Vonage IPO and VoIP

Cite this Article
Bill Sjostrom, Vonage IPO and VoIP, Truth on the Market (February 08, 2006), https://truthonthemarket.com/2006/02/08/vonage-ipo-and-voip/

Vonage, a provider of broadband telephone services, filed an IPO registration statement with the SEC today for the sale of $250 million of common stock. Basically, Vonage offers a cheap alternative to traditional phone service. For about $25 per month, you get unlimited calls to anywhere in the U.S. and Canada with all the bells and whistles (call waiting, caller ID, voicemail, etc.). Calls are routed over the internet through your broadband connection using Voice over Internet Protocol (VoIP) technology.

For more details, check out the registration statement linked above or Vonage’s website. One thing you won’t find on Vonage’s website is a list of disadvantages of going with Vonage over traditional phone service. The following, however, is included in the risk factor section of the registration statement:

Certain aspects of our service are not the same as traditional telephone service. Our continued growth is dependent on the adoption of our services by mainstream customers, so these differences are becoming increasingly important. For example:

• Both our new E-911 and basic emergency calling services are different in significant respects from the 911 service associated with traditional wireline and wireless telephone providers and, in certain cases, with other VoIP providers.
• Our customers may experience lower call quality than they are used to from traditional wireline telephone companies, including static, echoes and delays in transmissions.
• Our customers may experience higher dropped-call rates than they are used to from traditional wireline telephone companies.
• Customers who obtain new phone numbers from us do not appear in the phone book and their phone numbers are not available through directory assistance services offered by traditional telephone companies.
• In the event of a power loss or Internet access interruption experienced by a customer, our service is interrupted. Unlike some of our competitors, we have not installed batteries at customer premises to provide emergency power for our customers’ equipment if they lose power, although we do have backup power systems for our network equipment and service platform.

For about the last 18 months I’ve had broadband telephone service at home through Lingo, a Vonage competitor. I have frequently experienced static, echoes, delays in transmissions, and dropped calls. I don’t care about not being in the phonebook because as a law professor who sometimes gives out bad grades, I don’t want to be in the phonebook. I hope to never have to find out about the impact of emergency calling services limitations. In the end, the low price (Lingo charges $20 a month) makes up for these drawbacks (my wife sometimes disagrees).

As for the offering, while I won’t be holding my breath waiting for a free writing prospectus email to arrive in my inbox soliciting an indication of interest from me (see this post), if one does, I won’t be investing (or if I do, I will flip the shares immediately following any first day pop). This is because Vonage has lost money at an increasing rate every quarter since inception (October 2002). It has a cumulative loss of $310 million. More importantly, Vonage faces fierce competition from giants like AT&T, Verizon, Comcast, Time Warner Cable, Cingular, Sprint and eBay (Skype) as well as smaller companies like Lingo. I do not think entry barriers for providing VoIP are particularly high either, and Lingo is already undercutting Vonage on price. Further, Vonage tried to go the sale of the company route as opposed to an IPO but found no takers. Finally, Vonage had no Super Bowl ad. Burger King did, so I’m buying that IPO instead.

Bloomber has more details here.