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Vonage May Sell Out To Telco |
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Written by Adam Gosling
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Monday, 03 April 2006 |
Vonage is less bullish about the possibility of a public listing and may look at selling out to an established telco according to reports.
The company has been slow to follow-up its initial filing signalling its intention to float and some US money market insiders are speculating this signals that Vonage is shopping itself around town for a buyer.
Although Vonage is a well established VoIP brand, it’s not alone in the market and the long term prospects for any consumer VoIP outfit are likely to be tenuous. Apart from the threat of telco’s subsequently being forced to compete, Vonage also faces the likes of Comcast, Time Warner and Cox – huge cable companies with heaps of cash and established relationships with millions of subscribers.
Although the biggest threat to consumer VoIP service providers is probably not even the telco’s or the cable companies. eBay, Google, MSN, Yahoo and AOL are all lining up to take a piece of this market by offering advertising supported services that are free to the user.
It’s pretty hard to compete with free and as always-on Media Center style PCs and gaming consoles take a prominent place in the home, a move by these players toward interoperability could effectively eliminate any pay for use service in the long term.
Apart from this speculation, another reason potential investors might be wary of the company’s listing is the involvement of the company’s founder and chairman. According to CNN/Money Jeffrey Citron has had a run in with the US SEC before. While at brokerage firm Datek Securities he was accused of taking part in a “fraudulent scheme involving improper use of the Nasdaq Stock Market's Small Order Execution System." He subsequently settled with the SEC after agreeing to pay fines and was banned from future association with securities brokers and dealers.
Possibly in response to such concerns, Vonage hired Michael Snyder to take over the CEO role from Citron. But CNN/Money notes that Vonage even said in its prospectus that there is a risk that potential investors will not buy into a float “as a result of allegations against Mr. Citron."
The trouble for Vonage is cash burn. The company is running a massive marketing campaign in the US to build on its 1.4 million subscriber base. The company’s revenues tripled in 2005, but expenses followed suit leading to Vonage reporting a wider loss in the first three quarters of 2005 than in the equivalent period of 2004 said CNN/Money.
That’s the core problem facing any Internet Telephony service provider: reaching the point where the network is built out enough that incremental traffic turns to Gold rather than red ink requires a certain critical mass of users. Regardless of ARPU increases, customer acquisition costs do not fall as fast as sell price in what is turning out to be a fiercely competitive grab for marketshare.
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