Vonage Scary Big Spending Ways

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!

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