Vonage Dials Up $105M

VOIP competition reached another all-time high today as Vonage Holdings Corp. announced it has closed a $105 million Series D funding round, bringing its total funding to date to $208 million.

The company says its financing will be used to speed the expansion of its service in the U.S., Canada, the U.K., the Pacific Rim, and Latin America (see Vonage Plans Q4 Launch in UK). With more than 240,000 lines in service, Vonage says it continues to add more than 25,000 lines per month to its network (see Residential VOIP Will Boom, Says Study). At the end of 2003, it had about 87,500 lines in service, according to Vonage CFO John Rego. New Enterprise Associates (NEA) led Vonage's latest round with a $40 million investment. The VC firm has pumped about $60 million into the company overall, Rego says. Other investors include 3i Group plc and Meritech Capital Partners.

This funding boost for Vonage comes at a time when VOIP competition in the U.S. has taken an interesting turn.

For instance, AT&T Corp. (NYSE: T) has retreated from the traditional consumer local and long-distance market. It is likely that other inter-exchange carriers (IXCs) and competitive local exchange carriers (CLECs) will follow suit.

Why? Government regulations are on a course to make the cost of providing traditional calling services -- where competitive carriers, such as AT&T, rent phone lines from incumbent carriers and resell calling services -- too expensive.

So AT&T has decided instead to go head-to-head with Vonage in the VOIP market. The carrier sells its CallVantage service in 39 states and Washington D.C., and it has secured retail distribution agreements with several Vonage distributors, including Best Buy. Just this morning, in fact, AT&T announced that its service was available from Amazon.com, another Vonage reseller.

Providing VOIP services becomes a way for carriers to keep competing with incumbent carriers. Given that eventuality, it's no surprise that Verizon Communications Inc. (NYSE: VZ) introduced its own VOIP service, VoiceWing, earlier this year.

For Vonage, these CLECs and IXCs could be a competitive threat. Or they may decide to resell Vonage's service, as have several cable operators and public utilities.

Vonage's response -- and the chief reason for its funding -- is to ramp up its marketing. Rego says Vonage's capex costs are so low that it is a profitable company when you back out the marketing costs. Still, aggressive marketing is how the company has attracted customers and built its brand so far, and the company is sticking to the plan, says Rego.

In addition to more commercials and Internet ads, Vonage will be adding more technology features to enhance its voice services. In the fourth quarter, for example, it plans to debut VOIP-enabled wireless phones.

Vonage's primary advantage now is a matter of the technology and timing required to match its service feature-for-feature, according to Rego. "Some of the features we have will be replicated by others, but it is going to take them some time to do so."

— Phil Harvey, News Editor, Light Reading

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