Will SkypeFree KO Vonage IPO?

71 Comments

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.

71 Comments

Victor Blake

Just adding to the volume on this one — if you are keeping tally. I’m a Vonage subscriber and I used Skype (complete with cordless skype phone. Fundamentally they are different right now — although either could intrude on the other’s territory with hardly a moment’s notice. Skype has got the edge on application integration (thus ebay good fit). Vonage has the edge on legacy support (thus the market opportunity for being public) — because even my dad can use it (and that’s because he wouldn’t know it’s vonage).

Victor

Dave Siegel

As the first of what I hope will be a series of posts, I am going to talk about what Fixed Mobile Convergence is, or at least what it means from my perspective.

There are three different areas of FMC: Marketing Convergence, Device Convergence, and Network Convergence.

Marketing Convergence

As the name itself might suggest, the fundamental thing happening in a marketing level of convergence is that all of the convergence is a facade. It is the ability…

Sluggernaut

8 Billion People on the planet and ONLY 100mm Skype downloads? How many of them are paying customers? Trust me, the number is a single digit. Skype will only AUGMENT products like Vonage, or Digital Phone, and when you can get a softphone with a USB handset for Vonage and Packet8 or Digital Phone (maybe soon) who needs Skype?

Skype is giving itself away out of desperation. Millions are signing up to PAYING call plans between $20 and $35 a month. When will Skype comply with CALEA and E-911?

It’s an augmenting product, not a practical replacement for primary voice solution.

Digger Dude

To suggest that Skype will run the worlds phone calls is absurd. Their system will crash when 100 million users are on the phone at the same time. It’s a stupid proposition and a whores trick of whisteling to a John across the street who’s propositioning another whore and when he looks saying…”I’m cheaper”.

People want QoS and convenience, familiar ease of use. Vonage has a soft phone. Others will follow. There’s enough room for dozens of Skypes on the planet, there’s room for dozens of Vonages…gee – maybe that’s why T, BLS, TWTC and all the others are SELLING voice at a premium to Vonage and not giving it away…

Too many engineers think the majority of the world sees thinks and consumes things in the same way. They’re all wrong and that’s why they say stupid things. The consumers far outnumber the engineers. Therein lies the opportunity. So tell us again why millions of consumers are PAYING cable companies a premium for voice when Skype is free? My bet is Messeure Kessler was paid to speak his bobble headed mind.

Brady

I dunno, I have no plans to cancel my Vonage account just because of this announcement. I use Vonage heavily for work all day every day. It has replaced my home phone, fax line, and even communicates my alarm signal to the call station. I also have the soft phone installed on my laptop and I have used that tons of times from Starbucks and other WiFi spots without problems. I have a virtual number that forwards to my other lines for work.

Skype’s VOiP software client has always been very choppy for me. I’ve yet to understand a clear way to use it for all of the other reasons I have a phone line in the house (fax, alarm, normal “hard” phones).

Plus, no 911 with Skpe. Here is a quote all over their site:

“Skype is not a telephony replacement service and cannot be used for emergency dialing.”

Seems to me it is a totally different service until they provide a more clear, true home telephony solution. Right now, Skype is just a geek toy, in my opinion.

sandman

skibare,

It is really getting tiresome seeing all your L3 hornblowing everywhere you post. On your own blog, do what you like. I can opt to stop reading it, which I actually have. But on other fine blogs as this one, please don’t pollute.

Your post is not pertinent. Please consider the rest of us before you hit that “Submit” button.

Thanks,

Sandman

skibare

for all of you Skype vs Vonage ”’investors”’, just remember WHO supplies the BULLETS to all warring Voip companies…Level3
As an INVESTOR in Level3, I dont care who wins, only that all players go VOIP WARFARE MODE and all out combat against the RBOC’s
Voip will CRUSH RBOC’s over time led by CABLE GAINS…Vonage, Skype, Packet8, etc etc etc…they are MINOR compared to what CABLE is doing signing up PAYING Monthly Residual Customers…and Level3 carries the CABLES also! Vonage is top 10 customer of Level3
skibare

Mike

It sure sounds like there is a lot of Vonage customers posting on here that are trying to justify their $25 per month investment. I have been a SkypeOut user for years and I am betting that this is the future! Now that there are also handsets coming out that cut the cord from the laptop or PC the Vonage killer is complete.

Just wait and see. I also love the timing on this one given the pending IPO Vonage tried to pull off! Brilliant! They are dead in the water and bleeding through tons of money while Skype is profitable and cashflow positive! Impressive!

Zack Handley

All of you above that keep saying (and repeating) that Skype is no Vonage don’t understand how Wall Street operates especially in an IPO.

Of Course Vonage is easier to operate, it cost $25/month ($300/year) more than Skype. It should be easier to use.

Investors are buying the future. Not the obvious here and now…The Dream! If that Dream’s monetization scheme suddenly looks very shaky (and it does), who’s gonna pony up. What is Vonage’s plan B for monetization? Hmmmm? Anyone, Anyone, ??Bueller??

Ben

Their announcement says this is for Skype users within the U.S. Is this for Skype users who initially signed up as a U.S. resident (for example, using a U.S. credit credit), or do you actually have to be in the U.S. at the time you make the SkypeOut call?

I live in the U.S., but I am wondering if I can use this to make free calls to people in the U.S. when I am traveling internationally. Has anyone tried this?

Ved

Skype is a good product but I agree with others, skype can’t be compared with Vonage yet. Though I’ve no idea how Vonage is going to compete with traditional phone companies which are beginning to offer bundled services (data, voice, video).

Darren

Most of the responses already covered it, but how is Skype anything like Vonage???? My 80 year old dad and 7 year old kid can use Vonage, they CAN’T use Skype.

…and Michael, you might recall Google and Yahoo are free services, most likely the reason they didn’t send you an IPO invite, but I bet a lot of people associated with them did get a letter… I pay for Vonage and appreciate them letting me know via email, letter, etc that I can get in on the IPO. Not sure how I could have gotten in on it otherwise?

A company I used to do biz with also invited me to take part in their IPO afew years ago and guess what! They sent me a letter!!!! Oh the shame. Well, it turned out to be a triple banger, guess it would have been better had they not told me!

Andy, the 75 million loss is one third of their losses Q1of 2005. They also have doubled their customer base since Q1 2005. A company on that kind of trajectory is headed for profitability within two years. Don’t underestimate Vonage. They are THE largest Voip, they are in stores such as Best Buy, Officemax, Office Depot, etc… They also have THE name recognition in Voip.

JOY

I love Vonage and everyone down here at their second/third homes in Mexico use it! It is clearly a telephone system with more free options than our home landline has, by far. The voice quality is great and we can just forward our home U.S. phone to our Vonage number at no long-distance cost. Plus, I have multiple phone sets throughout our Mexico place that are wireless — making somewhat basic Mexican construction and lack of multiple outlets work beautifully!

In addition, I’m going to be in Spain later this summer and can just bring my Vonage router with me to connect to wireless over in the hotels there and make and receive “local” calls, receive messages, as well.

I’m buying the IPO and do best when I invest in things that I really think are great myself!

Christian J. Koch

I got rid of vonage a few months ago, there service went downhill from when i first subscribed a few years ago, and the support went to shit.
I’m back with verizon for the same deal as vonage offers for a few bucks more.

(Plus if my power or cable has issues, my phone STILL works!)

I have skypein as well, $40 a year? for unlimited calls, free voicemail, and a number of your choice?! It is a great deal by itself, grab a plantronics headset and connect it to your laptop and you’re ready to go.

Now Skype is offering skypeout for free for the rest of the year? Awesome..

The telecom sector has its work cut out for it these days, and its only going to get more intense with the variety of offerings around.

Ryan Irelan

it is close enouogh such that every knucklehead buy side fund manager and analyst is going to line up and ask that question to show how smart they are. I can just picture that junior sales person at Citigroup banging his/her head on the hoot trying to explain the difference between Vonage and Skype for the 15th time that morning! Ha ha ha!

OK, now that’s an explanation I can roll with.

Glen

Where is the Skype Terminal Adapter product that will allow me to make the combination of Skype In ($30 a year) and Skype Out (free, for now) a Vonage killer? I use both and Vonage’s quality is worse than Skype. We need a Skype appliance that will get around the complaint of leaving the computer on. This is an enormous market. Why hasn’t DLink, Linksys, Netgear, or Dell delivered this specialized appliance. Now that the cost of Skype appears to be $30 a year, I’d be willing to pay $300 for it if it did not crash. The problem with buying a low end PC is the stability. I don’t want my phone service to crash at my home.

George Chuang

Andy is right. This is a classic Wall Street sucker punch and it is brilliant. When I heard it this morning I immediately laughed out loud and thought about the Vonage IPO. My various businesses use Vonage and Skype extensively, each has its strengths and weaknesses (too long to list, you know what they are…). But I do have to agree that while it is not necessary the right comparison, it is close enouogh such that every knucklehead buy side fund manager and analyst is going to line up and ask that question to show how smart they are. I can just picture that junior sales person at Citigroup banging his/her head on the hoot trying to explain the difference between Vonage and Skype for the 15th time that morning! Ha ha ha!

BTW, Vonage is getting desparate… They sent their customers this letter telliing them that they are “eligible” to participate in their IPO through the DirectShare Customer program. Hmm, I don’t think Google or Yahoo gave us that option… :) There was some chatter that Vonage shouldn’t have done that during its quiet period. But I see it as a sign of desperation.

It is too bad that Vonage can’t make money doing this for 25 bucks a month per number. Personally it would be a pain converting the 10 numbers we have over to Skype or other services.

Michael

I’m with you guys on this one– Vonage competes with SBC/PacBell, Verizon, etc., not with Skype.

How many American households will dump the phone number they’ve had for 5 years and make phone calls from a headset wired to the computer? Not many. And unless I’m missing something, that’s the Skype solution today.

Ian Bell

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.

Dan

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.

originalvonageemployeenumerodos

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.

Moshe Maeir

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

chauka

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.

Ryan Irelan

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

Ryan Irelan

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.)

ZeddZull

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.

rick

When do they start paying customers to use the service?

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