By Jon Arnold
There are so many ways to interpret today’s disappointing reception to Vonage’s big day, and you’d be pretty hard pressed to call it V-Day. I’ve been pretty busy sharing my take with the media and on my blog (http://blogs.pulver.com/jarnold/), and Om has been nice enough to give me this soapbox as a guest blogger here.
No need to rehash the numbers – the market’s appetite was tepid at best, closing below the targeted range of $16-$18. A lot of people have been calling this a flop, and maybe it is. I guess it all depends on your expectations and time horizons. The stock closed $2.15 below the $17 target, but who’s to say bargain hunters don’t bid the price up tomorrow after digesting today’s action?
Let’s look at the downside first. No doubt, the telcos and cablecos like the news, and maybe even the IM players. And the institutional money knows too much about the numbers behind Vonage, the harsh competitive environment, and little things like Datek. So, the “I told you so” from these players is well founded. And they’re all nodding in agreement saying Vonage is going IPO because no one has come along to acquire them yet, and this is the only way they can raise enough capital to stay in the game.
For those who really feel smug about things, it’s easy to add that their window has passed, and they should have done this last year before Skype got acquired, before the MSOs got serious about VoIP, and when they were still keeping the RBOCs up at night. AT&T is back stronger than ever now, and it’s payback time now for CallVantage. Maybe.
On the bright side, with 33.8 million shares trading hands, the gross take is still a half a billion dollars. That’s pretty much what Vonage has spent historically to date. Looking forward, there’s a full tank of gas, and at current marketing spend levels, this money can carry them for up to 1.5 years. If they can’t make a go of things by then, well, they never will.
So the table has been set. They’ve got their money, they’re closing in on 2 million subscribers, $400 million in revenues, and healthy gross margins of about $17 per subscriber. Putting the marketing costs aside for a moment, these are pretty good building blocks for a business that’s got a lot of upside ahead, a strong brand name and an insurmountable market position relative to other VoIP pure plays. Problem is, these guys aren’t their competition. Details, details.
With so few VoIP IPOs going, I for one thought that retail investors would have been all over this today. No doubt this is the biggest IPO in VoIP’s short history, and when investors were denied a chance to buy into the other mega-brand – Skype – you’d think they wouldn’t pass up a chance to get a piece of Vonage. For those of us who blog and/or work in the telecom/tech space, we’re too close to this, so it’s easy for us to see all the shortcomings. But investor emotion is an intangible that I thought would have more impact here in the retail market. This isn’t 2000, where IPOs had no revenues or customers. True – very few companies have yet to make money with VoIP – but at least Vonage has a real business with real customers.
Clearly, retail investors weren’t so in love with Vonage as Vonage would like to think. One reason could be the fact that existing subscribers were entitled to buy shares, so they were already in. Arguably, once you get past this fan base, maybe the rest of the market just isn’t that excited, and the support falls off from there, especially once you look under the hood, even a little bit. And after you discover Skype, and even AIM, you realize Vonage isn’t the only game in town, and maybe there are better places to hedge your bets on VoIP. Clearly, Vonage will need time to make this all work, and the IPO buys them that time. As I’ve been saying elsewhere, they need to do three things:
1. Reduce customer acquisition costs – they need to be aggressive, creative, and make much better use of viral and referral marketing.
2. Keep churn down – their only hope of long-term survival is customer retention – they need 5 years to fully amortize their acquisition costs to make good money on their subscribers, which is a very long time in VoIP years.
3. Increase ARPU – this is going to be very tough as prices continue to fall, and their options for bundling are limited. Wireless is where the money is, and they really need find ways to generate revenues here. They can gain incremental ARPU with premium features for landline VoIP, but that won’t be easy given how competing services keep giving away more and more features.
They could also try to become a consolidator and acquire other pure play VoIP providers, but I suspect it will be very difficult for them to hold on to all these subscribers, and then you’re starting all over again. Bad idea. Another option is to focus on the small business market, which can be attractive in terms of the upside for revenues and likely lower churn levels. They’re already doing some interesting things such as Office Anywhere, but to ramp this up, they may need to explore partnerships or acquisitions with companies who can give them a really strong value proposition. Examples could be Iotum for advanced call routing/presence management, or Diginiche for multimedia collaboration, or Voxlib for using voice recognition to bridge among all types of endpoints and platforms.
Failing that, where does Vonage go from here? Long term, they can’t win going head to head with the MSOs and RBOCs. They have to find their niche and be the best-damned VoIP pure play out there. As long as we still have a landline market, Vonage will have a place. PC-based telephony may be the norm for the Internet generation, but there’s a much bigger market out there. As Niklas Zennstrom says, everybody likes to talk. On the other hand, Vonage can’t sit still. If they can’t come up with a winning game plan quickly, an acquisition exit is probably their best option. All those customers have got to be worth something to somebody, most likely a cableco or an ISP who needs to extend their footprint in a hurry. Any guesses?
Jon Arnold is Principal of J Arnold & Associates, an independent telecom analyst and marketing consultancy with a focus on IP communications.