More cash, more chances for VoIP

The story of VoIP continues with the latest round of funding at Vonage. From PRNewswire we learn:

EDISON, N.J., May 9 /PRNewswire/ -- Vonage, the leading provider of broadband phone service, today announced the closing of a $200 million financing round led by Bain Capital, with strong participation from existing investors including New Enterprise Associates (NEA), 3i, Meritech Capital Partners, Institutional Venture Partners, and existing investors. This latest round of financing brings total investment in the company to $408 million.

Boasting 600,000 subscribers, Vonage is the de-facto placeholder for what VoIP is yet to be: the alternative to fixed-line telephony, local and long-distance, and much more. It is difficult to call into question the viability of the Vonage model, even though no VoIP-enabled killer-app has surfaced into the shopping lists of customers. However, a series of exceptions could be taken with the current positioning statements of most VoIP services, chief amongst being 'low-cost telephony.'

Before Vonage even came into being, price wars among the long distance carriers brought the price per minute of most phone conversation down to pennies. The low prices were due in part to: excess capacity combined with VoIP technologies, opaque cost structures at the big long-distance carriers, and the apparition of a myriad of small players squeezed in between.In essence, the above reasons centered on a cost structure that allowed such low prices for the consumer. On the other hand, the sustainability of such costs has proven to be questionable. Several of the large carriers are no longer in business, and the small ones (the squeezed in between) cannot scale much beyond their initial scope.

When Vonage entered the stage, the prices of phone conversations were already low, for local and long-distance alike. A look at the cost structure at Vonage is indicative. Vonage spends about $400 to get a new customer who, in turn, pays back to Vonage $25/month. Assuming monthly operating costs between $10 and $12 per subscriber, we see that Vonage needs to serve a new subscriber well over 20 months to break even. So unless somebody (read, for example, cable companies) is willing to subsidize for that long the challenger category to the Baby Bells, providing low cost telephony may not be the way to stay in business for the VoIP promoters. For one, the Baby Bells could do a number of things to temper VoIP, and for another, VoIP architectures don't seem to scale well on the provider side.

As a way out for a company like Vonage, one can think of:
  1. An application rich environment that targets the mobile individual (e.g. follow-me abilities, and connecting IM, email, phone, calendar, etc.);
  2. Selling the company to the public or some cable operator.

Adding to the recent infusion of cash a friendly regulatory environment in Washington, makes for a hopeful landscape for Vonage/VoIP despite some regulatory hurdles big states that are hosts of individual Baby Bells may raise along the way--see Texas' lawsuit against Vonage over how it handles emergency calling.

-these are some thoughts from a larger project I have undertaken with my partner, M. Vexler, VP with IPCC-


fCh said...

There are also (big) states reversing obstructions to VoIP:

Florida removes VoIP tax from books

Marguerite Reardon, Staff Writer, CNET
Published: May 12, 2005
A Florida law that threatened to tax Internet phone networks has officially been removed from the books.

fCh said...

At the end of March 2005 the attorney general of Texas, Greg Abbott was suing Vonage, charging that Vonage does not "clearly disclose the lack of traditional 911 access."

Internet Phone Companies Ordered to Connect to 911 Network

Published: May 19, 2005

WASHINGTON (AP) -- Federal regulators voted Thursday to require that Internet phone service providers connect their customers to the same emergency 911 capabilities as callers with traditional service within four months.