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VOIP services

Analysts: Vonage Feeling Cable Heat

Analysts believe Vonage Holdings Corp. (NYSE: VG)'s worrisome fourth-quarter numbers, announced Thursday, reflect increasing competition from the bundled voice services of cable operators. (See Vonage Reports Q4.)

The VOIP specialist's latest financials reveal a worrying trend. Vonage's customer acquisition costs rose sharply to $306 for each new customer added during the fourth quarter, up from $244 per new customer a year earlier.

Despite that increased investment, Vonage's customer base grew by 166,267 subscribers, compared with 207,252 customer adds during the same quarter a year earlier.

Vonage ended 2006 with just over 2.2 million lines, up 75 percent from 1.27 million at the end of 2005.

"Net subscriber adds were lower than we expected, and the customer acquisition costs were higher than we thought," says Piper Jaffray & Co. analyst Troy Jensen.

The reason? People are attracted to the kind of service bundles that the cable operators are offering, says Jensen, and that's "raising the subscriber adds for the cable guys, and it's lowering [their] churn rate." (See Cable to Hit 11M VOIP Subscribers in '07 .)

And on the marketing side, the analyst says Vonage's best days might be behind it. "They had an opportunity two years ago when they were the only ones marketing and they were picking up share, but now it's just going the other way," Jensen says. (See Vonage Adding Enhanced Voice Tricks.)

Buckingham Research Associates analyst Qaisar Hasan notes that Vonage's customer acquisition costs have been increasing in each of the past few quarters. With the amount of cash the company has now, Hasan says Vonage can keep paying the current customer acquisition costs for another two-and-a-half years.

But Hasan notes that adding new customers is going to become "more and more challenging with the passage of every quarter," as competition from cable and telco bundles intensifies. Every day "more homes get access to cable telephony, and those homes are less likely to sign up with Vonage," he says.

Vonage appears to have accounted for the impact of greater competition in its forecast for 2007 revenue, which also fell short of analysts' expectations. The company predicts annual revenues of $850 million to $900 million, up from $607 million in 2006. Analysts, though, were expecting 2007 revenues of $924 million.

Investors weren't happy with Vonage's news and outlook. The service provider's share price closed down 54 cents Thursday, more than 9 percent, at $5.30. The stock has lost 65 percent of its value since the company joined the stock market in May 2006. (See Poll: Vonage IPO Gets Thumbs Down and Vonage Falls Hard & Fast in Public Debut.)

Vonage acknowledges it has a problem. "Although we had a great year, adding nearly 1 million new lines, we did see some reduced effectiveness in our marketing efforts during the fourth quarter," says Vonage spokeswoman Brooke Schulz.

But the company doesn't believe competition from cable service providers is hurting its numbers. "While competition is also a factor here, we don't think it is causing the deterioration in net additions, because the areas in which we have cable competition are those that perform the best for us," Schulz says.

Vonage reported that its fourth-quarter revenues rose to $181 million from $95 million in the year earlier period. Analysts had expected $180 million.

The company reported a net loss of $65 million for the final three months of 2006, though that at least was better than the $72 million net loss recorded a year earlier.

Hasan at Buckingham Research says Vonage's profitability doesn't provide much insight into the company's ongoing performance at present. "It's a little bit misleading to look at the bottom line of companies like Vonage, because they are subscription-based and still in a growth mode."

He says one reason Vonage's loss narrowed in the fourth quarter is that its customer activation costs were lower because of the reduced number of new customers.

— Mark Sullivan, Reporter, Light Reading

materialgirl 12/5/2012 | 3:14:20 PM
re: Analysts: Vonage Feeling Cable Heat This was predictable at their IPO. Voice is a feature, not a product.
^Eagle^ 12/5/2012 | 3:14:17 PM
re: Analysts: Vonage Feeling Cable Heat MaterialGirl,

I totally agree. how long do you think Vonage has before they are "toast"?

Voice has indeed become a feature. Driven by not simply IP networks, but also by the long years of investment in voice infrastructure being finally fully depreciated by the carriers... Deregulation accomplished a few things.

how long before VOIP is given away free by carriers (either phone carriers or cable tv carriers.... or even better future nationwide WiMax / Wifi carrier?!) as part of the bundle you get for buying their broadband access offering.

It will eventually come down to pipes and content. (video, games, sports, etc.)

so, who else is in trouble either short term or long term because of this trend? Cell phone providers who charge by the minute? Other VOIP solutions providers? the large dinosaur companies who still have a ton of legacy copper voice gear on their product offereing list? (ALU, etc.)

sailboat

Michael Harris 12/5/2012 | 3:14:15 PM
re: Analysts: Vonage Feeling Cable Heat Funny thing is that Vonage is getting whacked by cable IP POTS sold for $40 per month. That's far from free. One could argue the trend signals that voice as a best-effort IP application is trending toward a zero price point, while lifeline IP telephony as a service is not.
materialgirl 12/5/2012 | 3:14:15 PM
re: Analysts: Vonage Feeling Cable Heat Dear Mike and sailboat,
The featurism of voice is subtle. It starts with these bundles. Soon, people will not be "voice", "data" or "video" customers, but "subscribers". The whole RGU (revenue generating units) thing will go into a bundled black hole and everyone will pay $100/month for "access".

Surely the folks who make gold-plated voice gear will go, wired and wireless. The first battle will be between the telcos and the cable cos, with the cable cos ahead. Next, the battle will be between the service providers and the portals. How that goes depends on who wins the 08 Presidential election, and who runs the FCC.

ATT does not want to wait for that uncertainty, and is re-monopolizing now. They hope to stamp out that nasty Internet, limiting their portal competition. Stay tuned. As to Vontage, they go away when their cash balance goes. This depends on how fast they spend money.

Never a dull moment!
Michael Harris 12/5/2012 | 3:14:12 PM
re: Analysts: Vonage Feeling Cable Heat The featurism of voice is subtle. It starts with these bundles. Soon, people will not be "voice", "data" or "video" customers, but "subscribers". The whole RGU (revenue generating units) thing will go into a bundled black hole and everyone will pay $100/month for "access".

Perhaps this could be described as the "hole enchilada" package. ;)
materialgirl 12/5/2012 | 3:14:12 PM
re: Analysts: Vonage Feeling Cable Heat Dear Michael:
At first the bundle will seem unusual. Soon it will become basic.
American Indian 12/5/2012 | 3:14:10 PM
re: Analysts: Vonage Feeling Cable Heat
For Vonage and others ---- if you do not own local fiber --- you have no future.

Thinking someone that spent billions to build out the pipe is going to let anyone free ride, needs to think again.

No fiber, no future.

Vonage should never seen the light of day by an IPO ... shows just what iBankiers will do for a fee.
kjmcdonald 12/5/2012 | 3:14:07 PM
re: Analysts: Vonage Feeling Cable Heat As a Vonage consumer, I can't see anythign the Cable VOIP provides me at $40-50/month that I don't get from Vonage at $15/month.

I'm not sure why Vonage would need it's own 'lines' since, the broadband provider their customers use can't limit what the customers do with the broadband access.

All that said, Vonage is limited to those customers that have broadband access, which is not as large a pie as thouse who want phone service.

I suppose if Comcast were to roll voice in the cable modem access fee at little to no charge , then i might consider leaving Vonage. But at $43/mo for internet, and $40/mo for voice, I'm not leaving anytime soon.

I do forsee a day when these companyies will only really be providing 'data access' for a fee per month. Instead of Cable TV, you'll get your TV as data, youll get your phone as data, etc. I suppose the monopolies can try to make it worth it pricewise tobuy TV and phone in the Data package, but I think you'll see people opting to choose the alternate TV or Phone providers that they can access through the data connection to the internet.

Any Telecom provider that thinks they can block access to anything on the internet (competing services or not) is crazy I think. There will be a huge revolt, and with FIOS and other's finally providing competition on the Data side, Customer's will walk to the provider with the fewest limitiations.

Verizon, Comcast, Timewarner, Cox, AT&T, etc. should just get used to the fact that they'll be back in a one product business eventually. They'll all be Data Access providers. Eventually I wouldn't be surprised if they even feel competition on that from the electric company.

davefromca 12/5/2012 | 3:13:44 PM
re: Analysts: Vonage Feeling Cable Heat I love my VONAGE and I have NO plans to cancel my service....you have total control of your telephone service...if you move...you dont have to call to move your service..you take it with you and hook it up....IMMEDIATELY!!! I LOVE IT!!!
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