What's Up with Vonage?

What’s up with Vonage? Not its stock, of course. After a recent IPO at 17, Vonage has dropped to a current price of $12 today, which is up a bit from its low last week of 11.52.Vonage does have customers and revenues, which totaled $387 million during the past year.

A visit to the Vonage website (http://www.vonage.com/) provides a look at some marketing efforts, including their basic service of free calls in the U.S., Mexico, and Canada, as well as some EU countries, for $24.99 per month. For a small business, the figure is $49.99 per month.

This service is cheaper than what I spend with Quest for traditional land-wire based phone service. However, Vonage requires high-speed internet connections. My rural home receives a wireless service beamed from the water tower in Treynor, Iowa, which is about 5 miles away. It is subject to quality variations and speed limits, which may make Vonage impractical for me.

If you want to test your service yourself, Vonage does have a cool feature that graphs your upload and download speed. It is available here: http://www.vonage.com/help_knowledgeBase_article.php?article=497&category=159

Also available on Vonage is the use of a virtual local number for a fee of $4.99/month. Thus, if you want people to be able to call you without charge, you might be able to set up one of these numbers, which will then transfer to your home phone via the Internet. Pretty clever, no?So, since all of this sounds so good, why is the market so skeptical? Scott Patterson has an article in today’s WSJ (available online here: http://online.wsj.com/article/SB114962335948272932.html?mod=home_whats_news_us) that questions whether Vonage is a bargain at these prices.

I don’t usually give opinions on these issues. In fact, I must have one of those virtual numbers assigned to my crystal ball: it seems to be located somewhere there is a perpetual fog. But it seems to me that there is a real problem here from a competitor service, Skype, which is owned by E-bay.

My friend John in Australia introduced me to Skype, which he uses regularly to communicate with his spouse who is often in Europe. You can learn about Skype here: http://www.skype.com/. Skype-to-Skype calls anywhere are free, and through year-end, calls from Skype to the U.S. and Canada are free.Now, let me get this straight: Vonage is charging $24.99/month and its competitor is giving away a similar service. Vonage does get customers, but its operating margin is a negative 83% (http://finance.yahoo.com/q/ks?s=VG) indicating that price competition at this subscriber level is not going to be favorable for Vonage). (Query: will Skype continue to give away this service?) This currently does not look good for Vonage.

Vonage has done a good job marketing, though, as evidenced by an informal poll I took with my students this morning. They are bright, technologically sophisticated people. All but one had heard of Vonage; the converse was true with Skype. (Those who knew about it had heard about its acquisition by E-bay, but had not used this service.)

Another issue for Vonage: a class action suit filed June 6 alleging technical misstatements about the effectiveness of Vonage services in the IPO documents for the company. Though such suits are common when stock prices plunge, this one could present another cloud on the horizon. The PR release for this suit can be found here:
http://biz.yahoo.com/prnews/060606/phtu048.html?.v=37

EAM

P.S. Sorry for the misspellings and multiple posts in the earlier version. Blogger was malfunctioning and I could not get back to edit.