Vonage bets the farm on Internet calling
Brash CEO Citron seeks to turn phone industry on its ear
By Matt Richtel, The New York Times
March 8, 2004
[Another startup, Net2Phone, offers Internet phone service directly to consumers (as does Vonage) and works with cable operators to help sell phone service over their lines; Vonage is privately held.]
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Jeffrey Citron, the man who hopes to turn the telephone industry on its ear, works in a cubicle just down the hall from the "Tony Soprano" conference room. Nearby are the "Meadow" and "Uncle Jr." rooms, although if those are full, Citron's staff could gather in "Dr. Melfi."
The conference rooms at Vonage, an Internet telephone startup in Edison, N.J., where Citron is chief executive, are named for characters from The Sopranos. That hints at Citron's embrace of the unconventional, a trait that has made him a danger to some of America's most entrenched industries and also, at times, to himself.
In the 1990s, he helped pioneer computerized day- trading, putting a thumb in the eye of Wall Street's biggest companies. He amassed a fortune but wound up leaving the industry after he was charged with illegal trading by the Securities and Exchange Commission. Though admitting no wrongdoing, he agreed to pay a $22.5 million fine and was banned from the securities business.
Citron, the Sequel, is no less ambitious. Already one of the nation's wealthiest 30-somethings, he aims to use Vonage's Internet technology to bring fundamental change to the telephone industry, one of the most entrenched and tradition-bound sectors in the American economy.
"I'm going to change the world," Citron, 33, said in a recent interview over lunch at the New York Palace Hotel. "I did it before. Why not again?"
There are plenty of reasons. Citron's own investors acknowledge that Vonage may be zapped out of existence if it somehow misfires, its customer care problems persist, major competitors provide better service or regulators take steps such as insisting that Internet phone companies pay the same fees as the rest of the industry.
Yet even skeptics credit Citron with helping create an inflection point in the telephone industry by turning Internet telephony - which had long been just a great- sounding theory - into a viable product line.
In a little more than a year, he has signed up 100,000 customers who use his black box to connect their traditional telephone to the Internet. Customers pay a flat fee of about $35 for unlimited local and long-distance phone service, though that figure does not include the upward of $40 a month that subscribers also must spend for high-speed Internet access used to transmit the calls.
Industry analysts say Citron's success has hastened development of the technology by major telephone and cable companies, which are clearly following his lead. AT&T and Time Warner Cable, for instance, recently announced their own voice-over-Internet strategies; Verizon, Denver-based Qwest, Cox Cable and others have said they intend to deploy the technology, too.
Their efforts come not only in response to Vonage, but in the larger context of the upheaval in telecommunications. Since the deregulation of Ma Bell, a simmer of competition has turned into a boil. Companies deploying many different technologies, from cable to wireless, are vying to create voice infrastructure that they hope will enable them to capture billions of dollars in fees from subscribers.
So Vonage faces competition not just from big telecommunications companies but also from startups even tinier than itself. One of them, Skype, makes free software that lets people talk directly over computers - like a voice version of instant messaging - thus bypassing the telephone altogether.
Another startup, Net2Phone, offers Internet phone service directly to consumers (as does Vonage) and works with cable operators to help sell phone service over their lines.
Facing off against them all is a man who, by many accounts, is a study in extreme capitalism, not Harvard Business School niceties.
Citron is not about polite cocktail conversation and low-carb diets; he leans more toward gut decisions and fast food.
Just as he barreled into Wall Street seven years ago, he now is barging into the telecom fray. In doing so, he has put himself in position for a great entrepreneurial comeback.
"He's out for redemption; he wants to prove he can do this, and do this properly," said Harry Weller, a partner at New Enterprise Associates, a venture capital firm that invested $12 million last year in Vonage.
After Weller's firm conducted extensive due diligence on Citron, it decided to forge ahead with the investment, despite what Weller described as the significant risk inherent in the technology and the man behind it.
That investment was followed recently by a $40 million round of financing from two other venture firms: 3i Group, based in London, and Meritech Capital Partners, based in Palo Alto, Calif. As part of the deal, the investors have structured the board so that Citron does not have control over it - in part, Weller said, to make sure that Citron is kept within bounds.
Still, Weller said investors were convinced that it takes a personality like Citron's to shake the foundations of the telephone industry.
In 2000 Citron met with Jeffrey Pulver and the other principals of a company called Min-X.com. Min-X was trying to create a market where companies could trade excess phone network capacity in blocks of minutes, in much the same way commodities like oil are traded.
They approached Citron for financing.
He invested what he calls a "significant portion" of the $12 million raised in that first round of financing. Citron took an active role in the company, immediately replacing Pulver as chief executive and then changing the concept for the business. He decided to focus the company on offering Internet- based telephone calls, transforming it into Vonage.
Initially, the company wanted to create partnerships with cable companies to help them in their assault on traditional telephone companies. But there was skepticism. Vonage was regarded by some executives as a leftover from the bubble.
So in April 2002, Vonage started a consumer-based service.
Secretly, the company hoped that if cable companies saw that Vonage was successful, they would consider signing partnerships, Holder said. But then Vonage took on a life of its own. Within 18 months, it has amassed 100,000 customers, and Holder said the company expects to have 250,000 by the end of this year and 500,000 by the end of 2005. Vonage says it will be profitable this year. |
