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Summary:

For those of who have lived through the bubble of the late 1990s very well know that there is something called dumb money. And in many cases it was the likes of Bain Capital, who were glad to provide that. Hello again … for now they […]

For those of who have lived through the bubble of the late 1990s very well know that there is something called dumb money. And in many cases it was the likes of Bain Capital, who were glad to provide that. Hello again … for now they have jumped into the fray with a massive cash infusion into Vonage, which just raised another $200 million from Bain and previous investors who have upped their ante. (More details here on Business Week’s Deal Flow blog!) Just in case you forgot, Bain Capital was one of the late stage funders of WebVan, and you know what happened there. Global Food Exchange and Interpath anyone.

SiliconBeat is impressed and sum it up succinctly in one word: balls. (Word!) Balls are for sports, not for investments, but hey that’s just me. Matt (thanks for the links!) goes on to pose all of the important questions: “Is this really just an outrageously aggressive land-grab? Or are they going to buy up other VOIP companies? Or is this to assure big corporate customers they’re big enough to stay the course? Or all of the above?”

My attempt at answering those questions: Corporate customers can stitch their own network, they just priced themselves out of the acquisition market, and the only option is an initial public offering. Business Week suggests a 2006 IPO, and it will be sometime before the investors can fully liquidate their holdings. By 2007, the incumbents would have everything in place – to launch a fierce counter attack.

The latest round of non core money flowing into Vonage is the first sign of VoIP froth. I expect more dollars to flow into this nascent market – just like it did into the @Home and other early DSL providers – and it will once again evaporate into thin air. It is interesting to see what yardstick the new investors are using for Vonage – even by most optimistic estimates this is a highly risky investment. The total residential market for 2008 is being forecast at about 20.8 million lines by Infonetics Research.

With Cable operators growing the way they are right now, it is going to be hard for Vonage to retain its pole position. (Sure they are the undisputed champs for now, like Yankees were in 1999. Yanks are last in the AL East with a $200 million investment.) Comcast wants 4 million lines, and the other three carriers are not too far behind – and if these guys can carve out 15 million lines, what’s left on the table is scraps. Over which many will be fighting. Notice, I have not even factored Bells into the equation. Then there is the whole issue of 3G wireless. It is all about voice – cheap, and tons of voice minutes – and that means that independent VoIP Service Providers will have a lot to content with. And then there is Skype! Not to mention the quality issues that incumbents can create for Vonage on their pipes. The biggest problem Vonage and others of its ilk are going to face is the increased and more more brutal scrutiny from FCC.

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  1. Mike Masnick Thursday, May 5, 2005

    I’m still trying to figure out how they go public with Citron in charge. The story going around is that his SEC settlement from the Datek/SOES fiasco bars him from running a public company. I was wondering if the reason they did this round rather than go public right away had something to do with that.

    http://www.techdirt.com/articles/20050505/1840253_F.shtml

  2. Vonage Gets Cash, Testicles

    We like Voice-over-IP, because we’re cheap. Om likes it, too, but questions whether the recent shipment of hats made of money to Vonage is really a wise investment. But first, an out-of-context pullquote:SiliconBeat is impressed and sum it up succinct…

  3. Vonage is on top now and can stay on top if they don’t do what the cable companies (cough cough – Time Warner) are doing. Vonage is 24.95 for unlimited everything – TWC digital phone wants 40 bucks and that does not include voice mail! Companies like Packet 8 don’t offer the voice quality (tried them both and Voange wins hands down) and getting everything for 25 bucks versus 40 is a no brainer.

    Once WiMax hits or some other broadband wireless technology then we can talk about truly mobile cheap talking (and Video) –

    p.s. it’s contend not content :)

  4. Sure, Time Warner’s more expensive, but it’s built directly into my cable modem, drawing its own dedicated bandwidth that doesn’t affect sound quality or my internet connection. As well, unlike Vonage and AT&T CallVantage, they run it into my phone jack and route it through every jack in my home, allowing me to use all my normal phones throughout my house instead of having to hook up one phone, or a multi-base cordless phone system to have phones elsewhere. As well, the Time Warner unit has a backup battery, providing an hour of power in case of an outage. Even if such a feature was built into a Vonage router, the actual modem still wouldn’t have power, defeating the benefits.

    I’m not knocking Vonage. It seems like a great service. But don’t knock what I get for my extra $15 a month from Time Warner. And as for charging for voice mail, that doesn’t much matter to me. I far prefer having an answering machine so I can screen my calls or pick up if I can’t get to the phone before it goes to the machine. A matter of personal preference, but unimportant to many.

  5. All voip services allow you to utilize the phone jack to send the signal to every phone in your home. The secret is making sure you don’t fry your router by checking that there is no power going through the phone line.

    I currently use Lingo and don’t have any issues with it, so, for $20.00 a month and no long distance costs which includes Western Europe, I’m saving a lot of money considering all the family members I’m calling. $40.00 a month and $100.00 in long distanc now $20.00 total. It’s a no brainer as any limitations with VOIP, the slack is picked up by my cellular phone.

    The hardware side of things is impressive ( dedicated bandwidth and backup battery ) with Time Warner, but $15.00 a month and you don’t even get voice mail is pretty stingy. Also, correct me if I’m wrong, does Time Warner allow virtual numbers domestically and internationally where you can allow family members to call you as if it were a local call? Might not matter to those that don’t have family outside of their area, but it’s a good option which most voip
    companies provide.

    It’s not a comparison contest. Each Voip provider has its plus’s and minus’s. I can only see the service getting better and better and putting the frights up the phone companies that have, up to this point, been charging an arm and a leg for service. Let’s hope they all don’t get too greedy and ruin a good thing.

  6. Tmothy Ryan Friday, May 6, 2005

    Vonage is starting to also have some very serious growing pains and their service is starting to suffer.

    Type “Vonage Sucks” into google and you’ll see what I mean. While every company offering VOIP will have their fair share of complaints, all of Vonage’s customer service is now being outsourced to india and is a lesson in patience. Sometimes you get disconnected and generally you’ll have to wait for around 30-60 minutes with no one answering your call.

    The quality of their phone service is also starting to lag. And while there is no hard evidence out there as to call quality, I do think their rapid growth is starting to tap their capacity.

    The cable and old school phone companies have an advantage, because they already have the infrastructure and capacity to deal with large numbers of customers. The reality is that Vonage is hurting with reliablity and customer service that is worse then a bad cellphone provider. They may need the money to build capacity and build a competitive infrastructure.

  7. Oliver Thylmann’s Blog Saturday, May 7, 2005

    This is getting silly

    Vonage just got another $200 million from VCs. Om Malik has more. At that kind of money, I’d love to see sustainably competitive advantage, unique selling points, lock-in, and the like. I simply don’t see it. Ok, I didn’t invest

  8. Om Malik’s Broadband Blog » Vonage Scary Big Spending Ways Saturday, May 28, 2005

    [...] , then we could see final customer acquisition cost of around $400. Perhaps that explains why they needed that $200 million cash infusion from Bain Capital et.al! Business Week&#821 [...]

  9. Om Malik’s Broadband Blog » Return of the Telecom VC Monday, June 27, 2005

    [...] s are cautiously returning to the telecom sector. And that’s not taking into account mega investments in VoIP service providers like Vonage. Last week, PicoChip, a wireless chip [...]

  10. Om Malik’s Broadband Blog » Vonage spends more dollars… Canadian dollars Wednesday, July 13, 2005

    [...] The free spending VoIP providers is trying to buy its way into the Canadian market. Same story, different currency! In VoIP (the New Phone) and Asides Posted Wedne [...]

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