What Vonage should be doing

A few months back, we were asked by a company sitting on the Vonage IPO what we thought of the company’s strategy. Our thoughts at the time (and they haven’t really changed) were that it was a very tough investment – Vonage has had an early mover advantage, but no real ongoing technical or other differentiation.

We were also asked what we thought of Vonage as an acquisition candidate. Our response was simple: what are you acquiring? The answer is “a customer base.” But does the acquisition get you get a base that sticks around? Unlike many other service providers, customers went with Vonage for two reasons: first, because they were disgruntled with their incumbent service providers, and second, because of the price. Unfortunately, these both things that customers will move again for.

On top of all this – and we hate to pile on – we tried the service for our own virtual office needs, and it wasn’t really business class, or even SOHO class . We had to deal with dropped calls, bad links, etc. – all of the concerns that over-the-top services bring to the table. For residential users it was fine, but it seemed to us that if another provider popped up with a better service that costs the same, users would switch.

These conversations took place before the IPO – and if you’ve been following the business press or stock prices since then, you’ve seen that the market has some pretty similar thoughts and concerns.

So what would we do if we were running things at Vonage – or advising them? (And we want to note that we’re not advising them, so perhaps some of these things are already in the works – we’re going on what’s publicly known.)

At the highest level, we think that for Vonage to succeed long term and not bleed as much as they are bleeding now , they need to have three things: a focus, an attitude and a true differentiation…

First, focus. Today, you could say Vonage is focused on VoIP, but that’s too narrow to sustain the burn rate. Voice is Vonage’s focus, and it’s just been a brutal market for 20 years now. Heck, voice is essentially given away for free for taking IPTV, data services, 4G wireless, etc.

And for over-the-top services like Vonage, free is truly the wave of the future. EBay recently launched free Skype Out services for the U.S. and Canada – you can’t get much freer than that, and you can easily mix in an inexpensive Skype phone to get away from your computer when using this service.

For Vonage, the focus has to be broader , not narrower – not VoIP, not even triple play, but across the whole range of IP services (think sextuple play, mixing in audio, mobile VoIP, and gaming on top of the traditional voice/video/data).

Next, attitude. Let’s face it, people who went to Vonage tend to be early adopters of technology. Even with more than 1 million customers, this is out of a market of hundreds of millions of lines – so Vonage is still on the early adopter curve. Much as Virgin created an image and painted a picture of itself as hip brand for youngsters, Vonage should paint itself as early adopter/leading edge brand, and as such they would always keep their target market. Where do leading edge customers go today? The answer is “no one place” because there isn’t one brand for these folks – Vonage could become that brand.

Finally, differentiation. It’s not too hard to differentiate yourself in a market of one, but unfortunately for Vonage, everyone else is offering similar services these days. We think Vonage can find differentiation by focusing on the CPE and not the network – it’s easier to do new and at the CPE level rather than a normal traditional, legacy network. Vonage should develop the ability to differentiate on the leading edge with CPE. After all, they’ve already got a customer base which is willing to put up with at least the minor the headaches that come with the leading edge.

What does this CPE-based leading edge mean? Well there are lots of possibilities. Vonage could put together the first network-based Cisco digital home. They could deploy set top with Hillcrest’s Freespace Navigation and provide a new way of dealing with entertainment content. Vonage CPE could leverage the VoIP service and offer fixed/mobile convergence (FMC) services. And etc. etc., etc. The sky’s the limit!

Vonage already has the IP from gateway out to the network. Now they’re only selling $25 a month LD. But sticking with voice offers no path but a downward one.

Vonage, don’t spend money on customer acquisition and expanding the base outside of the early adopters, but instead grow your base of leading edge consumers. Give the world the first taste of Amazon.com on a TV set, or next generation remote controls, or what have you! Vonage may be a public company now, but they can still be more nimble than every one else who’s out there.

In all fairness, Vonage is certainly thinking about some of these things. But the problem is that they’re not positioning the company this way – they could avoid their sinking stock dilemma. All they do now is spend on customer acquisition and marketing – but it needs to be spent more wisely by overhanging the market and these new IP services opportunities, or else customers will move from one leading edge product (Vonage) to another (like IPTV).

Perhaps Vonage will say “we’re working on that” – well ok, you have the strategy part right, but you’ve sure got the marketing part wrong!

Copyright © 2006 IDG Communications, Inc.

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