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CARL HOWE

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Marketing and technology analyst, www.blackfriarsinc.com/blog
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Vonage's IPO: it's no Google

Thu Feb 9, 2006 5:04 PM EST
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By Carl Howe
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Vonage announced it plans a $250 million initial public offering yesterday. So will we see Google-like appreciation once it hits the secondary markets? The short answer: no. I followed the Google IPO, I knew Google, Google was a friend of mine, and Mr. Vonage, you are no Google. This is a liquidity event for the Vonage investors, pure and simple. Here's why:

  1. No profits. The company is losing money hand over fist. It spends 101% of its revenue on marketing, and the money raised by this IPO will be gone in less than a year. Further, the company plans losses as far as it can see in the future. Google was hugely profitable at its public offering; Vonage is in a completely different position.
  2. No differentiation. Everyone from Microsoft to Google to eBay has voice over Internet protocol (VOIP) offerings in the market. Even the telcos like Verizon and at&t offer VOIP services now. Many competing offerings are bundled with other communications systems like instant messaging, while Vonage's offer is a stand-alone service. Google's market position was nearly unique when it went public; Vonage's service is a commodity.
  3. No strategy. Nothing in the S-1 filing indicates to me that the company has any plan to change its operation to sell anything other than VOIP service, nor any plan to get its costs below its revenues. Google may have been stubborn about doing its offering its own way, but at least it laid out a plan for how it was going to grow its business once the offering was done.

So if the fundamentals are this bad, why is Vonage going public? The answer is simple: The investors need a liquidity event to get their money back. The big question they haven't answered is why they think consumers or institutions will want to buy shares in the IPO. All I know is that it's no Google.

Disclosure: I own no telecom stocks nor Internet stocks that might be affected by Vonage's IPO.

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Calvin Tang

The other difference that you didn't mention here is the quality of each company's product or service.

We have Vonage here in the office. The quality of this service is so bad that we've adopted the use of its name as a verb, saying "Man, you just got Vonage'd" when someone has had a disruption in service, dropped call or noticed a break in thought. Why do we use it then? Its cheap and we're a web company without much need for landlines. Eventually, we're going to have to go with a real phone system.

    Reply#1 - Fri Feb 10, 2006 11:35 AM EST
    Jason Coleman

    I disagree with your point no. 2 in that while, yes many companies offer VOIP in spirit, Vonage (and a few others, such as AT&T) offer true VOIP replacement for POTS. My household uses Vonage and the fact that is a stand alone makes it a completely different service to the user. Skype is the only cross-over of which I am aware, and it still is not marketed successfully as a way to ditch Ma Bell. That's what the consumer wants: much cheaper bills while having effectively the same service.

    Further, as WiFi coverage spreads, WiFi phones could encroach upon cell phone service in urban areas. Paying a low price for landline replacement is great, but paying one low price for landline and portable replacement is even better. This is very much a niche market now, but things may change with increased coverage.

    Calvin: I am surprised to hear that the Newsvine operation has so much trouble with their Vonage connection. I actually have been remarkably impressed with mine. Further, my wife and I would have never tried it had most reviews not been favorable, particularly regarding sound quality.

    All that being said, I do not disagree with your final assessment. The investors want some return.

    (Disclosure: The amount of tech stocks I own is laughable. Seriously, roughly 1/8th of a share in Google.)

      Reply#2 - Fri Feb 10, 2006 12:24 PM EST
      Carl Howe

      Thanks for the comments, guys. I'd love to hear more experiences from others, both good and bad.

      My analysis was mostsly about the financials more than the technology, since I think that really determines the company's longevity and how well the IPO will do. I too haven't had great experiences with Vonage, although it depends a huge amount on your ISPs and their oversubscription rates on their trunks. I'm actually very pro-VOIP technology overall; it really offers an opportunity to leave "toll-quality" 3 KHz telephony behind and deliver a new quality of phone service. But at the end of the day, it has to be a sustainable business, and it doesn't look to me like Vonage has hit the mark.

      Some things I do like: I love the Asterix open-source PBX solutions as being a very cool way to do VOIP over a local area and possibly for a business. I'm also a fan of both iChat for its quality and the Gizmo project because of its use of SIP standards. But for our business, we still have garden-variety Verizon business lines. And even then, we wish the quality were better, not worse as it appears most Vonage experiences are.

        Reply#3 - Fri Feb 10, 2006 4:28 PM EST
        Calvin Tang

        Jason Coleman writes: Calvin: I am surprised to hear that the Newsvine operation has so much trouble with their Vonage connection. I actually have been remarkably impressed with mine.

        You probably have less data transfer going on in your house than we do over our lines at the office :)

          Reply#4 - Fri Feb 10, 2006 9:31 PM EST
          ubergerbilDeleted
          ankit.gulati

          I also have to question Vonage's success as an IPO. I do agree that it provides a great service, but I also think that it has been commoditized. Also, Vonage has no bargaining power because everyone isn't already an existing customer (such as AT&T) and they don't control any telephone lines or service outside of VoIP. I have Vonage and it works great for me, but I only use it because it is cheaper right now than the other providers. Once the rest of the competitors start giving rebates like Vonage does, I am sure it will get bought out or go out of business. The fact that it may get bought out could make it an interesting stock.

            Reply#6 - Mon Feb 13, 2006 1:18 AM EST
            Jason Coleman

            Calvin Tang writes:

            You probably have less data transfer going on in your house than we do over our lines at the office

            Okay, I'm sure that you guys do have more data in your pipes than we do, but you probably have more than cable modem (I hope). However, I wouldn't discount bittorrent traffic and how much upstream bandwidth it eats up; it can be quite a bit (pun intended). We still have pretty good quality, though. We've also assigned priority to voice traffic on the router, which helps.

            As far as how the service relates to the business, I think the quality is comparable to cell phone use, which is to say, good enough for most people. It is also reliable enough to be a satisfactory replacement for traditional POTS lines. I do agree that, unfortunately, Vonage seems to be in the business of ad buying company. The fact they sell VOIP seems to sometimes be an afterthought. Selling and "okay" product at a cheap price and flooding every website and/or television channel with ads isn't much to get excited about as far as I can tell.

              Reply#7 - Mon Feb 13, 2006 12:35 PM EST
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