February 11, 2006
Skype and Vonage - Good and BADDDDD
Henry Blodget sums it up perfectly below. Like recent IPO's CROX (of shit) and Under Armor (odor), Vonage will be a stinker as a public company down the road. By the way, I just bought the most awesome Nike shirts for half the price it would cost for an Under Armor shirt. I can't see them survivng Nike long-term.
Vonage Not Far Enough Ahead
The Vonage S-1 finally provided a detailed look at the VOIP leader's financials, which aren't pretty. Given that the company is spending more on marketing than it is generating in revenue, one would hope that at least it would be miles ahead of its dinosaur cable co competition. Alas, it isn't.
According to a table published today in the WSJ, Vonage had 1.2 million subs at the end of 2005, versus 1.1 for Time Warner, 700,000 for Cablevision, and a smattering for other competitors. That Vonage is still No. 1 is good. That it's only No. 1 by the skin of its teeth isn't, especially given that marketing budget.
Time and again in Internet land, nimble upstarts have grabbed the early lead in a product category and, despite the eventual bellowing of incumbent elephants, have managed to hang onto it (Amazon, PayPal, eBay, Google, Yahoo!, AOL, etc.) The difference between each of these cases and Vonage, however, was the size of the lead. After Barnes & Noble finally got around to opening an online store in 1997 (which was widely expected to put Amazon out of business), Amazon continued to grow far more rapidly in the book market and gain even share. Same for all the rest. The early experience of cable companies suggests that there is significant synergy between cable TV, broadband Internet, and VOIP, with customers preferring to purchase VOIP as an add-on service instead of a stand-alone product.
Bottom line, although Vonage certainly grabbed the early mindshare in cable/VOIP, this mindshare did not translate into market share. If a company as lumbering as Time Warner can flick a switch and catch right up, this doesn't bode well for Vonage's competitive position long-term. All is not lost: With its subscriber base and experience in a hot market, Vonage will probably make a nice acquisition, but its days as a stand-alone market leader are probably numbered.
Interestingly, the one VOIP player that does seemed to have translated mindshare into marketshare is Skype. Each day that goes by without a credible competitive product from Yahoo, Microsoft, and AOL--the only companies that have a legitimate shot at derailing Skype--the less likely such a derailment becomes.