Vonage: Burned by Bundles

Vonage Holdings Corp. (NYSE: VG): To love it or to hate it, that is the question. It's apparent already that a lot of people hate it. The stock is getting killed, down 35 percent from its IPO offering price – which was only a week ago! Meanwhile, some cheerleaders are still defending it.

I say it’s already over. The bundle will kill Vonage.

Vonage markets a flavor of VOIP as a residential service. That is, it allows you to add a small VOIP device to your broadband network, acquire a new phone number, and make VOIP calls at a discount to the incumbent’s pricing (in theory).

VOIP is a cute feature. But eventually the market will bundle the features that Vonage offers with every other known service, and the game is over.

For Vonage, pricing is the big marketing pitch. In the ever-widening portfolio of packet-based communications services, that’s not a lot to hang your hat on: You are selling commodity features through cut-rate pricing and expensive marketing campaigns.

Here are other problems with the business model as I see it: (1) Vonage really isn’t that cheap – and the competition's pricing is going down (Skype is mostly free), putting even more margin pressure on Vonage; (2) Vonage relies on connections to the PSTN – the incumbent’s network – so it really isn’t even true Internet VOIP; and (3) Vonage offers no other part of the crucial services package – wireless, IPTV, or broadband.

Recently, in discussions with the large service providers, I’ve been hearing that “it’s all about the bundle.” This makes a lot of sense. As the core communications services becoming commodity items and competition accelerates, the only way to survive is to bundle your entire suite of communications services – and tightly integrate them in a way that the customer perceives value.

I still believe we’re moving toward a world of the telecom superstore – a Telco Costco, if you will – where the only way to survive is to offer a huge range of communications services, at a very low cost. (See Telecom Superstore.)

That, in a nutshell, is also the Comcast Corp. (Nasdaq: CMCSA, CMCSK) strategy. Comcast is trying to boost the number of services it’s offering (digital cable, VOD, broadband, and VOIP), while keeping prices stable or even increasing them. Competing along the same lines, you have large communications incumbents such as AT&T Inc. (NYSE: T) and Verizon Communications Inc. (NYSE: VZ) – which are quickly trying to add video to their services package of wireless, broadband, and voice – heading for the same endpoint as Comcast.

Where’s that leave Vonage in this race? It's desperately behind on the services bundle. Vonage is to Comcast as Netscape was to Microsoft Corp. (Nasdaq: MSFT). It’s just a browser, and probably not even the best one.

The other route for Vonage to take would be to offer hyper-specialized, high-quality services. It could become the axe in the VOIP space. But I don’t even think Vonage has that. Vonage owns no network and thus maintains no service control over the services it offers on the incumbent’s network. There are competitors offering everything that Vonage has at a lower price.

I suppose if Vonage has one hope of survival, it's to use the remaining IPO cash to acquire some sort of complementary communications business – or even a large network.

Vonage does have its customer base. But the company has already alienated a large number of customers by selling them stock in the IPO that is now underwater. This has got to be one of the most hair-brained stock-pimping schemes of the post-Enron era. Marketing IPO stock to your customers? How 1999.

Let’s face it, the Vonage IPO existed for one reason and one reason only: The investors, founders, and investment bankers were desperate to get the deal done. It’s evident now from the post-IPO performance that there was no real demand to take this company public. The venture capitalists and the founders have a chance to cash out (if only they can make it to the end of the lockup period before their gains evaporate), and what we’re left with is a one-trick pony – residential VOIP access.

In the meantime, enjoy Vonage in its double-digit share price days. They are numbered.

— R. Scott Raynovich, Editor in Chief, Light Reading

twistedcopper 12/5/2012 | 3:52:32 AM
re: Vonage: Burned by Bundles I agree with 99% of everything you've said, but I think you need to take it easy on the extreme verbage. You say Vonage "alienated a large number of customers...." In all fairness, Vonage burned 9,000 customers. It loses 3-4x that every month in churn alone, so I don't think losing those 9,000 customers will put them out of business. The bigger problem will be the resulting lawsuits.
Michael Harris 12/5/2012 | 3:52:12 AM
re: Vonage: Burned by Bundles Vonage is toast. The company has racked up nearly a half-billion dollars in cumulative losses due to insane marketing expenditures. Becoming the number-one advertiser on the Internet doesn't come cheap!

The idea, clearly, was to sign up as many customers as possible before competitors got their acts together on VoIP, and create enough buzz to convince investors that Vonage was the next Internet super stock. The strategy has failed on both counts.

Even with its mad dash to sign up customers, Vonage only counted 1.6 million lines in service at the end of Q1. That's not much of head start with cable MSOs now hot on their heels. Indeed, Time Warner Cable alone finished Q1 with more than 1.3 million IP phone customers (not just lines). This is noteworthy considering Vonage is pitching its service to more than 50 million broadband customers in North America, while Time Warner is only selling its IP phone offering, which is priced more than 50% higher that Vonage's, to 16 million homes in its footprint. There's the power of the bundle in practice.
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