As more than one person has already pointed out, the much-anticipated — and much delayed, and much criticized — Vonage IPO just keeps setting new records for how screwed up a public share offering can get. In what no doubt seemed like a Web 2.0-type gesture for a tech issue, the company offered its customers stock as part of the IPO, and that has turned into a gigantic boomerang that just clocked Vonage in the back of the skull. Since the stock tanked after it started trading, many of those eager investors are now saying they won’t pay.

Even if my friend Paul Kedrosky is right (which he often is) and the investors who grabbed those shares should have known what they were getting into — since skeptics on the Vonage IPO weren’t exactly difficult to find — the company is still caught between a rock and a hard place, or maybe two rocks and a hard place. It has now said it will reimburse the brokerage firms for any stock that disgruntled Vonage customers (see the Vonage forum here) don’t pay for, but all that’s going to do is piss off the ones who actually paid money for a stock that was tanking.

So then you have a company that is already losing money at a prodigious rate of speed — losing more last year than it made in revenue, which is no mean feat — spending more money to soothe the egos of the customers it convinced to buy shares. The only other option is to sue those customers, and what kind of marketing would that be? It’s a lose-lose-lose proposition, a rare money-losing hat-trick in hockey terms. It’s no wonder that Om thinks it’s a shoe-in for Business 2.0′s 101 dumbest things list. Mike Urlocker, a former tech analyst, has a nice take here.

Update:

Vonage now says that it will pursue legal action against those who don’t pay for their stock, but as I pointed out above, that is just one of the three losing options available to the company (the third being to do nothing).

And so we return to our story, to find our hero — the plucky little (or not so little) voice-over-Internet company Vonage — finally going public, after much back-and-forthing over the past year about when to issue stock and for how much, or whether to try and convince someone to take the company over. And what happens? The stock tanks, dropping by as much as 15 per cent at one point on Wednesday. Needless to say, that’s not what most IPOs are supposed to do (as Mark points out), especially since underwriters of initial offerings usually try hard to underprice the issue so that they get a little “pop” on opening day.

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).

I originally wrote this for the Globe and Mail — and Mark even linked to it, which I thought was quite nice of him — but I thought I would reproduce it here for people who might not get to the Globe that often. For you tech-savvy blog readers out there, please ignore the dumbed-down parts designed for non tech-savvy newspaper readers :-)

The bare-knuckle bout for VoIP supremacy is still in the opening round, but Skype has thrown what could be a haymaker punch. The voice-over-Internet pioneer that eBay acquired from founder Niklas Zennstrom last year for a mind-boggling $2.4-billion (U.S.) – and up to $4.1-billion if Skype meets certain performance targets – is now allowing users to make VoIP calls from their computers to any landline number for free.

The freebie for what the company calls “SkypeOut” calls is only a short-term offer, however. It expires at the end of the year, and is clearly designed to suck new users into the Skype vortex. But is it a smart move by eBay to build a customer base and take on Vonage, or a desperate move to justify that multibillion-dollar cheque it cut?

Skype said in its release that “completely free calling in the U.S. and Canada will expand Skype’s increasing penetration in North America and solidify Skype’s position as the Internet’s voice communication tool of choice.” And there are those who believe it will make the service – which is based on P2P or “peer-to-peer” technology originally developed for the Kazaa file-sharing network – a lot more appealing to non-geeks, since the previous free VoIP service only included PC-to-PC calls.

Phil Wolff of SkypeJournal.com wrote after the announcement was released that “in one stroke [it] simplifies the choice to try Skype. No need to whip out a credit card or think about minutes. Just download and call. No trying to understand SkypeOut rates.” The move will “starve small competitors,” he added, as well as forcing Microsoft, Yahoo, AOL and Google to match the free outbound call offer or fall behind.

The VoIP player it really puts pressure on, however, is Vonage. The company is currently the leader in what some call the “hardware-based” VOIP market, since it sells users a box (and/or a handset) that plugs into their Internet connection, rather than just software that runs on a computer. But selling those products and marketing its service as a replacement for traditional phone service costs a lot of money – much more than Vonage makes by charging for its VoIP service – and so it is currently hemorrhaging cash, even as its costs continue to grow. The company’s marketing costs alone totalled more than $88-million (U.S.) in the first quarter of this year, contributing to a loss of more than $85-million on revenue of $118.9-million.

Skype’s announcement couldn’t come at a worse time for Vonage, since the company is trying to market a public share offering despite its money-losing ways. And yet more than one analyst has noted that the VoIP provider is being squeezed by Skype on the low end with its free services, and the cable companies on the higher end with their all-in-one VoIP services.

Andy Kessler, a former hedge-fund manager who now writes about technology and investing, wrote on Om Malik’s blog that the free SkypeOut announcement was a “classic, high-stakes, Wall Street sucker punch” to Vonage. He described the impetus behind the offer as a case of “why not play with the mouse before you kill it,” and added that eBay must have been thinking: “What better way to do away with the Vonage IPO and raise their cost of capital then/ scare investors even more.” (Telcos are likely feeling just as glum as Vonage, of course, since Skype continues to push the cost of phone calls down closer and closer to zero).

Over the past year, while Vonage’s customer base has grown, the cable companies have grown faster in terms of VoIP adoption, to the point where some are wondering whether Vonage is likely to become the TiVo of VoIP – a pioneer that winds up struggling to turn itself into a lasting business. As of February, surveys from both UBS and TeleGeography showed that cable providers had taken more than 52 per cent of the voice-over-Internet market, while independents including Vonage only had about 37 per cent. Vonage was still the largest single provider, with 1.2 million customers, but Time Warner was close behind.

eBay, meanwhile, is obviously trying to boost market penetration for Skype to the point where it becomes the de facto standard for free or low-cost VoIP. The company has been adding services to keep its product the leader as AOL and Google add voice-calling features to their instant messenger offerings. It has also been doing deals with hardware companies to sell Skype-branded handsets such as the Netgear-Skype Wi-Fi phone, a cellphone-like device that allows users to make Skype calls from any wireless hotspot or Wi-Fi network.

Skype’s news may be bad for Vonage, but it has its own battle to fight against Microsoft, AOL and Google, not to mention the cable companies, all of whom have very deep pockets. Call this the first punch in what could be a long slugfest over the VoIP market. The good part for consumers, of course, is that it means using the telephone continues to get cheaper.

Anyone who has been following the Vonage IPO story – as my friend and conference-organizing colleague Mark Evans has, and as Om Malik has – won’t be surprised that the voice-over-Internet pioneer is rumoured to be shopping itself around. The prospectus for its initial public offering, which was on and then off, then back on again, has been out there for months with little or no interest, or at least not enough to make it happen. That’s not a great sign.

As I’ve mentioned before – and others have too, including Mark and Om – Vonage’s IPO smacked of more than a little desperation to raise some cash while the iron was even slightly warm, and the story at CNN/Money fits with that. Whether an IPO or a takeover, Vonage needs money big-time. Its marketing costs have exploded, thanks in part to those Woo hoo! commercials (which I actually kind of like, if only because I like the song), and it needs a river of cash flow to pay for the expansion it needs to remain relevant.

As Om and others have pointed out, research shows that cable VOIP services are taking share away from standalones such as Vonage – and doing so at an increasing rate. That means the window is rapidly closing, and the risk for Vonage (which was started by VOIP pioneer Jeff Pulver, whose VON Canada I am appearing at next week) is that it could become the next TiVo, a pioneer that winds up winning the early battle but losing the war.

As someone told me once, the pioneers get the arrows and the settlers get the land. Alec Saunders says buying either Vonage itself or the stock would be the “ultimate triumph of greed and stupidity over common sense.” Of course, as we all know, that doesn’t mean it won’t happen :-)

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.