Vonage Holdings (VG)

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-	Vonage Holdings (NYSE:VG) is a leading provider of voice over Internet protocol ([[VoIP]]) telephone services in the U.S. Vonage has over 2.2 million subscribers. Through monthly service plans customers can utilize many features that are not available on traditional telephone lines at little or no additional charge. Vonage has seen increasing net losses for the past three years and is facing numerous law suits involving its initial public offering (IPO) and patent infringement. Vonage competes with traditional phone companies as well as cable companies who are becoming more prevalent in the telephone industry.	+	Vonage Holdings (NYSE:VG) is a leading provider of voice over Internet protocol ([[VoIP]]) telephone services in the U.S., with over 2.2 million subscribers. Through monthly service plans, customers can utilize many features that are not available on traditional telephone lines at little or no additional charge. Despite its significant number of customers, Vonage has seen increasing net losses for the past three years and is facing numerous lawsuits involving its initial public offering (IPO) and patent infringement. Vonage competes with traditional phone companies as well as cable companies, who are becoming more prevalent in the telephone industry.
	==Business Overview==		==Business Overview==
-	Vonage is a leading provider of broadband telephone service. Their Voice over Internet Protocal ([[VoIP]]) technology allows for inexpensive communications similar to traditional telephone service. At the end of 2006 Vonage had 2.2 million subscribers.	+	Vonage is a leading provider of broadband telephone service. Their Voice over Internet Protocol ([[VoIP]]) technology allows for inexpensive communications similar to traditional telephone service. At the end of 2006 Vonage had 2.2 million subscribers.
	Vonage offers a number of service plans to subscribers, each with features similar to (and in some cases beyond) those available through traditional phone line services.[[image:NetLoss.png|thumb|200px|right]]		Vonage offers a number of service plans to subscribers, each with features similar to (and in some cases beyond) those available through traditional phone line services.[[image:NetLoss.png|thumb|200px|right]]
	===VoIP Technology===		===VoIP Technology===
-	Through the [[VoIP]] technology, voice signals are converted into digital packets and transferred over the Internet. There are three steps that take place when a Vonage subscriber makes a call:	+	Using [[VoIP]] technology, voice signals are converted into digital packets and transferred over the [[Internet]]. There are three steps that take place when a Vonage subscriber makes a call:
	#The sound travels from the customer's handset to their Vonage-enabled device, which converts the analog audio signals into digital data packets.		#The sound travels from the customer's handset to their Vonage-enabled device, which converts the analog audio signals into digital data packets.
	#These packets are sent through the customer's existing broadband connection to a call processing center.		#These packets are sent through the customer's existing broadband connection to a call processing center.
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	===Services===		===Services===
-	Vonage provides subscribers with some features that are not available on standard telephone lines. Many of these features come at no cost, while some require additional fees. All the Vonage calling plans include Call Waiting, Caller ID and Call forwarding.	+	Vonage provides subscribers with some features that are not available on standard telephone lines. Many of these features come at no cost, while some require additional fees. All the Vonage calling plans include call waiting, caller ID, and call forwarding.
	====Basic and Enhanced Features (no charge)====		====Basic and Enhanced Features (no charge)====
	[[image:Churn-cost.png|thumb|200px|right]]		[[image:Churn-cost.png|thumb|200px|right]]
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	*'''Personalized Web-Enabled Voicemail''': Customers can access their voicemail messages through an audio file sent to their email account. Vonage customers are also able to check their voicemail online or from a touchtone phone.		*'''Personalized Web-Enabled Voicemail''': Customers can access their voicemail messages through an audio file sent to their email account. Vonage customers are also able to check their voicemail online or from a touchtone phone.
	====Premium Features (additional charge)====		====Premium Features (additional charge)====
-	*'''Virtual Phone Number''': Customers can pay an additional fee to have a second number ring on their primary line. These different numbers can have different area codes, which allows customers to receive calls from people in different areas of the country without those callers incurring long distance charges. In addition to U.S. area codes, Vonage also offers virtual phone numbers from Canada, France, Italy, Ireland, Mexico, Spain and the UK.	+	*'''Virtual Phone Number''': Customers can pay an additional fee to have a second number ring on their primary line. These different numbers can have different area codes, which allows customers to receive calls from people in different areas of the country without those callers incurring long distance charges. In addition to U.S. area codes, Vonage also offers virtual phone numbers from Canada, France, Italy, Ireland, Mexico, Spain, and the UK.
-	*'''Toll Free Plus''': For an additional fee Vonage customers can hold a toll free number on an existing subscriber line.	+	*'''Toll Free Plus''': For an additional fee, Vonage customers can hold a toll free number on an existing subscriber line.
	*'''Vonage SoftPhone''': SoftPhone is a computer application that can be downloaded and installed onto a customer's computer, enabling them to make calls without a telephone. SoftPhone essentially turns the customer's computer into a fully functional telephone.		*'''Vonage SoftPhone''': SoftPhone is a computer application that can be downloaded and installed onto a customer's computer, enabling them to make calls without a telephone. SoftPhone essentially turns the customer's computer into a fully functional telephone.
	===Operating Metrics===		===Operating Metrics===
-	*'''Churn''': The percentage of customers lost during a given period. It can be seen as an indicator of customer satisfaction as it measures the percentage of customers retained. Vonage has recently seen higher churn rates, moving from 2.0% in 2005 to 2.5% in 2006.	+	*'''Churn''': The percentage of customers lost during a given period. It can be seen as an indicator of customer satisfaction as it measures the percentage of customers retained. Vonage has recently seen higher churn rates, increasing from 2.0% in 2005 to 2.5% in 2006.
-	*'''Customer Acquisition Cost (CAC)''': The amount of money spent per customer gained. For Vonage, the majority of this cost is from marketing. Average monthly marketing cost per additional line is a similar metric that Vonage uses.	+	*'''Customer Acquisition Cost (CAC)''': The amount of money spent per customer gained. For Vonage, the majority of this cost stems from marketing expenses. Average monthly marketing cost per additional line is a similar metric that Vonage uses.
	==Litigation and Legal Issues==		==Litigation and Legal Issues==
	===Intellectual Property Suits===		===Intellectual Property Suits===
-	In June 2006 Verizon Services Corp. brought a suit against Vonage for infringement on seven of Verizon's patents involving VoIP technology. Before the case went to trial in February 2007 Verizon dropped the claims on two of the seven patents. The jury concluded that Vonage infringed on three of Verizon's patents and awarded Verizon $58MM along with $1.6MM in pre-judgment interest.	+	In June of 2006, [[Verizon Communications (VZ)]] brought a suit against Vonage for infringement on seven of Verizon's patents involving VoIP technology. Before the case went to trial in February 2007, Verizon dropped the suits on two of the seven patents. The jury concluded that Vonage infringed on three of the patents in question and awarded Verizon $58 million along with $1.6 million in pre-judgment interest.
-	===IPO Related Suits===	+	===IPO-related Suits===
-	In June and July of 2006 Vonage, many of its officers and some underwriters of the Vonage IPO were listed as defendants in numerous law suits. The case alleges that people were damaged through acquiring Vonage stock in connection with the IPO. The claims state that Vonage omitted or otherwise misstated facts involving their IPO's Customer Directed Share Program. Some claims also allege that Vonage's IPO prospectus misrepresented some of their products as well as some of the past experience of their management. These cases have not yet been resolved.	+	In June and July of 2006, Vonage, many of its officers, and some underwriters of the Vonage IPO were listed as defendants in numerous law suits. The suits allege that people were harmed through acquiring Vonage stock in connection with the IPO. The claims state that Vonage omitted or otherwise misstated facts involving their IPO's ''Customer Directed Share Program''. Some claims also allege that Vonage's IPO prospectus misrepresented some of their products as well as some of the past experience of their management. These cases have not yet been resolved.
	==Trends and Forces==		==Trends and Forces==
	*'''Demand for VoIP service'''		*'''Demand for VoIP service'''
-	**Many consumers are skeptical of switching their phone service over to an Internet based system. Traditional phone service is very well established and reliable and in many cases the savings margins are relatively small. [[VoIP]] service has been criticized for inconsistent call quality and is still a developing service.	+	**Many consumers are skeptical of switching their phone service over to an [[Internet]]-based system. Traditional phone service is very well established and reliable, and, in many cases, the savings margins of Vonage's service are relatively small. [[VoIP]] service has been criticized for inconsistent call quality and is still a developing service.
	*'''Decreasing costs of alternative providers'''		*'''Decreasing costs of alternative providers'''

---

Revision as of 23:11, July 22, 2007

Vonage Holdings (NYSE:VG) is a leading provider of voice over Internet protocol (VoIP) telephone services in the U.S., with over 2.2 million subscribers. Through monthly service plans, customers can utilize many features that are not available on traditional telephone lines at little or no additional charge. Despite its significant number of customers, Vonage has seen increasing net losses for the past three years and is facing numerous lawsuits involving its initial public offering (IPO) and patent infringement. Vonage competes with traditional phone companies as well as cable companies, who are becoming more prevalent in the telephone industry.

Business Overview

Vonage is a leading provider of broadband telephone service. Their Voice over Internet Protocol (VoIP) technology allows for inexpensive communications similar to traditional telephone service. At the end of 2006 Vonage had 2.2 million subscribers.

Vonage offers a number of service plans to subscribers, each with features similar to (and in some cases beyond) those available through traditional phone line services.

VoIP Technology

Using VoIP technology, voice signals are converted into digital packets and transferred over the Internet. There are three steps that take place when a Vonage subscriber makes a call:

1. The sound travels from the customer's handset to their Vonage-enabled device, which converts the analog audio signals into digital data packets.
2. These packets are sent through the customer's existing broadband connection to a call processing center.
3. The digital packets are then routed in one of two ways, depending on the recipient of the call. If the recipient is also a Vonage customer the packets are routed directly over the internet to their location and converted back to analog signals. Otherwise, the packets are routed through one of Vonage's regional data connection points, where they are converted to analog signals and sent to the public switched telephone network.

Services

Vonage provides subscribers with some features that are not available on standard telephone lines. Many of these features come at no cost, while some require additional fees. All the Vonage calling plans include call waiting, caller ID, and call forwarding.

Basic and Enhanced Features (no charge)

• Area Code Selection: Customers can choose the area code for their phone line. This allows subscribers to avoid long distance charges regardless of their physical location.
• Service and Number Portability: Vonage customers can use their Vonage phone number to make and receive calls anywhere that has a broadband Internet connection.
• Online Account Management: Vonage offers online options such as real-time feature management, call forwarding options and a lifetime call activity log.
• Personalized Web-Enabled Voicemail: Customers can access their voicemail messages through an audio file sent to their email account. Vonage customers are also able to check their voicemail online or from a touchtone phone.

Premium Features (additional charge)

• Virtual Phone Number: Customers can pay an additional fee to have a second number ring on their primary line. These different numbers can have different area codes, which allows customers to receive calls from people in different areas of the country without those callers incurring long distance charges. In addition to U.S. area codes, Vonage also offers virtual phone numbers from Canada, France, Italy, Ireland, Mexico, Spain, and the UK.
• Toll Free Plus: For an additional fee, Vonage customers can hold a toll free number on an existing subscriber line.
• Vonage SoftPhone: SoftPhone is a computer application that can be downloaded and installed onto a customer's computer, enabling them to make calls without a telephone. SoftPhone essentially turns the customer's computer into a fully functional telephone.

Operating Metrics

• Churn: The percentage of customers lost during a given period. It can be seen as an indicator of customer satisfaction as it measures the percentage of customers retained. Vonage has recently seen higher churn rates, increasing from 2.0% in 2005 to 2.5% in 2006.
• Customer Acquisition Cost (CAC): The amount of money spent per customer gained. For Vonage, the majority of this cost stems from marketing expenses. Average monthly marketing cost per additional line is a similar metric that Vonage uses.

Litigation and Legal Issues

Intellectual Property Suits

In June of 2006, Verizon Communications (VZ) brought a suit against Vonage for infringement on seven of Verizon's patents involving VoIP technology. Before the case went to trial in February 2007, Verizon dropped the suits on two of the seven patents. The jury concluded that Vonage infringed on three of the patents in question and awarded Verizon $58 million along with $1.6 million in pre-judgment interest.

IPO-related Suits

In June and July of 2006, Vonage, many of its officers, and some underwriters of the Vonage IPO were listed as defendants in numerous law suits. The suits allege that people were harmed through acquiring Vonage stock in connection with the IPO. The claims state that Vonage omitted or otherwise misstated facts involving their IPO's Customer Directed Share Program. Some claims also allege that Vonage's IPO prospectus misrepresented some of their products as well as some of the past experience of their management. These cases have not yet been resolved.

Trends and Forces

• Demand for VoIP service
  • Many consumers are skeptical of switching their phone service over to an Internet-based system. Traditional phone service is very well established and reliable, and, in many cases, the savings margins of Vonage's service are relatively small. VoIP service has been criticized for inconsistent call quality and is still a developing service.

• Decreasing costs of alternative providers
  • In recent years cable providers (who incidentally provide the broadband internet that Vonage customers use) have been bundling multiple services into a single package. Most of these package deals include Internet service, cable television and telephone service. By doing so, these companies have been able to cut service prices significantly. These package deals are also very convenient for consumers as they combine three services into one bill, with one provider. If the competition amongst cable companies builds and the price wars continue the implied price of the phone service they provide could become significantly cheaper than what Vonage offers.

• Increasing churn & the marginal cost of customers
  • Vonage has seen increases in both its churn rates and the cost of acquiring new customers. These two trends coupled together are especially negative for Vonage. The cost of acquiring new customers is rising because the target market is shifting away from "early adopters", who often need little convincing to switch providers, to a increasing mainstream market. As a result, Vonage is forced to spend more money on marketing to gain these mainstream customers. As the churn rate increases, the number of customers that need to be gained (to keep all else constant) increases. Meanwhile, the cost of gaining additional customers is rising and the result is significantly higher costs.

Competition

Incumbent Telephone Companies

Vonage's primary competition comes from traditional phone companies that have (in most cases) been in business for many years. These companies include: AT&T (NYSE: T), Qwest Communications (NYSE: Q) and Verizon Communications (NYSE: VZ). These companies are all much larger than Vonage and include many customers that don't have broadband internet access (and are thus unable to use Vonage) or are satisfied with their current provider. Furthermore, when Vonage customers make a call, the connection travels over these incumbent companies' "last mile" connections, to the receiver of the call. For this service, Vonage pays their competitors directly. However, when a customer of one of these competitors calls a Vonage subscriber the incumbent phone companies pay nothing to Vonage. Below are some metrics that compare Vonage to major incumbent telephone companies.

	AT&T	Verizon	Qwest	Vonage
Market Cap	254.88B	126.38B	19.03B	467.86M
Revenue	76.27B	89.50B	13.89B	683.61M
#of Access lines (000s)	68,786	46,950	14,283	2,200

Source: Company Data

Cable Companies

These companies include Cablevision Systems (CVC) , Comcast (CMCSK) , Cox Communications and Time Warner Cable . These companies are increasingly investing in last mile broadband connections and as a result are eager to gain the money their customers pay for the telephone service that travels over these connections. Cable companies are marketing many of their products as package deals. In many cases companies are offering fixed monthly prices for a bundle of cable television, Internet access and phone service. In some cases the implied cost of the phone service included in this bundle is cheaper than the cost of Vonage's service. To remain competitive with these providers Vonage relies on its unique features such as area code choice and portability.

Wireless Telephone Companies

Companies like AT&T, Sprint Nextel Corporation, T-Mobile USA, Inc. and Verizon Communications (VZ) (NYSE: VZ) have customers that utilize wireless phones as a replacement for a traditional phone line. These companies also provide wireless broadband Internet access and could potentially offer VoIP services in the future.

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