Hello, Vonage, get me cable
Paul Kedrosky
Financial Post
Thursday, August 26, 2004
Is Vonage the hottest thing in technology, or is it just the second coming of doomed dot-com @Home? The noisy voice-over-Internet provider (VoIP) announced this week it had received $105-million in new venture capital. That brings the total venture funding for the start-up telephony company to $208-million, a whopping figure by any reckoning.
Admittedly the New Jersey-based company is on a roll. It has managed to sign up 250,000 paying customers for its cut-rate Internet-based phone service, and getting that number of people to pay as much US$29.95 for flat-rate phone service is nothing to dismiss lightly.
And there is no denying that VoIP matters. Incumbent telephony providers have lived for too long on their dying monopolies. Despite the cost of providing their meager services falling dramatically, they have been enable to extract remarkable monies from local callers.
Customers are finally rebelling. According to The Wall Street Journal, the U.S. Bell companies have lost more than 18% of their local lines since 2000 -- 28 million phones. It is the first time in more than 50 years that these firms have actually lost lines. The erosion continues, with these formerly monopolist U.S. firms losing nearly 5% of their residential lines every year.
Price is the biggest reason. Companies such as Vonage use the low-cost Internet to transmit voice bits for low, low prices. For example, for US$29.95 a month a Vonage subscriber can call anywhere in the United States or Canada for as long as they want. That's it -- no extra charges, no per-minute fees. Nothing.
It is darn attractive to many people, even if it does come with some consequences. There have, for example, been some issues with universal 911 service using VoIP phones, and there is also the problem that powered VoIP phones go p-f-f-f-f-t during power outages, something that doesn't happen to traditional telephones.
But customers are willing to walk for lower prices. And investors are paying attention, as the news this week about Vonage shows.
Are venture investors right? Well, it is at least debatable. With $208-million in the door, investors are valuing Vonage's 250,000 subscribers at a remarkable $832 a head. Assuming that they are all paying US$29.95 a month (which they are not: Vonage has popular lower-price plans), you would recoup that investment from revenues in about 28 months. If you bring it down to the level of earnings, well, who knows? Vonage is a private company, so it doesn't have to disclose, but it is almost certainly not cash-flow positive.
All of this, however, should look familiar. Cable-Internet provider @Home raised millions from venture capital firms at the peak of the dot-com. It was, after all, obvious that stodgy cable companies would not be able to compete with a fleet-footed upstart such as @Home.
And for a little while that looked true. @Home collected subscribers, had a public offering, and was eventually merged into another hotshot Internet firm, Excite. But it all collapsed shortly thereafter, with @Home burning through cash and incoming revenues from subscribers not enough to justify investors (public ones now) putting more money into the struggling firm.
What was the problem? Competition. Cable companies were not as slow and stodgy as @Home liked to paint them. They came blasting into the cable Internet market, and they priced aggressively, making it difficult for @Home to maintain pricing, let alone raise them to a level where the struggling company could actually make a decent return on its massive investment in cable Internet.
Expect the same thing in VoIP. All the same suspect pundits have pegged Vonage as the Bell-killer. And there is no doubt that were the Bell companies to do nothing, then Vonage, or a company like it, would wreak havoc with local telephone markets. After all, consumers are not fools: Given radically lower prices, they would happily abandon irritating incumbent phone companies.
But that will almost certainly not happen. Incumbent phone companies would have to be deaf, dumb and blind to not see the VoIP onslaught for what it is, and they are already moving quickly to blunt the attack. Sure, it is impressive that Vonage has accumulated a quarter-million customers, but it is only a quarter-million customers. That pales against the tens of millions at the Bells -- all of whom the Bells could handily turn into grateful VoIP customers.
Both Vonage and the Bell companies do face a threat, though. But it comes from the cable companies, not from each other. Cable companies have the customers, the technology and the Internet smarts to quickly leap into the VoIP business, neatly annihilating Vonage while putting serious pain into Bells such as Verizon. If you are a telco and you want something to worry about, then worry about the cable companies, not noisy and over-funded companies such as Vonage. |
