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Summary:

By Andy Kessler This is a classic high stakes Wall Street sucker punch. The buzz on the Street is that the Vonage IPO is on the rocks. They HAVE to raise money or they are in a world of hurt. Their investors don’t want to put […]

By Andy Kessler

This is a classic high stakes Wall Street sucker punch.

The buzz on the Street is that the Vonage IPO is on the rocks. They HAVE to raise money or they are in a world of hurt. Their investors don’t want to put another penny in and the company seems to still be bleeding cash, $75 million in the first quarter of 2006. Geez, Vonage is begging customers to buy 20% of the deal – not a great sign.


Ebay knows this, why not toy with the mouse before you kill it. What better way to do away with the Vonage IPO and raise their cost of capital then scare investors even more. Every prospective buyer on this deal asking the same questions: what about pricing, why will anyone pay a flat fee per month when skype connects in the US for 2 cents a minute. $25 per month to Vonage is the equivalent of 1250 minutes.

At Skypeout = zero, its infinite minutes. The value of what Vonage provides has just gone from $25 per month to somewhere close to $0, goose egg, nada. Tough to get a return on equity with those kind of numbers.

F-ing brilliant. I’d like to shake the hands of the person that thought this out. Citigroup, Deutsche Bank, and UBS now have to work a lot harder to sell this deal. Boo-hoo.

Back in my days on Wall Street, I remember working on an IPO and just as the roadshow started, some competitor filed a patent infringement suit. They could have done it anytime, but they waited until the IPO pitch was in full swing. Even though the suit ended up being baseless, it changed the game. Capitalism is not without its Department of Dirty Tricks. Not much different than your beloved Yankees overpaying for Johnny Damon – because they could!

Even the timing gives a clue – now through the end of 2006 – just long enough to sink the good ship Vonage. The effect on Ebay? Noise.
They already took the 3% or so dilution when they overpaid for Skype, they might as well have some fun with it. Lose some cash flow? So what, you’ll barely be able to find it in their income statement.

I was starting to give up hope. Maybe things really are fun again.

Andy Kessler is a former hedge fund manager who now writes on investment trends in technology and communications. His latest book, The End of Medicine will be released shortly.

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  1. When do they start paying customers to use the service?

  2. Maybe Skype can pay customers in EBay shares!

  3. I use both Vonage and Skype. I am very excited by the free US SkypeOut, but I am not sure that it is the Vonage-killer that you make it out to be. Skype is great on a computer, but it doesn’t pass the “wife-test” It doesn’t act like an easy-to-use voice phone with extensions anywhere in my house. Vonage looks and feels like the regular Verizon service that it replaced for me. I don’t need a computer running, I don’t need to upgrade the software, I don’t need to log in. The wife just picks up the phone and dials. When Skype starts to sell a dedicated TA like Vonage and the other VoIP carriers, then it will compete directly with Vonage.

  4. Ryan Irelan Tuesday, May 16, 2006

    Call me naive, but I don’t see how Vonage and Skype are anything but an apple to orange comparison. Vonage provides a seamless telephone service that is easy to use, install and manage. Unless I’m missing something, I don’t see Skype offering any of that in the USA right now.

    So, how can the publicity stunt by Skype have any impact on Vonage at all?

    (I am a Vonage customer.)

  5. Ryan Irelan Tuesday, May 16, 2006

    ZeddZull beat to the Submit button, but I agree, Skype does not pass the test of being usable by non-tech people.

  6. ZeddZull your comments calling it the “wife test” are very sexist and it is people like you who try to put down women and keep them out of technology. I hope some girl kicks your ass for saying that.

  7. Moshe Maeir Tuesday, May 16, 2006

    I wonder if Zennström had anything to say about it this morning in his Keynote at VON Europe

  8. originalvonageemployeenumerodos Tuesday, May 16, 2006

    Don’t be stupid andy.

    skpyeout alone can’t kill vonage.

    Subscribers still have to pay some carrier for a phone number to receive calls.

    SkypeIn isn’t free.

    And … oh snap… Skype doesn’t support local number portability, so instead of keeping the number by which everyone knows me, I have to tell all my friends my new SkypeIn number.

    AND EVEN BETTER… Try telling an American that they have to pay in Euros. Give me Freedom Fries any day baby.

    This ploy by skype has a short half-life. It’s all fluff and no stuff.

  9. Thank You Skype. Your little stunt will drive down the Initial Price of the Vonage stock. This allows me to get in lower and reap higher profits later when people start seeing this dastardly deed for what it is — a two-bit shyster-act.

  10. I would like to think that Andy is correct, however Skype and Vonage are still, at a service level, fundamentally different. Skype is a service for individuals, not families, and Vonage really is all about residential calling.

    To the extent that this invalidates Vonage’s pricing? Well, that’s somewhat true, but even so with Vonage you’re not paying for Long Distance Voice Calling. You’re paying for connectivity and some flavor of availability.

    Skype, while much cooler, is a really different value proposition. There are probably many folks who use both, for different reasons.

    -Ian.

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