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Summary:

This just in – Vonage is spending $21.829 million a month on Internet advertising alone, making it the second biggest money spender online. If you look at the number of customers they are adding – 15,000 a week or 60,000 a month, that makes it about […]

This just in – Vonage is spending $21.829 million a month on Internet advertising alone, making it the second biggest money spender online. If you look at the number of customers they are adding – 15,000 a week or 60,000 a month, that makes it about $363 per customer in acquisition costs. Never mind that they are advertising like crazy on television and in the print media. If those figures are taken into account, 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’s Stephen Baker asks, “Why the hurry? Vonage is rushing to become the uncontested giant of Voip before the big telcos gain traction in the market.”

Clearly, the increased spending shows that the low-hanging fruit, the early adopter market, has been fully tapped. Secondly, the competition from cable providers is much stronger than one thought. The last bit: price war and competition from other players is finally beginning to have an impact. What would be nice to see are the total VoIP subscriptions at the end of the second quarter 2005.

Add to the mix the equipment subsidy, channel distribution, installation the costs can seriously add up. Now the more recent developments like spending money on e911 and other such things, (aka cap-ex) will add to the bottom line. A very wise man who follows the industry closely recently emailed me and point out that, “if acquisition cost is around $400 per customer (equipment, marketing, etc.) with 4% per month churn rate(our conversation a while back) – so, you lose 1/2 of your customers in a year!” In fact at those prices you will need a minimum of two years per sub to break-even with just the acquisition costs!

  1. It seems that the companies who’ve locked onto good ideas in 2005 are making the same mistakes as the ones who had bad ones (can you hear me pet food delivery?) five years ago.

    The rules don’t change and spending as if sheer force of will can alter basic math is crazy.

    Customer aquisition costs in the subscription business have been a hot topic for adult websites for a decade now. Their pricing is very close to ISP’s and VOIP concerns. Some players also spend heavily on advertising.

    Punchline? The most profitable companies (and the largest) don’t advertise at all.

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  2. Sam

    I agree, that it is like 1999 all over again. i am surprised that Vonage has to spend as much money … My biggest concern is the churn. Vonage never talks about that, and from anecdotal evidence I know that it is pretty high.

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  3. blah blah

    You should be asking yourself who dies or sells out first…

    vonage or skype.

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  4. given the expenses, skype seems to be a better option at this point.

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  5. Skype might look like a better way to approach an iffy market. But it has its own uncertainities. For example it has been tacitly assumed that Skype makes profit on every SkypeOut calls. Isn’t it possible that acquisition costs are built into their tariff? I just now read that they have stopped SkypeIn and SkypeOut services in Norway due to E911 regulations. Finally, unlike PSTN or a subscription based VoIP service, it is easy/feasible to offer a bypass service in Skype.

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  6. Clearly Vonage is on a suicide mission; their cost and churn stats are worse than a cellco in return for about 1/4 or 1/3 of the ARPU. Either they’ve got something truly spectacular planned, or there’s a VC sucker born every half decade. (4% churn a month on PCS would get the CEO of Sprint fired; 3% was enough to get the last row of SVPs the )

    The trick for Skype is to find the VoIP equivalents of (0)800 and (in the UK) 0870 numbers, where companies respectively either want to solicit calls or want to charge for incoming connections. The brokerage of presence also offers opportunities. (Outcalls from companies will have a higher success rate with presence and IM.) Before you can do this you need a very large pool of user chickens to encourage the laying of corporate golden eggs.

    There’s a superficial similarity between Vonage and Skype in that they both are rushing to accumulate the biggest pile of users. But in Skype’s case there’s a fighting chance of then converting them into revenue by new kinds of (value-creating) messages passing through the Skype network. Being tied to traditional CPE, Vonage doesn’t stand a chance; it’s always limited to the value proposition of POTS.

    Skype’s got a ton of business and technical shortcomings, but in the absence of strong competition for the ultimate user experience they win by default.

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  7. i agree with martin, by default.

    but lord people—!

    “voip” seems to be the only thing talked of…there is the whole microcosim of the IM world and how that has invaded peoples lives and essentially hooked them. combine that with reliable, option riddled choices voip (free calling) and a public awarness and adoption of voip that is only certain to grow given time (and media’s help of course)—and I think you have a very UNCERTAIN future.

    e911. BIG DEAL.

    IF IM voip is still transmitting after the dust clears, MILLIONS will use it…its the IM way. They may not do away with their phone (i’m not yet), but they will certainly use the online app’s that are IN.

    vonage doesnt have much to do with this does it.

    and—

    skype ISN’T the only one to watch re: voip/IM, although readers new to here and many other blog corners would think so. keep and eye on the ones using asterisk. they are doing things that skype would salivate over at this point in time…

    yours truly still thinks that nikklas and the ole estonia crowd are already counting the days down, and more than likely making a list of who to partner with “quick” (to make their real estate resale value appear larger), rather than doing what a real company would, listening to their customers and fixing flaws—of course, tis hard to do that when the business model was flawed since day 1.

    Can you say peer-2-peer?

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  8. Martin,

    I am not certain about the exact churn rate, but that number is pretty hard to justify. maybe that is why they don’t want to talk about it.

    i do agree if skype can convert more people to its paying services, they have a chance to building something more sustainable. but aswath and craig make good points. the governments are getting *concerned* and other so called free options abound.

    This is turning out to be more interesting that I really thought.

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  9. Om,

    “if skype can convert more people to its paying services, they have a chance to building something more sustainable”

    That;s what all players or self dubbed players are hoping and trying for…but its certainly not about just converting…

    Its about KEEPING.

    I think everyone here and most looking in are not looking at this in a real world perspective…we get lost (myself included), in this internet world—where an app like skype can come along and possibly disrupt/change/create/destroy…and we get lost in the what we think are plausible possibilities….simply because, “Hey its the internet right”!

    Wrong…in this case anyways,,,This isnt hotmail guys.

    I’m not above saying that I myself do not now the ramifications, regulations, hurdles and roadblocks that are surely going to come down the pipe re: voip. And I just know most of you (including those outside this thread), would say the same.

    Do you REALLY think that skype has planned for all these DEFINATE, IMMEDIATE, and most ASSUREDLY unexpected issues?

    No.

    It;s funny though…we all bring skype up constantly………its the media dammit! But they arent the real story…

    Voip unfolding is.

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  10. Vonage: Raise a Lot, Spend a Lot

    According to ClickZ, Vonage spent $21.8 million in April on advertising. As Om Malik succinctly puts it: now you can see why they needed to raise $200-million in private equity recently. Clearly, Vonage believes it’s in an “Amazing Race” to establis…

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  11. charliesierra Sunday, May 29, 2005

    Om,

    Your looking at Vonage in a too literal manner, thus your CPGA number is overstated. Furthermore its also irrelevant strategically.

    1) What is the real Vonage CPGA?

    First of all, marketing folks think in terms of 3 components.
    MC = BC + AC + RC.
    AC is of course CPGA, BC is pure branding cost, and RC would be specific retention costs.

    Vonage is building a sub base and a Brand, thus their own internal CPGA numbers are much lower than yours, and I suspect they are very happy with them, for now.

    2) If people will give you the capital, strategically, growing fast is less risky, because the future is quite unknown. And in this case the sleeping giants will be players in the future. So the expense of going slow might then be unaffordable, and then the whole business is near worthless.

    What Vonage is doing IMNSVHO, is building a NATIONAL brand.

    The importance of this, is that the MSO’s are pure regional players, and their biggest challenge is how to become national and compete against the nationally focused phoned companies.

    A strong Vonage is a good target/acquistion for a future MSO JV for wireless or however the MSOs might work together.

    PS. I think Churn is an asymetric metric at this point in its life. If its low, thats great, if its high, its not a super big deal, because of the law of numbers. TMUSA and SprintPCS each had churn of 6-7%+ early in their lives.

    Now, chronic long term high CPGA and higher than average churn (ie. Sprint PCS) is what leads to MVNO’s. Which is a fancy way of saying, its no longer economical for us to continue buying our own subscribers, and build a network, at the same time.

    Capital always demands a return in the end.

    Now if Vonage is really on the ball, they’d follow the recent moves of Yahoo and Google.

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  12. Sailing aboard the VoIP Titanic?

    Hmm, wonder if I should be concerned about my favorite VoIP company: Vonage? Om Malik says that they are on a spending tear:
    Vonage is spending $21.829 million a month on Internet advertising alone, making it the second biggest money spender online. …

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  13. When you’re afraid to admit you have a high customer acquisition cost, you call the difference branding…

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  14. peer-2-peer

    Nobody really talks about Vonage’s cost of servicing customers vs Skype. The other side of the coin is that Vonage is collectly monthly revenue from those customers.

    It seems the monthly subscription view justifies the infrastructure cost and the p2p aspect of Skype doesn’t play up that much in the comparison.

    Except for the viral effect and the potential customer base.

    That’s all.

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  15. Vonage Scary Big Spending Ways

    If you’ve got it, flaunt it. Vonage is plowing through it’s $200M financing to buy market share:…

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  16. It might be true that Vonage has high infrastructure cost, but I would like to suggest that one can deploy a service that has the almost the same infrastructure cost as Skype (I reject the claim that Skype’s cost is zero). The only difference is which revenue model is preferable: fixed monthly subscription vs. usage charge. The former incurs acquisition cost and the latter has to compete constatnly for customers, because they can bolt at any time. Neither is appealing in an environment where the demand will only diminish as time goes by (due to wider broadband adoption and migrtation away from PSTN.

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  17. Nitin Ahuja Monday, May 30, 2005

    The telcos will finally catch up, for a long time they have considered VoIP as what they call a “disruptive technology”, but they are slowly embracing it, since its pretty much inevitable, and they would have long term traction in terms of market position,because they have systems in place (customer service,marketing etc) that new companies like Vonage cannot beat.

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  18. Its about the service dammit! ;-)

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  19. Nitin

    I agree … this is a story which has unfolded many times before – in case of DSL it was even more stark.

    Aswath,

    I for one, agree with you on the whole issue of skype’s infrastructure costs.

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  20. [...]

    According to ClickZ, Vonage spent $21.8 million in April on advertising. As Om Malik succinctly puts it: now you can see why they needed to raise $200-million i [...]

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  21. Om – “If you look at the number of customers they are adding – 15,000 a week or 60,000 a month, that makes it about $363 per customer in acquisition costs.”

    Actually, those were their customer adds before they upped their spending. Previously they were at $7-$11 million in spending per month.

    Spending $10 million per month and adding 60,000 would be a $166 CPA. Spending $7mil/month/60k would be a $116 CPA. Add in other misc costs and you get to your $150-$200 CPA that Citron quotes.

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  22. Important to note that the online spending figures are certainly overstated. Looking at data from NetRatings AdRelevance backs up that Vonage is the biggest spender online, but spending figures from TNS or AdRelevance are typically overstated due to their use of ratecard pricing. AdR in particular has done a lot to ‘normalize’ spending levels to better numbers using publicly released figures from the likes of Yahoo! and other publishers, but a bias still remains especially for the large players who are negotiating 8-figure deals with Yahoo! and others.

    Their customer acquisition costs are extraordinarily high, however, if you roll in TV I would say it is probably in the $300+ range but not as high as $400. Time will tell, when these guys have to eventually disclose the actuals. It’s a great service (and Skype won’t cut it for a lot of the mainstream for quite some time) but I worry when I see as much advertising as I do ~ it’s like either it’s a mortgage ad or a Vonage ad wherever you go online.

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  23. Skype Parasites

    Andy comments about Zoom’s Pay as you go service. (By the way they seem to offer an In service as well.) Recently Russell Shaw compared Vonage and Skype and suggests that for certain usage models Pay as you go scheme…

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  24. [...] ogic of Vonage spending a ton of money on advertising and whether is it having any impact. Well it is something I have often wondered about, especially now that cable companie [...]

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  25. Fluoxetine

    Vonage Scary Big Spend…

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  26. [...] “During the nine months ended September 30, 2005, we experienced average monthly customer churn of 2.11%. Our churn rate among those U.S. direct and retail customers with us for more than six months was lower,” the company says, in its filing. That seems to be a rather innocuous number. To be fair, the company’s churn rate of 2.11% is pretty darn good – if you compare it to other Internet related services business such as web hosting and DSL High Speed Internet that see about 1%-to-3%. Vonage is actually doing much better than it had reported earlier. [Talk about being wrong in my estimates previously. The numbers reported in the S-1 were exactly half of what I had estimated with the help of others. My original estimate was 4% churn and $400-per-customer acquisition cost.] [...]

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  27. Voip Weekly had a great article showing all the stats on Vonage. Their CPA is around $210 and around $250 with CPE (customer premise equipment), coupons, and such. Their 2.11% churn rate is amazing. I believe that figure only includes those customers that have been with them more than 30 days.

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  28. It is surprising that it skews that old.. but there are some amazing videos being uploaded by the 1% that can make the experience kind of addictive once you get there.

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