Wednesday, October 19, 2005

Sprint Should Purchase Vonage (Part II)

My Reliable Motorola VT1000 ATA (first generation).  It doesn’t seem to have the problems plaguing the newer Linksys/Cicso products.During my diversion on Comcast’s IP-TV experiment, Light Reading outted offers and potential suitors for Vonage. BellSouth was mentioned as a potential buyer, but are they the ideal buyer? For Vonage any buyer that pays the most is probably the ideal buyer.

Over the last year, Vonage has focused on building a good POTS replacement service. They pushed the E-911 issue making the FCC become involved. Most of the RBOC were dragging their feet with the exception of Qwest that was working with Vonage to offer fair E-911 access. Most remarkably they expanded their footprint into the U.K. and Canada as well as picking up over 1 million subscribers through an aggressive advertising campaign. There is no question that Vonage is the leader in residential VoIP service. Subscriber growth has boosted not only their top-line but also their bottom-line. They are clearly on the road to profitability which makes them poised for an IPO or acquisition.

Vonage has left feature innovation to other VoIP startups like SunRocket and VoicePulse much to the disappointment of this author. Their R&D budget is dedicated on E-911 service roll-out and market expansion. Forget features like subscriber name for called party, calling party name in voice-mail e-mail messages, ACR, and distinctive ringing. Features like IM integration with presence and PC active call management are out of the question. As a subscriber, I am disappointed that I probably will not see any significant new features this year. As someone in the industry, I completely resonate with their chosen business direction.

EBay’s $2.6 billion purchase of Skype has to have Citron and company salivating at the possibilities of a sale. A sale would be the best exit strategy because I do not see a pure-play VoIP provider surviving in the future unless they had a very creative and innovative expansion plan. The most logical purchasers of Vonage would be an ILEC or MSO. BellSouth makes sense as does Qwest with their struggling OneFlex service. Qwest makes more sense because they have a nation wide presence and network. BellSouth would have to rely on Sprint’s MPLS network for out-of-territory service; thereby, reducing profitability. A MSO like Comcast would have a ready-made VoIP service. Most customers are running Vonage over cable modems so the transition by the customer would be negligible. These are the most obvious suitors for Vonage. What we are missing are the dark horses that can really shake up how we perceive voice service.


For years, wireline carriers have been seeing their wired voice minutes decrease while wireless voice minutes increase. Verizon and SBC have recognized this trend and doubled-down with increased investments in their wireless properties. Sprint has also recognized that their growth is in their wireless business. In the last year, the U.S. wireless carriers’ strategy has been to offer more entertainment services to increase ARPU. There is no question that ring-tones have been a rousing success but watching TV on a postage stamp screen at 10 fps will not cut it. Why aren’t they looking more at the business customer to drive their revenue?


Sprint gets it. They purchased Nextel to get a better footing in businesses. Why not purchase Vonage? More businesses are relying on wireless services for their employees. How many times have you called a colleague’s office phone and not been shuffled off to voice-mail? Calling their cell phone results in reaching the contact more often. That is why the cell phone is quickly replacing the office phone. Mix that with Blackberry for mobile e-mail and you have most of your office on the run. Businesses with a mobile workforce are spending as much on mobile services than wired services. That is why today’s wireless carriers are perfectly poised to take over business voice services.


The distinction between wired and wireless is an artificial one in my view. IP Multimedia Subsystem (IMS) is the fabric that can sew together business voice, and even data, services. Today, businesses provide their mobile workers with a desk phone, mobile phone, and one or two computers. Some even give Blackberry’s and other PDA type devices. The capital and operational expenses are large when you factor in all of the back-office software and support required. With IMS, employees can be issued one mobile phone that rings in their office or on the road integrating with the corporate data network. Wireless carriers are poised to offer businesses a complete voice solution for all of their employees. One handset is all that is necessary. Mobile workers can be given a tri-mode phone supporting VoWi-Fi, CDMA/GSM, and AMPS. Stationary workers can be issued a VoIP desk set. Next add on value added services to increase carrier revenue.


Wireline carriers are seeing VoIP erode their traditional business by commoditizing voice service. They are getting into VoIP as a survival strategy. The wireless carriers should get into VoIP as an expansion strategy which makes Vonage a hot property. They can offer businesses seamless voice and data services which is something that most wireline carriers cannot. Sprint and Verizon are the most logical suitors in my opinion. They have wireline and wireless nationwide networks with business and residential subscribers. T-Mobile is also a contender since they are increasing their investment in the U.S and have a nationwide Wi-Fi network. They can offer a complete residential subscriber package through their retail outlets and expand into business voice service.


Where are the wireless carrier suitors? Purchasing Vonage would be a great way for T-Mobile to gain equal footing with Verizon. For Sprint it would be a way for them to realize value in their wireline network. Verizon and SBC could use it to continue their national domination, if only they could get out of their wireline mentality. Seidenberg should let Strigl take the reigns and run with them. The more that the wireless carriers focus on delivering a service instead of the pipe the more that they will grow. Viewed in this light, Vonage is worth much more than Skype.


For the next article, I will continue on with the theme that service delivery is more important than the pipe. As long as U.S. carriers continue to focus on the pipe, we will continue to languish in broadband penetration.