The Lovecraftian tale of Vonage's IPO
"But are not the dreams of poets and the tales of travelers notoriously false?" H.P. Lovecraft
Dear Vorticians,
Have you read any Lovecraft? He's truly an acquired taste, with his labyrinthine horror tales of ancient, dark gods from beyond the far reaches of space - the whole Cthulhu Mythos thing - and the insanity they inspire in the minds of mere mortals who come in contact with them. (If you want to sample some Lovecraft, you can try the story "The Call of Cthulhu". I'm not a big fan of the Mythos stuff. But Lovecraft could deliver a good scare, as evidenced by my favorite Lovecraft piece "Pickman's Model," which any Bostonian will enjoy.
I think there's some Lovecraftian insanity at work in the IPO plans of VoIP service provider Vonage. When Vonage announced plans on Wednesday to offer $250 million worth of shares to the public, a chorus of voices rose up to question the deal. But you actually heard about the problems with Vonage's IPO in this newsletter back in August, when the news came out that Vonage would go public.
Among the many problems I cited for Vonage:
- Price is the key buying criteria for VoIP and, as we all know, that price just keeps dropping. Vonage's revenue per subscriber is dropping (from nearly $31 a subscriber last year to less than $27 now.) Vonage has lived by this price sword and, well, you know what they say about living by the sword. We're hurtling toward the time when voice will be free. Unlike the folks who sell video and other services, what will Vonage lean on for growth?
- In that vein, there are a growing number of free VoIP options - including the poster child for free VoIP, Skype, and Google Talk, which is still technically in beta. Vonage has 1.4 million subscribers. Skype, now part of EBay, has 100 billion or some slightly smaller number of users.
- The cable companies and telcos are getting much more protective of their turf. Does it scare you that Vonage needs to rely on the broadband connections of cable and telephone companies? If you're up to speed on the net neutrality issue these days, it ought to scare any investor. Not only are the broadband providers getting nastier to those companies who rely on their networks, they're also getting more aggressive with their own VoIP offerings. Time Warner Cable alone almost matches Vonage with its 1.1 million voice users.
Marguerite Reardon of news.com provides some good insights on the challenges Vonage faces in her piece "Vonage - An IPO filing like it's 1999." She writes: Do executives at Vonage think it's 1999 again? Like the founders of many an Internet company in the late 1990s, executives at the Holmdel, N.J., upstart . . . seem to believe that profits can wait."
Reardon, citing information from Vonage's filing, outlines just how tough it will be for the VoIP company to finally get around to that profit thing. The cost to acquire a subscriber has gone up from $137 to $213 (not a great trend, given the revenue dropping bit mentioned earlier). Sales are up but losses are growing - the company lost nearly $190 million on $170 million in sales for the first nine months of 2005. All told, Vonage has lost $310 since it started marketing VoIP service in 2003 and it acknowledges that those losses will mount as it aggressively - and expensively - attempts to sign up new customers.
For me, the fundamental question is whether, in the long run, Vonage can survive as a standalone company. Racing against the devil - many devils actually - Vonage is trying to build a big enough (how big?) customer base before all these market challenges collectively sink the company. The sad reality is that Vonage is a very visible champion for a market that may not even exist in a few years. Voice is becoming a feature, not a standalone service.
Sometimes I wish I were free to invest in the companies we cover. This is one time I'm glad I can't.
What do you think? Let me know here.
p.s. I believe it's likely that Vonage will be acquired at some point by a competitor who sees value in the brand name. Maybe that's when investors will see some return.
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