Eric J. Savitz of Barron's wrote an interesting article Will Vonage Fly? (subscription required). I use Vonage and think highly of the company's services. But whether Vonage would make a great investment or not is another question.
SOMETHING BIG IS BREWING at Vonage. the Edison, N.J.-based Internet-telephony company reportedly has hired investment bankers to look for buyers while simultaneously readying an IPO. No doubt, the process has been sped by Skype envy: While Vonage and Skype have different business models, both provide phone service via VoIP, or voice over Internet protocol. And Skype just cut a rather startling deal to sell itself to eBay (ticker: EBAY) for at least $2.6 billion and perhaps as much as $4.1 billion, based on performance.
Vonage reportedly is looking to raise as much as $600 million in a public offering of 20% of its shares, for a potential market value of $3 billion. That, too, would imply a rich valuation, of roughly 10 times revenue. Assuming all of its one million customers pay $25 a month, annual revenues would equal $300 million.
I use Shaw Cable (Shaw Communications – SJR) in Calgary for my Internet service provider. Shaw offers a High Speed Xtreme version where, for an additional C$10 per month, users can enjoy 7Mb download speeds. As an added benefit, Shaw provides a Quality of Service Enhancement
.
Shaw is now able to offer its High Speed Internet customers the opportunity to improve the quality of Internet telephony services offered by third party providers. For an additional $10 per month Shaw will provide a quality of service (QoS) feature that will enhance these services when used over the Shaw High Speed Internet network. Without this service customers may encounter quality of service issues with their voice over Internet service.
All public Internet networks (this is not unique to Shaw) encounter intermittent bandwidth shortfalls as bandwidth is consumed by applications such as Internet browsing and email. Bandwidth availability is an important issue when using voice services because the amount of bandwidth available at any given time can vary based on Internet usage.
In a recent article on October 21st, Peter Grant and Jesse Drucker of The Wall Street Journal Online wrote an article Phone, Cable Firms Rein In Consumers' Internet Use (subscription required) where they discussed how phone and cable firms have begun to manage broadband usage by customers.
Telecom companies overseas have been more aggressive than those in the U.S. in controlling their networks. Verso says that interest in its service so far has come primarily from overseas carriers, since deploying such a technology here in the U.S. would be highly controversial. The only carrier it would name is Britain's Cable & Wireless PLC, which it says is interested in deploying the technology in its Caribbean markets. Cable & Wireless didn't respond to requests for comment.
Shaw Communications Inc., a large Canadian cable operator, has been using technology purchased from Ellacoya to manage its broadband network for about one year, says Shaw's president, Peter Bissonnette.
All that said, I find Vonage to be an exceptional value from a customer perspective. I enjoy its ease of use, its quality, its superior feature set, and my ability to check my voice mails using any computer with speakers. Vonage was extremely easy to set up and use. Within less than 5 minutes of receiving my package, I was making VoIP (voice over Internet protocol) phone calls. Generally, the quality of phone exceeds my regular line. I hear the other person more clearly than with my regular phone line. However, occasionally, I find the quality is not quite as good. But that usually only lasts for a few seconds. Vonage provides every feature imaginable all for a very low and competitive price. I like the ability to view my voice mails online, listen, and delete my voice mails in any order that I choose. I am a very happy customer.
The reason I chose Vonage over Shaw's phone service is that should I move anywhere, I can take my phone number with me. With Shaw, I cannot. Moreover, I believe that Vonage with a larger user base will have more of the kinks worked out. And I like that Vonage has a lower price and has an excellent feature set. But my ability to move anywhere and keep my phone number was a key point selling point for me. With Shaw, I must continue to be a Shaw customer.
As enthusiastic as I am about being a Vonage customer, I am not sure I want to be a stockholder. Without knowing the financials and without being able to get a feel for the competitive landscape, I simply cannot comment with any confidence. The Barron's article highlights some of the competitive pressures that might affect Vonage. The article also discusses some potential buyers for Vonage. While this information is interesting, it lacks specificity of cold hard data. Thus, there simply is not sufficient information to make a decision. But as a customer, I give Vonage high marks.
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