ask your customer to repeat (who knows if it is happening to them from my voice via Vonage).

I attempted on several occasions to write Vonage via their website support system. They must have been too busy growing as I never got a response from them. When their website (and all your controls over your voicemail/forwarding) goes down for hours at a time, there is no explanation of why it occured. When I call, I got non-native English speaking support staff.

I finally decided I could no longer afford Vonage, as much as I wanted to use the new technolgy. To be sure it was not simply the kind of connection I had, I also tested Skype in the same environment. I did not experience technical difficulties with Skype and the quality of voice connection was clearly superior even with a laptop's built in microphone and speakers.

So, if Vonage wants to grow, it better do things to hold on to customers. I wanted to give them a full chance to grow through their difficulties. I gave them a year. I can't afford to give them any more time.

DP
Posted by dbpayer (2 comments )
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No problems here
I have two lines on Vonage. One for home office, one for the family. So far, so good. I wish I could say the same for the Comcast Cable service it runs over. I have no doubt that the "big boys" will make life miserable for Vonage and that our wonderful federal government will burden them with regulation and taxes that will make the advantages of VOIP less pronounced. The main reason I disconnected from Verizon (my local carrier) and went VOIP was the fact that I'm not being nickeled and dimed to death. All the things I've come to rely on like call waiting, voicemail, Caller ID and advanced forwarding features are part of the one low price I pay for Vonage. The technology is cool, but the savings are cooler. If Vonage does nothing more than drive down the cost of good full-features telephony, I'll be happy. Vonage is doing to the local carriers what MCI did to AT&T back in the 80s. That's a good thing.
Posted by felgercarbnaysay (49 comments )
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Vonage works for Time Warner, etc.
Everytime they advertise for Vonage, they aren't advertising why their VoiP solution is better than the big guys, like the cable companies, and accordingly all of their advertising dollars goes into getting customers for the competition. Good job!
Posted by mortis9 (370 comments )
Reply Link Flag
Skype is Winning
I'm not buying Vonage stock. . .
Posted by (139 comments )
Reply Link Flag
skype?
ya, ok. whatever. i'll stick with my 1998 cell phone. it makes PHONE CALLS and doesnt take pictures or play music. as for a home phone, havent had one since 2000. dont need one. the cell works fine.
Posted by MS789 (17 comments )
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