June 30, 2006 4:00 AM PDT

'Vonage the Dog' bites back

NEW YORK--A month after Vonage debuted on the New York Stock Exchange, one of Wall Street's most bombastic personalities has been haranguing the company like an unwanted mutt.

Literally.

CNBC's Jim Cramer has taken to calling the voice over Internet Protocol (VoIP) provider "Vonage the Dog," and turned ranting about the company's disappointing initial public offering into a regular bit on his call-in show. In fairness, he's not just doing it for giggles; Vonage's share price has steadily declined from its debut price of $17 to around $8.90 on Thursday.

Cramer's entertaining or humiliating--depending on your viewpoint--rants are hardly Vonage's only problem.

The company is mired in investor lawsuits. Investigators are looking into an investor stock short-selling, and a very large competitor is suing the company for infringing on its patents.

But at a press conference here Wednesday, CEO Mike Snyder defended his company's IPO and its prospects.

"The IPO did what it was supposed to do," Snyder said. "The goal was to raise capital, and in that respect, it was hugely successful."

Some analysts actually agree that from a fund-raising perspective the IPO was a success for Vonage. But they say executives could have handled the situation better once the stock started dropping and investors started complaining.

Days after the company went public, some investors, particularly customers who had been included in the IPO allocation, said they weren't going to pay for their shares. Initially, Vonage made statements suggesting the company would reimburse underwriters for any shares that weren't paid. But then a day or so later, it said that it would do everything possible to collect money for shares that had been allocated to all investors, including its customers.

"Nobody here at the company is looking at this as anything other than noise...The stock is down. We'd like it to be up, but the whole market is down. It's out of our control."
--Mike Snyder, CEO, Vonage

"The deal was obviously overpriced," said Todd Rethemeier, senior research analyst for Sur Terre/Soleil Securities. "And that's not Vonage's fault. But the company is responsible for what happened afterwards with the confusion about whether customers would have to pay for shares. They handled that poorly, and it added to worries on the stock."

The public berating from the media, especially Cramer, likely didn't help Vonage's stock price either. Cramer even brought a puppy on his show last week and hung a sign around its neck that said "Vonage." If that weren't enough, he then hit a button that played a barking dog sound.

Despite these public floggings, Snyder said Cramer doesn't worry him.

"I don't think Jim Cramer has had an effect on our stock," he said. "Nobody here at the company is looking at this as anything other than noise...The stock is down. We'd like it to be up, but the whole market is down. It's out of our control."

But Vonage clearly has a tough road ahead. The company plans to continue investing heavily in its marketing efforts to boost its current number of subscribers, now at 1.6 million. Rethemeier estimates Vonage will actually need 7.5 million subscribers before the company turns profitable.

He thinks Vonage can achieve this target in 2009, if pricing for voice services remains stable. But it's likely that prices will fall, especially as cable operators enter the market. Because cable companies also own the broadband pipe that carries the phone service, they can offer discounts by bundling their voice service with high-speed Internet access. Internet companies, such as Skype or Yahoo, that offer free Internet voice services could also put pressure on pricing.

Management seems to recognize the challenges ahead in the competitive consumer phone market. Earlier this week, Vonage announced a new product targeted at large business customers. The V-Phone replaces desk phones by turning laptops and PCs into phones by simply plugging a small device loaded with Vonage voice software into a USB (universal serial bus) port.

But analysts are skeptical that Vonage can penetrate the enterprise market, which is already dominated by traditional phone companies, as well as newcomers such as Cisco Systems.

"I don't think large businesses are going to replace their phone systems with a doohickey they plug into a laptop," Rethemeier said. "Their voice networks are mission critical. They'll go with more sophisticated voice over IP systems."

The best option for Vonage could be to sell the company, some analysts said. But that might not be as easy as it sounds. After eBay bought Skype for $2.6 billion last year, Vonage reportedly shopped itself around and found no buyers willing to pay the same hefty price.

Would suitors be interested at a lower price? Maybe. And Vonage's sliding stock price is making it cheaper all the time. Internet companies such as Yahoo and AOL are trying to break into the phone business. Vonage's 1.6 million subscribers and voice calling software could supplement efforts the Internet companies already have in the works.

Maybe then Vonage could get out of Cramer's doghouse.

See more CNET content tagged:
Vonage Holdings Corp., IPO, voice service, investor, cable company

5 comments

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Its their own stupidity
When you go IPO, you don't go on opening day and say that Vonage may never turn a profit. Thats just shooting your self in the foot.
Posted by gnotellaluvr (16 comments )
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Cold Calls...annoying...
I was hip with Vonage...saved $100's over the local phone company "taxation without representation and monopolies". However, because Vonage doesn't exactly own the net it depends on, QOS was bad with cablemodem issues at ISP end. (Let's suggest that the Comcast provider was in direct competition with Vonage and might have been giving users a reason to move to their VoIP). Now, I experience cold sales calls from Vonage promoting the second phone line for two months free. Um, sorry, I don't need to pay more for less. Or pay more to the feds for some fund that really is socialist. Vonage can't make money if it has to pay the phone company for access, as phone companies leech to stuff their lobbyists pockets! :)
Posted by Below Meigh (249 comments )
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giving users a reason to move
<a class="jive-link-external" href="http://www.analogstereo.com/lexus_rx_owners_manual.htm" target="_newWindow">http://www.analogstereo.com/lexus_rx_owners_manual.htm</a>
Posted by Ipod Apple (152 comments )
Link Flag
Where's Google when you need them?
If they're shopping themselves around, where's Google for the bite?

This seems like a perfect match.

This is exactly the type of integration that would drive Google Talk, and it's IP calling features into the arms of consumers.

I'm a Vonage customer. And, if I could get my voice mail from my Gmail account I would do cartwheels. Cartwheels, I say!
Posted by kamueller (3 comments )
Reply Link Flag
Give credit where credit is due
Vonage was a pioneer in bringing VOIP to the masses. They deserve credit for that. It was a bold move, involving alot of risk. Being the underdog in a business full of giants, some rooting is in order.
Posted by Seaspray0 (9714 comments )
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