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Optical/IP

Vonage Raises Another $200M

VOIP specialist Vonage Holdings Corp. will soon announce that it has raised a whopping $200 million in its fifth round of funding, as it prepares to launch into new territories outside North America, Light Reading has confirmed.

The latest investment, led by Bain Capital, takes Vonage's total funding to $408 million, and comes only eight months after the service provider's $105 million Series D round (see Vonage Dials Up $105M ).

Last August the company said it needed funds for international expansion into Europe, Asia/Pacific, and Latin America. It has since launched in the U.K., though without the anticipated marketing push (see Vonage Tiptoes Into the UK).

A Vonage spokesman confirmed the value of the round and that Bain Capital was the lead investor, but said an official announcement and further details wouldn't be made public until Monday.

While Vonage seems able to raise increasing levels of cash to fund its expansion, some folks have wondered about future profitability. Competition is rising in the VOIP services, with increasing pressure from all competitors, including incumbents. (See LR's TIC: Get Me Video, AOL VOIP: You've Got Apathy, VOIP Goes Mobile in NYC, and Vonage Hits ISP Resistance.)

Kevin Mitchell at Infonetics Research Inc. isn't convinced that Vonage makes an attractive investment opportunity. "Someone clearly wants to throw away their money. I don't understand Vonage's end game." To be acquired, perhaps? "How much would you get for a sales and marketing operation? I can't see how the investors would get their money back," says Mitchell.

Vonage, which has encountered some business and operational speedbumps of late, now has more than 500,000 residential and business customers, but is facing increasing competition from traditional fixed-line carriers and the large cable operators. (See Verizon Outlines VOIP Service, Texas: Vonage 911 Is a Joke, Vonage Off the Hook, Vonage Reaches 500,000 Lines, XO Launches National Biz VOIP, Vonage Hits ISP Resistance, Cable VOIP Subs Jump 900%, and Cable VOIP Could Boost IXCs.)

— Ray Le Maistre, International News Editor, Light Reading

rjmcmahon 12/5/2012 | 3:16:12 AM
re: Vonage Raises Another $200M Is it fair to extrapolate from this that the cost for Vonage to acquire a VoIP customer is something like $208M/500,000 = $416 per customer? If memory serves, I heard some data from a UNE-P voice competitor where their customer acquisition costs were in the neighborhood of $175 per customer. Reducing this was seen as an important and difficult challenge to their business. Also, how do these numbers compare to TIVO's customer acquisition costs?

Can somebody with real information comment on these numbers? Thanks in advance.
voyce_overipee 12/5/2012 | 3:16:12 AM
re: Vonage Raises Another $200M at $400 million invest, with 500k customers, that's like $800 per, just for equipment and marketing? what happens to the $20/mo they get for each customer? that should be $120 mill a year. i thought their model was supposed to be capex + opex cheap. i guess they'll need a lot more than 500k customers.

i'm actually surprised they only have 500k. how many does skype have?
rjmcmahon 12/5/2012 | 3:16:11 AM
re: Vonage Raises Another $200M I think we posted about the same time. Something about great minds thinking alike...;-)

at $400 million invest, with 500k customers, that's like $800 per, just for equipment and marketing?

According to this article, they current investment for 500K+ customers is $408-$200=$208.

what happens to the $20/mo they get for each customer? that should be $120 mill a year. i thought their model was supposed to be capex + opex cheap.

The article didn't break down the numbers. It's hard to tell what is capex and what is opex. It's also hard to tell how much is spent on marketing which, by my guess, is probably what the majority of investor money is going towards.

i guess they'll need a lot more than 500k customers.

I'm not sure more customers helps unless the same customers buy into a Wall Street IPO. (I guess that's one indirect way of achieving a "customer owned last mile")

i'm actually surprised they only have 500k. how many does skype have?

It suggests how hard it is to build a business that looks backwards instead of one that looks forward.
fiber_r_us 12/5/2012 | 3:16:10 AM
re: Vonage Raises Another $200M >Something about great minds thinking alike...

or maybe, "Fools seldom disagree" :)
Mark Seery 12/5/2012 | 3:16:07 AM
re: Vonage Raises Another $200M I don't think this will impact your calculations or conclusions very much, but FYI, Vonage has announced they have 600,000 customers.

-mark
Kevin Mitchell 12/5/2012 | 3:16:04 AM
re: Vonage Raises Another $200M I suspect that Vonage's subscriber claims also include their promotional/trial subscribers, which I believe are 30-day trials.
falsecut 12/5/2012 | 3:15:57 AM
re: Vonage Raises Another $200M I know that set up costs are big drivers. If the customer has a problem setting up the service, and as the number of early adopters (and presumably more tech-savvy customers) taking the service dwindle, you are left with people who have issues with set up. So those customers call tech support and that increases costs.

Then if the customer is dissatisfied with the service, then (and I'm not sure of Vonage's policy but this is true at some providers) they will switch them back to their old service. That's another cost.

As to the UNE marketing issue, AT&T announced dramatic margin improvements in its 1Q05 earnings (from 17.6 to 34.1%) which in the statement is attributable to lower marketing and sales expense. Operating income rose $204M attributable primarily to ceasing marketing. With an announced base of customers of over 3 million, This is significant savings per customer.

To sum up, acquiring customers is expensive and I should imagine that a lot of the money is going to just that. I wish I had some inside information to share on Vonage but I do not. Hopefully someone else will share some better insight into that.
rjmcmahon 12/5/2012 | 3:15:51 AM
re: Vonage Raises Another $200M To sum up, acquiring customers is expensive

Agreed that acquiring and supporting customers can be expensive. I was told that it takes seven years before Brinks Home Security makes any profit from a new residential alarm system.
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