When it comes to Vonage - I told you so!
Dear Vorticians,
I rarely say "I told you so" and there's a good reason why. It's because I'm rarely right on the money. But when it came to Vonage's initial public offering last week, and the stock's subsequent performance, well . . . I told you so.
Back in August, when the voice-over-IP company began talking about an IPO, I said I thought the plan was a bust. So far, events are conspiring to prove me right (although it's still early in the game for Vonage and I may ultimately be proven wrong.) Vonage shares were offered at $17 but closed down 13% on the day of the IPO. As of this writing, they're priced at less than 12 bucks a share. A Wall Street Journal piece called Vonage's coming-out party one of the ugliest of the year. Ouch. (If you'd like to read my original piece, you can find it here.)
Why was I sour on Vonage? A variety of factors:
* VoIP is a market built on price - or no price, as the case may be. Vonage undercut the traditional providers of telephony, but they've fired back. AT&T, Verizon and others have launched VoIP services and they've pushed Vonage's prices down over time. How does Vonage - or any VoIP provider - prevent price fighting from eroding revenue and profits? As if that were not bad enough, recall that in the brutal long distance wars of years ago, the cost of acquiring new customers increased dramatically along with the rate of customer churn. (Check out Vonage's customer acquisition costs.)
* The cable companies will become even more protective of their turf and it will become harder to use them as a channel. As the telcos roll out fiber services that can support IP television, it will become even more important for cable companies to have strong packages of data, TV and voice. They're not going to want Vonage siphoning off those voice dollars. The same is true for those local telcos who'll own the other broadband option. (The FCC has gotten what it always wanted: a duopoly of broadband providers.)
* Skype, the 'free' VoIP service, continues to grow like a weed, particularly among younger 'customers'. How do you compete against free? What's to prevent the next free service from emerging? (EBay acquired Skype shortly after I wrote this.)
* There doesn't seem to be much of a feature war to win. What can you offer callers in the future for which they'll be willing to pay extra? As competition increases, more and more of the features will be bundled and the opportunity to cash in on them lost.
* VoIP is a global market and there will be global competitors who can easily extend their services to the US, targeting key markets or ethnic groups.
* With Google Talk, IM users can also make IP calls. And Google's not the first here. Other instant messaging services also offer voice capability, including the big fish of AOL IM. That takes away even more voice minutes.
All of the issues I wrote about in August remain major concerns and it seems clear that investors had them in mind when they snubbed Vonage's stock. As if that weren't bad enough, Vonage is now in a fight with its own supporters over the IPO. According to press reports, the company set aside some 4 million shares for customers and thousands agree to buy them. Some of those customers are now balking at paying for their shares and the company has said it will pursue those who renege on their commitments. Ouch. Not exactly how the company wanted to begin its life as a public corporation.
It's unfortunate and I apologize for the "I told you so" up top (don't you hate smugness?). As I wrote back in August, Vonage was a pioneer in consumer VoIP and it deserves a lot of credit for popularizing - and commercializing - VoIP service. But I believe VoIP's going to be a tough market for any standalone service provider. Voice is quickly becoming a low- or no-cost add-on to other services. That's a market dynamic to which even the biggest companies are struggling to adapt.
Separately, shortly after I wrote about Vonage's impending IPO, I wrote this piece asking what the heck EBay was thinking about in buying the aforementioned Skype for what could amount to over $4 billion. I asked then what EBay could possible do with Skype (which had then projected 2006 revenue of about $200 million) to make it worth that investment.
So, a question for you, gentle readers: It's been nearly nine months since the EBay/Skype union was announced. In that time, have you seen anything that leads you to believe that EBay will get its money's worth? Is EBay doing anything with Skype that warrants that kind of risk?
Drop me a line and let me know.
Bye for now.
p.s., Thanks for all the notes regarding the new Security Standard conference. We're continuing to add top-notch speakers. Check us out.
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