Thursday, August 03, 2006

Vonages Woes Are to Be Expected

I do not know why anyone is surprised at Vonage’s financial and stock performance.  They are trapped crossing the chasm.  Vonage was an innovator in the industry introducing VoIP to the masses.  They successfully transformed their customer base from early adopters to mainstream by making the service simple conceptually and operationally.  They chose the path to expand their customer base by attracting the mass market instead of continuing to introduce new services that may attract business customers—that was not their market.

Like any maturing technology, incumbent phone providers began to see their market share slowly decrease and new providers like cable companies found it easy to enter the market.  Now the innovators had real competition.  Incumbent telcos faced the innovator’s dilemma because they were hesitant to cannibalize their POTS revenue, but cable companies jumped on VoIP as a way to increase ARPU.  Time Warner and Cablevision’s bundling of voice video and data gives them an eight point market share lead over Vonage for residential customers according to Infonetics Research.  This lead will only increase with offers like Comcast’s $99 per month triple-play bundle.  Vonage is failing to articulate its strategy for the future past the short-term explanation in the prospectus is why real investors are hesitant to invest in them.

Vonage’s stock price lag is a result of spending 50% of their budget to acquire new customers and lack of innovation driving a business plan to counter the cablecos successful bundling strategy.  What are they to do to survive?  Embrace wireless.  Voice over Wi-Fi and other wireless technologies offer a way to reduce churn and bring on more customers.  Vonage should partner with leading Wi-Fi service providers to offer a package allowing their customers to receive and place calls through public and private Wi-Fi networks.  A good place to start would be with T-Mobile.  Leveraging T-Mobile’s hot-spots with Vonage’s residential service will expand T-Mobile’s presence into the home and Vonage out of the home.  There is even a SMB play here too.  T-Mobile benefits from increased coverage until it can purchase more spectrum, and Vonage ads value creating a seamless voice service.  

Their feeble entree into Wi-Fi with the UTStarcom phone is just the first step in what must be a grander strategy for their survival.  Without the ability to guarantee call quality, offer more than just voice service, or mobility, Vonage has no future.  Investors realize this fact.  Consumers are increasingly moving to integrated communication providers to simplify the use of communications technology.  Vonage or any other stand-alone VoIP provider does not offer enough value to residential subscribers to be a long-term viable business concern.  They need to tie their exit strategy to mobility services and a larger carrier or face obscurity.

Tag: VoIP, Vonage (VG), T-Mobile (DT)