Vonage pulls the trigger - out of desperation?

by Mathew on February 8, 2006 · Comments

So VOIP pioneer Vonage has finally pulled the trigger on its much-rumoured IPO, hoping to raise up to $250-million. Over the past year there has been repeated whispering that the company was planning a stock offering - but then the rumours changed their tone, and Vonage was reported to be in talks about being acquired. Then everything went quiet. As Andy Abramson noted almost exactly a year ago, the company has been burning through money at a tremendous rate.

As my Canadian tech-blogging colleague Mark Evans notes in his take on the news the SEC filing from Vonage states the company had revenues of about $174-million (U.S.) in the nine months ended in September, and racked up losses of $189-million or so in that same period . The vast majority of those costs were for marketing, which isn’t surprising given that Vonage has been blanketing the Web and the airwaves over the last year.

Needless to say, that’s not a terribly attractive business model - which implies that founder Jeffrey Citron (who also founded online stock-trading firm Datek Online, which he later sold) - has gotten a little desperate about his ability to cash out his significant investment in the company. And he might be right to feel a little desperate, considering the fact that VOIP from cable companies, Skype and other forces - including a possible Google VOIP offering - is turning up the heat.

According to a recent survey by Sandvine, the share of VOIP minutes that broadband providers control has gone from 18 per cent last year to 53 per cent, while Vonage has 22 per cent. Good luck with that IPO, Vonage. At least Jeff Pulver might get a little something out of it.

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Viewing 5 Comments

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    Like I said on Mark's blog, the marketing spend on this puppy stinks. And it won't be getting any cheaper down the road, once the market gets even more competitive. I have seen this movie, and their marketing spend is not going down any time soon. Could adoption go into hyper-drive and they are suddenly in the money? Perhaps. But gut says unlikely that they would be the primary beneficiary from overall category growth. That's going to be the cable and phone companies. Net/net: it is no wonder they are trying to float it.

    -- Stuart
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    That's my sense too. I wouldn't touch the thing with a 10-foot pole, just between you and me. The fact that Jeff Citron and his backers are so desperate to cash in, er... "monetize" their holdings makes me nervous. I think Vonage is another TiVo in the making -- a pioneer that winds up getting creamed.
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    I wouldn't use a TiVo analogy here - there are people who LOVE their TiVo. They are happy to shout it from the rooftops etc. Sure, they're not a mighty throng, but they are out there; for some, TiVo makes their lives better, which is just the best marketing strategy going. Near as I can figure (and yes, I am not a VoIPer) this does little to truly make my life better. All this does is allow me to do the same thing I've always done, for less. Where's the unique selling proposition in that? Smells like a fight to the price bottom against those who can always discount further, either because they are cable/phone companies who own the assets or they are portals with IM installs who have a lot of prospects "for free." Meanwhile, you have ever escalating customer acquisition costs.

    Yech.

    -- Stuart
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    That's a fair point about TiVo and the love -- and you're right that Vonage is more of a price thing, which is death. But I think they are similar in the sense that neither one is a good investment, and that's because being a pioneer doesn't always translate into becoming a good business or a good investment, for a whole bunch of reasons. For both TiVo and Vonage, it's because the cable guys are taking away the functionality -- both the DVR thing and the VOIP thing -- and there's not enough left over to be worth investing in, or at least not enough to make either one worth what it wants to be worth.
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    The Pioneers get the arrows, the Settlers get the land. Even more arrows when the Pioneers are trying to build on the shaky ground the Settlers already control.

    -- Stuart

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