Well, Vonage definitely got a pop, but it was more like the sound a balloon makes before it deflates. Why? as Paul Kedrosky notes, it isn’t much of a surprise. While the term VOIP may be hot, industry watchers such as Om Malik have been warning for some time that Vonage is caught between a rock and a hard place — it has the name-brand value (courtesy of a very expensive marketing campaign) but it is being squeezed by free VOIP provider Skype on one hand and by cable providers on the other.
It’s true that by selling shares at $17 (U.S.) each, Vonage managed to raise a little over $500-million, giving the entire company a combined market value of over $2.5-billion. So we shouldn’t be holding any charity drives for CEO Jeffrey Citron, whose stake is likely worth about $1-billion or so. But at the same time, Vonage needs all that money to try and plug the gigantic hole in its balance sheet, which continues to drain money at a furious pace. Last year, the company lost $261-million, which was almost as much as it had in revenue.
The worst part is that Vonage’s costs are likely to remain roughly the same, or even increase, as the market gets more competitive — and yet its chances of becoming profitable are likely to fall, as Skype and the cable companies both put pressure on prices. Sound like a good recipe for an investment to you? Then Vonage would like to hear from you. Better use Skype to call your broker though, it’s cheaper. (Henry Blodget has a great anecdote from an AP story about a Vonage user who got some stock as part of the issue).