Vonage: VoIP or Void?

Vonage: VoIP or Void?
Subodh Annojvala, T’10
Abhijit Ganguly, T’10
James Nzukie, T’10
Arathi Seshagiri, T’10
Vishnu Srimurthy, T’10
Tatiana Zambon, T’10
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VOIP : Value proposition
Voice over IP (VoIP), also known as IP Telephony, is the real-time transmission of voice signals using the Internet
Protocol (IP) over the public Internet or a private data network. In simpler terms, VoIP converts the voice signal from
your telephone into a digital signal that travels over the Internet.
There are two fundamental technologies that are necessary for the existence of VoIP. The first, and most widely used,
is the telephone. The second technology is the Internet. Although the telephone and Internet were vital to the existence
of VoIP, there is another technology that is closely related, and just as important. In 1972 TCP/IP was invented Transmission Control Protocol / Internet Protocol (TCP/IP) i.e the technical protocol that defines the form of network
data packets and how they travel to their destinations.
To transport voice over a data network, the human voice must be packetized. This process contrasts significantly with
the circuit-switching mechanism used in traditional networks. The voice signal is broken up into small pieces (packets)
and sent though the network one-by-one. The process of packetization compresses the callers voice signal, transfers it
over the IP network and it is then decompressed at the other end.
One of the most significant advantages of VoIP (over a traditional public switched telephone network (PSTN - also
known as a legacy networks)) is that one can make a long distance phone call and bypass the toll charge. This
integrated voice/data solution allows large organizations (with the funding to make the transfer from a legacy network
to a VoIP network) to carry voice applications over their existing data networks. Not only did this technological
advancement have an impact on the large traditional telecommunications industry, it altered the pricing and cost
structures of traditional telephony. Furthermore, when compared with circuit-switched services (yet another name for
legacy networks), IP networks can carry 5 to 10 times the number of voice calls over the same bandwidth.
A graphical representation of traditional PSTN vs. VoIP is as below:
Figure 1: Conventional telephony
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Figure 2: VOIP Telephony
From most accounts, VoIP started in February of 1995 by a small company in Israel called Vocaltec, Inc. Their product,
InternetPhone, allowed one user to call another user via their computers, a microphone and a set of speakers.
Additionally, this application/product only worked if both the caller and the receiver had the same software setup. By
1998 some entrepreneurs started to market PC-to-phone and phone-to-phone VoIP solutions. The phone calls were
marketed as free nation-wide long distance calls. When the caller would start the call he/she had to listen to
advertisements before the call was connected.
Another development in 1998 was the hardware foray into the market. There were IP switch manufacturers (Cisco,
Level 3 etc) that introduced VoIP switching software as a standard in their routing equipment. By the end of 1998 VoIP
calls had yet to total 1% of all voice calls. By 2000, VoIP calls accounted for 3% and by 2003 that number had jumped
up to 25%.
Although the initial version of the Internet Phone was an immediate commercial success it did suffer from a variety of
problems. The lack of high speed internet access meant that the quality could be poor and the flow of voice slow. Early
VOIP calls were like using walkie-talkies to communicate in terms of quality of signal. Another issue was the fact that
the two computers that where talking to each other needed to have the same soundcards with the same drivers for the
software to work. This obviously limited the use of the software and the effectiveness of the process. Much of the
transmission was done via modems and was therefore utilizing traditional telephone lines and providing a service that
was of a worse quality to that of a normal phone call.
Vonage’s market entry and positioning
Vonage launched pure-play VOIP services in March 2002 and, in that year, it completed five million calls. The company
ended 2002 with 7,800 subscriber lines, and, by mid-2006, that subscriber base had increased to nearly 1.9 million.
95% of Vonage lines were in the United States. Vonage’s market entry occurred when broadband internet connections
started taking off in the US. Vonage saw the opportunity to leverage the broadband connections to transfer voice, not
just data packets. This idea parallels how telephone evolved from telegraph.
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Cable companies and Telcos invested in the infrastructure but companies such as Vonage started extracting value.
Vonage provided cheap service by using its customer’s existing broadband Internet connections, eliminating the need
for it to heavily invest in building or leasing networks. In addition, Vonage's network is based on internally developed
software and industry standard servers, rather than circuit switches used by traditional telephone service providers.
At that time, roughly 10% of the adult Americans had access to high-speed internet connections. This allowed the
company to grow with the growing base of potential customers. Given that telecom carriers traditionally required DSL
subscribers to also purchase a local access line, many existing Vonage customers likely use a cable modem or an
alternative broadband connection. The increasing growth of cable based broadband connections versus DSL also
allowed the growth of Vonage as an independent VOIP provider.
Being the first significant competitor in the market to offer an independent VoIP offering across much of the country
enabled Vonage to capitalize on the accelerating shift from traditional telephony services to VoIP services. This trend
was helped by Vonage’s emphasis on service and features that traditional telecoms and cable companies sorely
lacked. They struck a deal with Circuit City that helped establish a sales channel to reach a broader number of
potential customers.
Thus, Vonage was able to match its innovation strategy to its innovation ecosystem by leveraging the growing
broadband infrastructure and the maturing voice over IP technologies to launch the service directly to the residential
customer. The company managed both interdependence risk with the broad-band players as well as integration risk on
the technology front. Vonage positioned itself against traditional telecommunication offerings and initially focused on
price differentiation and then moved towards differentiating based on price, features and service. Simplicity and
efficiency were other key differentiators. Vonage reaped the benefits of perfect timing to enter the market, which
enabled market domination in the pure-play sector. Keynote's survey of seven VoIP providers in early 2005 found that
Vonage offered the best call reliability.
The company targets both the price sensitive costumer looking for basic service and the more sophisticated customers
who are looking for advanced features that are unavailable with the regular phone providers. Vonage offers its
broadband telephone services to customers through a variety of service plans with different pricing structures. All of the
service plans include an array of both basic and enhanced features, and customers have the opportunity to purchase a
number of premium features at an additional fee. In order to access the company's service, a customer need only
connect a standard touch-tone telephone to a broadband Internet connection through a small Vonage-enabled device.
After connecting the device, customers can use their touch-tone telephone to make and receive calls. Appendix 1
provides details about the various service plans – basic and premium along with an array of add-on devices provided
by the company.
Entry of telecom and cable providers:
Similar to the telecom industry, the cable sector was dominated by a handful of multi-billion dollar multi-system
operators (MSO), like Comcast, Cox, and Time Warner Cable. Due to various circumstances that existed during the
cable industry's first 30 or so years, these video entertainment service providers were effectively shut-out of the
lucrative telecom services market. They faced a number of high barriers to providing voice telephony services
including: technological ones (their network architectures were primarily engineered to deliver television services oneway, to the customer), regulatory ones (public policies at the time did not permit competitive entry in telecom markets),
and business ones (the cable video markets experienced high growth rates, presenting little motivation to look into
other market opportunities). However, by the mid 2000s, these circumstances changed dramatically. Technological
advances permitted cable companies to leverage their previously uni-directional networks to offer a richer set of
communications services. The regulatory landscape also shifted dramatically, not only permitting but mandating
competition in communications markets. Finally, growth in the core video entertainment market has slowed and cable
companies are now in the position of looking for greener pastures.
As early as 2003, the cable companies started to take note of the lucrative market for VOIP services. This was a great
avenue to challenge the telephone companies' stranglehold on the local and long-distance phone market.
Time Warner Cable and Cablevision announced in late 2003 that they will offer internet phone service to their cable
broadband customers. Both companies cited significant savings in cost and set-up times over traditional phone
network installations. However, Cox and Comcast continued to have significant reservations about VoIP technology
due to several setbacks such as cost (creating a service with all the trimmings American dialers are used to, costed
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just 10 percent less than building a traditional phone line, not the 50 percent savings predicted in early projections),
questions around large-scale deployment of VoIP equipment, interoperability issues and need for a standardized
protocol for high-quality service. However, they still continued with VoIP trials in limited test markets through soft
launches and started to embrace VoIP gradually. In 2005, Comcast launched Comcast Digital Voice to more than 16
million homes in 25 markets and added 202,000 new customers while Cox Digital telephone established itself in five
new markets. The cable companies had officially arrived.
In 2003, as the sleeping giants in the cable industry started to wake up, incumbent telecom providers also started to
jump onto the bandwagon. However, they had to adopt a cautious strategy so as to not cannibalize their traditional
services. An entry into the VoIP market provided them opportunities to expand and add value to their existing
broadband access basis with new VoIP applications. In Dec 2003, AT&T, Qwest, MCI/Sprint (through a JV with Time
Warner) announced plans to sell internet phone services to consumers and businesses starting in 2004. Verizon, SBC,
BellSouth quickly followed suit.
Who had the competitive advantage?
As competition intensified between cable companies, Tel Cos, and pure-play providers, VoIP started to become a key
differentiator in the marketplace. For pure-play startups like Vonage who dominated the VoIP market up to 2003, the
advantage soon started to shift in favor of the cable companies.
Figure 3: Key Market Players
VoIP Market
Cable Co.s
Tel Co.s
Pure Plays
(Comcast/Time Warner)
(AT&T, Verizon)
(Vonage, 8X8)
The cable companies were the most daunting of all market players not just because of their size, financial backing and
political muscle, but due to their strategy of playing down on pure-play providers’ price advantage through a ‘triple pay’
bundled sale of voice, data and video. Bill consolidation was a major selling point in a busy, modern era, as it saves
money through discounts on data and makes paying for utilities that much simpler and more convenient. Also, what
cable companies may have lacked in innovation, they made up for it through quality of service. As the voice service
runs over their own network, they were able to provide higher priority to the voice packets to ensure excellent voice
quality unlike pure-plays like Vonage who were forced to piggy-back on an already existing and increasingly crowded
network and had no control over prioritization. Another major advantage over services like Vonage was the integration
of e911 capabilities through which users could call emergency services (which was not yet possible through Vonage).
Another key question that arose was how long could Vonage hold onto its price differentiation considering it was a
small player with its pockets not as deep as the cable and telecom giants (Please see Appendix 2 for more details on
the price wars faced by Vonage and other significant externalities affecting the financial position of Vonage).
With respect to competition from telecom providers, an estimated $75 Billion investments by the cable companies’
during the 1990’s to upgrade their networks provided them a clear advantage over Telco providers who were then
struggling with decaying copper networks. Huge capital investments were required to buy new capital equipment and
to switch networks to move to speedier fibre-optic lines and VoIP technology. This also involved a lot of operational
costs which slowed down the process. In response to the bundling offers provided by cable companies, regional phone
providers such as SBC and Verizon also planned to introduce their own video service in hopes of stealing customers
from cable. However, the cable companies’ plans were cheaper than the unlimited calling plans offered by the local
providers which could keep them from defecting.
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On the legal aspects of IP protection, Vonage made mistakes in not shoring up its relatively small intellectual property
base by the use of defensive and offensive patenting techniques. This cost Vonage dearly – to the tune of $300M in
lawsuits from Verizon and Sprint-Nextel. Also, Vonage did not invest enough to expand its IP portfolio beyond VoIP
Telephony into other areas such as VoIP devices, interfaces and other surrounding areas of the value chain. The Telco
providers also aggressively resorted to lobbying with the government for regulatory and legal restrictions around IP
telephony in a bid to protect its customer base by delaying implementation of competing technologies for voice.
Overall, the cable companies were better positioned to reverse their commitments in VoIP since this technology does
not affect their ability to offer other services (TV, broadband). For Telcos, this situation was different since VoIP tended
to replace traditional land lines. Companies like Vonage are in the worst position to reverse their commitments. These
companies were created with the objective of providing VoIP services, and lacked the capabilities to provide other
services if they had to revert their commitments.
Not surprisingly, by 2008 neither Telcos nor pure-plays were big players in VoIP. The following graph clearly illustrates
the trend for the next 5 years:
Figure 4 : Forecast : US Broadband Telephony Trends, 2007 to 2013
Cable will continue to drive VoIP technology to the average US household, growing to almost 23 million lines by 2013
and pushing the overall VoIP market across the 28 million-line mark over the next five years.
The moral of the story here is that although Vonage was an early adopter of VoIP and had a great initial run compared
to any of the pure-play first movers through innovation, time to market and price advantages, the start-up was unable
to retain its competitive advantage for long as it was not really unique, scaleable or non-replicable. It was as though the
cable and Telco companies let a small player conduct the VoIP experiment in order to test market the technology and
its feasibility.
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Market segmentation:
Predictably, since 2005, adoption of pure-play and over-the-top (OTT) Telco-provided VoIP services remained at 3% of
US consumers. These customers were mainly attracted by low prices for long-distance and especially international
calling and additional service features. By 2008, Vonage had only 2.6M subscribers, almost the same number as in
2006 and around 50% off forecast.
Figure 5: Vonage Subscribers
Vonage Subscribers
3000000
Subscriber
numbers levelling off
2500000
2000000
1500000
1000000
500000
0
2002
2003
2004
2005
2006
2007
2008
2009
Currently 15% of residential lines are VoIP, however, there is not a direct substitution effect between VoIP and
traditional landlines since many consumers did not replace their landlines but rather chose to complement them with
VoIP mainly for long distance calls. So let’s look at what the consumers of VoIP look like.
Figure 6: Who are the VoIP users?
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Consumers who use pure-play and Telcos VoIP today are the same niche stereotypical early technology adopters,
younger than average, more likely to be male, high-earning, technology optimists. These tech-savvy, consumers lie
ahead of the curve, and products or services targeted at them will likely miss the mainstream, where most consumers
reside. In contrast, cable voice subscribers are mainstream consumers who are more value conscious and have gotten
used to the unlimited calling range and prepackaged premium features of their mobile phones. Thus, cable companies
are considered to be the main driver for IP-based voice services growth who accelerates technology adoption rates by
easily offering bundled services to customers.
Another interesting aspect of the Forrester survey was on the desire for mainstream consumers to switch to VoIP:
Figure 7: Switching intent
It is clear from the above study by Forrester that most users plan to stick to their existing home phone services. If and
when the switch happens, the beneficiaries would be the cable companies or the Telco providers.
Even on the enterprise market, VoIP was initially considered more attractive to small and medium sized businesses
due to their agility and nimbleness to adopt new technologies. Large businesses shied away from VoIP as the costs to
replace entire telephone systems were prohibitive.
What should Vonage do?
Clearly, the big players in the market are here to stay. In this scenario, Vonage is presented with some very interesting
questions on how it should establish itself in a crowded marketplace.
 Existing market: There are 3 key market segments where Vonage can be a niche player. (note that these
segments may not be mutually exclusive- a survey limitation)
a) Chatters: 11% of US households make more than five hours of long distance calls each month. For these
consumers who spend 300 minutes or more per month chatting with far away contacts,
the benefit of a low-cost, flat-fee VoIP service is unlimited long-distance talk-time. They make up 14% of
today’s pure play VoIP users.
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Figure 8: Chatters
b) Distance Dialers: International calling matters only for a relatively small portion (14%) of US households. An
even smaller group of consumers are Distance Dialers, with 10% or more of their long distance calls going to
international numbers. These users can benefit from pure-play VoIP, which often prepackages calls to select countries
into their monthly price and do not charge an additional monthly fee for preferred per-minute rates to other regions. As
with the Chatters, Distance Dialers represent a segment where pure-play VoIP already has traction: Among VoIP users
today, 7% of long-distance calls are placed to international destinations.
Figure 9: Distance Dialers
c) Voice over Instant Messaging Users (stop-gappers): More than 10% of consumers have already adopted
VoIM, a VoIP derivative, for some portion of their long distance calls (see Figure 5-3). This stop-gap behavior
— occasionally using VoIM as a long distance substitute, rather than choosing pure-play VoIP as a landline
replacement — is even more prevalent among Chatters and Distance Dialers. These Stop Gappers have likely
turned to VoIP technology as a way to decrease long-distance calling costs, but they must face the potential
challenges of using VoIM: clumsy softphone interfaces, uncertain sound quality, and awkward PC headsets.
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Pure-play VoIP can offer VoIM users a more natural alternative to their landline service with a traditional
handset that has a more intuitive dialing mechanism
Figure 10: Stop-gappers

New opportunities:
Apart from the above, Vonage can continue to target small and medium businesses with a cost-effective solution to
their telecom requirements. Recent move by AT&T allowing VoIP applications over its network has sparked investor
frenzy and this is a good opportunity for Vonage to start its foray into Mobile VoIP space. By being the first VoIP
provider to offer unlimited worldwide calling plan, Vonage can solidify its position as the market leader in this space.
Although a little late, Vonage also has a great opportunity to pursue VoIP for other applications by strengthening its
patent portfolio. Anticipating the next strategic move by cable and telecom providers (as detailed in Appendix 3) will
also be a smart way to step forward so as to avoid direct confrontation.
The free application, Vonage Mobile, is available now for Research In Motion's BlackBerry devices and Apple's
iPhones and iPod Touches. The app is designed to allow users to place low-cost international calls over Wi-Fi and
cellular voice networks. While Apple's handling of the Google Voice app for the iPhone prompted a federal review and
continues to court controversy, a similar Internet phone app by Vonage got the green light and is available today. A
flat-rate plan will be out by the end of the year, according to Vonage, which also said callers can retain their own
mobile phone number while using the service.
In the middle of these opportunities, significant threats loom large. Many smaller pure-plays such as TeleBlend and
Packet8, bundled cable and telephone service providers and other internet telephone players such as Skype and
Google Talk are threatening to change the VoIP landscape by either changing the business model or by bringing new
technologies to light. magicJack is picking market share through a price advantage. The threat of future patent
infringement lawsuits remains. The fact that Vonage is fully dependent on broadband internet for its business is
worrisome because this is an area in which they neither have IP nor expertise. Weak stock price and dwindling investor
confidence can put a damper on Vonage’s capital raising abilities and put future growth in jeopardy.
Facing rock-bottom stock price, patent infringement lawsuits and dwindling customer base, Vonage’s future prospects
do not look too bright. Unless something drastic pushes VoIP into the limelight again, Vonage might have to look into
alternate markets and products to survive. AT&T’s move to allow VoIP on its network has provided a glimmer of hope
for Mobile VoIP to take off but it would be smart on Vonage’s part to start exploring other options such as partnering
with a major player and entering into newer markets to make sure that it survives this phase. Agility is the best strategy
for the Vonage of today!
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Sources and references:

Forrester Research reports

Vonage website and financial reports

www.VoIP-news.com

Harvard Business Review

OneSource Complete: Vonage report by Reuters

Ford Equity Research: Vonage Holding Corporation, June 19, 2009
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Appendix 1: Service Plans from Vonage
In the U.S., Vonage offers consumers two calling plans, including the Residential Premium Unlimited Plan for $24.99 a
month with unlimited calling in the U.S., Canada, Puerto Rico, and select European countries and the Residential Basic
500 Minutes Plan for $17.99 a month; It also includes free calls to more than 60 countries. Vonage also offers a
premium residential plan that adds a softphone, visual voicemail, and directory assistance to the $24.99 offer. Vonage
sells its retail VoIP services to individual broadband users through its Web site as well as through retail channel
partners. Vonage also offers small business calling plans ranging in price from $39.99 to $49.99 a month.
As of December 31, 2008, approximately 92% of its United States subscriber lines were for residential service, and
approximately 76% of those residential subscriber lines were under the Residential Premium Unlimited Plan.
Basic and Enhanced Features: Each of the Company's calling plans provides a number of basic features including
call waiting, caller ID with name, call forwarding and voicemail. All of its calling plans include a range of features at no
additional charge to its customers, such as: Area Code Selection, where customers can select from approximately 259
United States area codes for their telephone number for use with its service, regardless of physical location; Service
and Number Portability, where customers can use their Vonage phone numbers to make and receive calls almost
anywhere in the world that a broadband Internet connection is available by taking their Vonage-enabled device with
them; Online Account Management, where Customers can view and manage their accounts online. The Company's
service provides capabilities such as real-time feature management, call forwarding options and a lifetime call activity
log; and Personalized Web-Enabled Voicemail, where customers are allowed to receive e-mail notification of a
voicemail with the voice message attached to the e-mail message as an audio file. They can also check and retrieve
voicemails online or from any touch-tone phone.
Premium Services: Vonage also offers a number of premium services for additional costs. These services include
Vonage Visual Voicemail, which allows a customer to have their voicemail messages transcribed to text and sent to
their e-mail address or mobile phone; Virtual Phone Number, where a customer can have additional inbound telephone
numbers that ring on a primary subscriber line, each for an additional fee. Each of these inbound telephone numbers
can have a different area code; Toll Free Plus, where customer can have toll free numbers that ring on an existing
subscriber line; Vonage SoftPhone, which is a software application that can be downloaded, and installed on
computers, laptops and WiFi-enabled personal digital assistant devices. It enables a user to use a computer as a full
functioning telephone, with its own phone number, through a screen-based interface that works just like a telephone
keypad; Residential Fax Service, and Business Fax Service. Vonage offers 500 minutes of outgoing fax service within
the United States, Puerto Rico and Canada on a dedicated fax line plus unlimited incoming faxes.
Add-on Devices: Vonage's plug-and play Vonage-enabled devices permit customers to take their equipment to
different locations where broadband service is available, as well as switch to different Internet service providers and
continue to make and receive calls on their Vonage phone numbers. The Company offers its customers a range of
equipment alternatives for their Vonage-enabled devices based upon Vonage's relationships with technology
companies.
The Vonage V-Portal can connect up to two Vonage lines through a high- speed Internet connection and includes a
networking router. It has a liquid crystal display (LCD display) with caller identification (ID) and call timer, call logs,
language selection, and built-in upstream bandwidth tester. The Vonage V-Portal allows customers to use the Internet
connection for the computer and the phones at the same time. Vonage's analog telephone adapters, which convert
analog audio signals into digital data packets for transmission over the Internet, are plugged in between the customers
touch-tone telephone and existing broadband Internet connection. Vonage's integrated adapters and wireless routers
further simplify installation by combining a standard adapter, a broadband router and a wireless (WiFi) access point in
one device.
The Company's cordless multi-phone system offers customers further integration of customer equipment by integrating
a standard cordless phone system, its adapter and a router into one device. These cordless multi-phone systems are
designed to appeal to mainstream consumers.
The Vonage V-Phone is a universal serial bus (USB) compatible device designed for use with the Company's service.
Vonage software comes pre-loaded on the V-Phone and updates itself on the devices 256 megabyte flash drive
without installing any software on the host laptop or Personal Computer (PC). The V-Phone comes with a standard 2.5
millimeter stereo earpiece microphone and customers can make and receive calls by plugging the device into virtually
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any Windows-based laptop or PC with a high speed broadband Internet connection. Also, for the phone to work, the
computer does not have to be switched on.
Appendix 2 : Significant Externalities
a) Price Wars
The providers of pure-play voice services have triggered a vicious cycle of price wars which would do them more harm
than good. While Vonage is much cheaper than other VoIP providers such as Comcast or Optimum it is more
expensive than new comer MagicJack, although the later requires a home PC to operate the service unlike Vonage.
Potential Vonage users interested in price alone will understand that magicJack has the cheapest VoIP service on the
market that includes unlimited inbound and outbound calls, voicemail, and customer calling features. At less than $4 a
month for the first year and less than $2 a month for subsequent years, the magicJack price is unmatched in the
market. Skype, the next cheapest service, offers Skype-to-Skype calls for free but charges $1.95 a month for unlimited
outbound domestic calling and its inbound service is priced at $60 for a full year. Vonage relies on a third-party
broadband connection, so every Vonage customer also has to have a relationship with a third-party broadband
provider. When considering the bundle discounts associated with a triple play (as much as $50 monthly from Verizon),
the Vonage savings may not be enough to keep a value-conscious consumer or attract them to its service.
b) Financials
Comcast, with a reported 2.43 million VoIP customers reported in Q1 2007, surpassed Vonage as the nation’s largest
VoIP provider. magicJack overtook Vonage as the nation’s largest pure-play VoIP provider in Q1 2009 when it reported
over 3 million subscribers. With all this competition, Vonage’s clocked a net loss of $65M in 2008. Revenues reflect a
decrease in sales from telephony services due to decrease in subscriber lines and changes in plan mix. Net income
reflects a decrease in selling, general & administrative expenses, lower direct cost goods sold and decreased
marketing expenses. Although Vonage has brought down its cost per gross subscriber line addition ("SLAC") from
$309 in Q1 2008 to $290 in Q1 2009, with monthly ARPU of $28.86, it takes over 10 months of ARPU to recover the
cost (SLAC is on top of direct costs to support the network and SG&A expenses). This strategy also has its limitation
since costs cannot be cut indefinitely without adverse effects on core operations.
Millions
For Vonage, profitability has been elusive right from the beginning.
$1,000
Revenues
$800
Net Income
$600
$400
$200
$0
-$200
2002
2003
2004
2005
2006
2007
2008
2009
-$400
-$600
Enabling emergency call features to compete with Cable companies will drain the company of further cash resources.
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c) IPO woes
On May 24, 2006 VoIP provider Vonage went public, and its shares immediately dropped from $17 to less than
$12, making it the worst public debut in more than two years. One theory is that investment bankers, chasing
Skype's heady valuation, when Ebay bought Skype for $2.6 billion, overpriced the stock. Lawsuits were
immediately levied by the government and shareholders against founder Jeffrey Citron claiming the company
made false and misleading statements about its financial health leading up to the IPO.
d)
Venture Capitalists
In the past, VCs sought returns on their investment within five years. But the five VC firms that owned 30
percent of Vonage were thought to have pushed Vonage to go public. The five firms had all invested in the
three years prior to going public. All this suggested that they wanted a faster return on their VC investment.
e)
Legal Issues
About a month after the IPO, telecom provider Verizon sued Vonage over seven alleged patent infringements
related to VoIP technology. Verizon acted after Vonage filed technical documents and diagrams with the SEC,
which were made public. Vonage promptly denied Verizon's allegations.
f)
Share Performance
Vonage went public on 24 May 2006 at a price of $17 per share and its price immediately dropped to $12.
Since then, the shares have continued to drop as shown in the share price trend line to a low of $0.33 on 2
March 2009. Recently it has climbed to$1.50- $2 in the last 2 months. On 29 October 2009 it closed at $1.58.
The upward trend is probably a reflection of the cost cutting that Vonage has recently embarked on and needs
to continue this trend significantly into the future. It is also important to note that to date, Vonage has not paid
any dividends.
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Appendix 3: What will the key players in the industry do next?
Voice over IP is not for everyone today, nor will it be for everyone going forward. Consumer awareness and skepticism
about new communications services limit today’s market. But careful product planning and strategy — which directly
addresses the needs and concerns of the consumer — at cablecos, Telcos, and pure-play VoIP providers can help the
market grow at a higher rate. A few strategies for VOIP could be:
a) Telcos will use the bundle to avoid ARPU(average revenue per user) losses from POTS(plain old telephone
service) switchers:
To make the economics work for subscribers who abandon their POTS landline — and the associated long-distance
fees that drive ARPU — for a managed VoIP service, Telcos have to emphasize the bundle. By charging for premium
value-add UC applications and services that make the bundled components work together, Telco’s can provide
enhanced benefits to subscribers while recouping any ARPU lost in the home phone service switch. Upselling and
cross-selling should focus on enhancing the voice component of the bundle with paid value-adds like integrated
landline and mobile voicemail boxes and caller ID notifications.
b) Cablecos will focus on building and enabling experiences with voice:
In the near term, cable voice providers have gained enough momentum to continue growing on the basis of the value
and ease of their services. Going forward, cablecos can extend and propel subscriber additions by taking the
experience-based provider approach to delivering voice service. This means, in part, integrating voice further into the
bundle with UC-type services. These services — which cross voice, data, and video networks and integrate the bundle
components — will provide unique benefits to cable voice subscribers beyond cheap communications and will help
cablecos compete with fiber-rolling Telcos that expand into the managed VoIP market.
c) Pure Players must quell consumer concerns to go mainstream:
Consumers don’t want to deal with the hassle or risk of switching to a new, unproven voice technology for their home.
Pure-play providers that want to break out of the niche early-adopter market segment must continue to stress service
reliability while being upfront about the limitations of their offering. How? One way is to ensure that all subscribers have
reliable-enough broadband connections to begin with by offering a Web-based test as a gauge. Pure-play VoIP
providers must also tackle fears about the installation and maintenance of a new technology. Truck rolls are expensive
— though they may be necessary for the most tech-challenged and can be offered as a paid service — but plug-andplay, fool-proof set-up is a must. Build messaging around these idiot-proof self installs to attract those consumers
sitting on the fence about pure-play VoIP.