Vonage Holdings Corp. (NYSE: VG) had a lackluster debut on the public markets Wednesday, as its shares closed at $14.85, down 12.7 percent below the $17-a-share opening price. (See Vonage Falls Hard & Fast in Public Debut.)

And the pain continued Thursday as Vonage shares fell another $1.74 (11.72 percent) to $13.11 as of 2:30 PM ET.

Thomson Financial Investment Banking/Capital Markets said Vonage's ranked as the worst IPO since July 2004, which isn't suprising given the number of landmines detailed in its S-1 filing. (See Vonage S-1 Nuggets.) The IPO, however, was also the second biggest from an Internet company in five years, bested only by Google’s nearly $2 billion IPO in 2004. (See Vonage Prices IPO.)

One recurrent theme among analysts reacting to the IPO is that the company hasn’t made clear how and when heavy spending habits will translate into healthy returns. The company has never had a profitable quarter, and spends almost as much on advertising as it takes in as revenue, and says these trends are likely to continue.

“The last thing you want to do is hold an IPO and then see the price go down,” says Scott Cleland, president of Precursor Group , a telecom industry analysis firm. “The problem is they’re giving us no guidance whatsoever on their pathway to profitability.”

“We don’t understand what the attraction is for IPO investors,” says David Menlow, president of IPO Financial Network. “There doesn’t seem to be any uniqueness about this technology that would make it proprietary.” (See US VOIP Revenues Triple.)

“The Vonage management team has a bull’s-eye on its back right now,” says William Quigley, managing director at Clearstone Venture Partners . “Everyone is waiting to see whether a company that has consumed so much cash can achieve long-term profitability.”

Morningstar Inc. analyst Michael Hodel finds nothing inherently wrong with Vonage’s plan to spend whatever it takes to reach a “critical mass” of subscribers. But he’s bothered by Vonage’s focus on only that.

“They’ve spent far more money on marketing than they have on product innovation,” Hodel says. “You’d think that a company that only does one thing would want to do that one thing really well and be pushing that experience forward, but that doesn’t seem to be the case with Vonage.”

When discussing the Vonage IPO with analysts, the conversation almost always comes back to the growing competition and downward pricing pressure in the consumer VOIP space.

“Maybe Vonage is the pure play now, and their revenues are growing almost exponentially it seems, but you’ve got statements in their own prospectus disclosures section that say cable companies and others either are or will be deploying similar technology,” says IPOFinancial’s Menlow.

Menlow and others believe that voice will increasingly be sold not by itself but as part of a product bundle that includes Internet access and video.

The cable companies are now actively selling VOIP as part of a bundle, and with considerable success. According to research firm IDC , the U.S. market for cable-based VOIP will grow from 2.2 million subscribers in 2005 to 19.8 million by 2009.

Vonage’s only real peer on the public markets is the consumer VOIP player 8x8 Inc. (Nasdaq: EGHT). The company’s stock has lost almost 10 percent of its value since the Vonage stock debuted Wednesday. 8X8 did not return calls for comment.

IPOFinancial’s Menlow believes Vonage's share price will continue to drop. “Voice over IP, we think, is the wrong end of this business,” Menlow says. “It’s about the bundle.”

Others believe it's too early to call the Vonage stock a loser. “Keep in mind that one day of trading is not a trend line,” Clearstone’s Quigley says. “The market is essentially saying the IPO price was a little rich so it gave the stock price a haircut.”

Brian Lustig, a spokesman for yet another consumer VOIP company, SunRocket Inc. , says investors still don’t appreciate the growth potential of residential VOIP service.

“The reality is that this market is still in the nascent stage,” Lustig writes in an email to Light Reading Wednesday. “Less than 5 million U.S. households with VoIP out of 40-plus million broadband homes; the market is huge, the pie is large, and there is still room for tremendous growth for market leaders who differentiate.” — Mark Sullivan, Reporter, Light Reading