By all accounts, Vonage is on the ropes. Last year, the pioneering internet telephony company was pummeled by lawsuits from Verizon, AT&T and Sprint. Vonage lost all three suits. Journalists who reported on its poor customer service and draconian cancellation policies also raked the company over the coals. Meanwhile, financial analysts openly wondered how the fledgling startup could survive, and its stock dropped to under $2 a share.
Yet Vonage refuses to throw in the towel. "Vonage is like Rocky Balboa: They get beat down and get back up," says Patrick Monaghan, a Yankee Group analyst. "Their chances of turning around are very good. They are past large litigation suits. They have an opportunity to become profitable this year."
Vonage, founded in 2001, was one of the first companies to successfully sell internet-based telephone service, known in the industry as voice-over-internet protocol, or VOIP. A splashy advertising campaign and aggressive pricing enabled the company to scoop up customers at a rapid rate, hitting 1 million subscribers by September 2005. But rampant customer complaints and patent-infringement lawsuits brought the company low in 2007.
According to Monaghan, Vonage's biggest challenge this year will be dealing with crushing debt, including $253 million in obligations that come due in December 2008.
Customer turnover, or churn, is another threat. Many early adopters have turned into angry former customers calling for a deathwatch. While Vonage added about 300,000 subscribers in Q3 of 2007, it also lost 222,215 (or 9 percent of its total 2.5 million subscribers), for a total gain of only 77,763, according to Monaghan.
The company has responded by digging in its heels. Former customers say trying to cancel Vonage service can cost as much as $40 and be a labyrinthine process akin to canceling an AOL subscription. Transferring a Vonage phone number to a land line takes 10 days and won't work at all for some customers, according to Vonage.com.
One post on Google Finance calls Vonage a "BS company," while sites like WeHateVonage.com express virulent outrage. "Their name should be changed to Bondage," complains one online commenter.
Telephone companies have attacked Vonage with their own internet-telephony offerings and unlimited long-distance plans. Since these companies can add satellite TV, phone and DVR services, Vonage has increasing difficulty competing on its low prices for voice service.
"Cheaper voice gets lost or minimized in a total bundled cost," says Elroy Jopling, a research director at Gartner.
There's also a pesky quality-of-service problem, where Vonage voice quality dips every time Timmy plays Call of Duty online, because both services are using the same internet connection.
Vonage has countered all these downturns by adding new services, fixing bugs, bundling its calling plans and services, and trimming expenses. The company sliced its marketing budget from $90 million to $60 million, according to Monaghan. In 2008, the plan is to bundle still more services, says Dan Smires, the vice president of engineering.
To solve the churn problem, Vonage says it will fix lingering customer-service problems and resolve customer service issues faster -- ideally on the first call. To stay competitive, Vonage must be as easy to use as a land-line phone and cost less for U.S. and international calls, executives say.
Yet even if Vonage manages to stay in the game, there's doubt about how much longer the land-line business is going to last. About 15 percent of the U.S. population doesn't have a land-line phone at all, and the number is rising as people start using their cellphones as their primary phones, according to Yankee Group. As a result, most of Vonage's growth is in the international market, says Monaghan, who is one of very few analysts still bullish on the company's prospects.
"Considering the market forces, the challenges facing Vonage will in all likelihood not be met," Jopling says.
