Vonage would be in the same mess even without the Verizon patent case

April 13, 2007
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While the Verizon patent situation may be an accellerator (perhaps a very rapid one, if an injunction denying Vonage the ability to add customers comes down in the decision due April 24), it is my belief that Vonage’s problems go deeper than this litigation, and I’ve been saying as much for several years, at least since 2004.

I’ll repeat now, what I said back then, with this short list of the fundamental issues with the Vonage strategy:

  • Low barriers to entry mean constantly increasing competition and fragmentation
    There are now hundreds (if not thousands) of services that are essentially exact replicas of Vonage. The primary barrier to entry is marketing dollars. Other than slight pricing model variations, there are almost no differentiators between these clones of each other.
  • Decreasing Revenue per subscriber combined with Increasing customer acquisition costs over time
    Due to the competition above, and general trends in telephone services, the retail prices of undifferentiated services was trending down when Vonage et al were being formed five years ago, and continues to do so. Vonage started at $39.99 per month and people at the time thought it was a bargain. They have dropped their price several times with increasing competition and market pressure. At the same time as their revenue per subscriber has come down, the cost to acquire new customers has gone up. And it will contunue to do so as they move past early adopters and saturate the market of those customers that fit their one and only value proposition: “cheaper phone service”. For many mainstream customers, the cost of their home phone service is not high on their list of problems that need attention. This means Vonage has to spend more and more money to “sell” these customers and get them to take action and switch.
  • Insufficient operational advantages over existing models
    I have said for a long time that building a Vonage-like phone service cost about the same as building a “traditional” phone service, if one were starting from scratch. Vonage doesn’t have to build the copper plant to the home and that’s the primary economic advantage. However, they lack buying power on the back-end (IP to PSTN termination, DIDs, etc.) making the overall costs of providing service roughly a wash, compared to the existing telcos. Certainly, the op ex advantages, if any, are not 100x or 1000x better.
  • Regulatory Nightmares
    For a long time, Vonage called themselves “The Broadband Phone Company”. They should not have been surprised, then, when the FCC came calling. Many of the operational advantages that Vonage originally enjoyed, such as not incurring costs for 911 and CALEA have now been taken away. Even without that, they live in a regulatory quagmire, an environment where traditional telcos thrive and where Vonage is a mere child among men.

In short, the Vonage strategy lacks the ingredients to achieve disruption. And this applies to all the competitors in this Pure-play VoIP space, by the way (see Phone over IP or PoIP). It’s possible to have a modestly successful business in this space by focusing on niches and keeping customer acquisition costs low, but as a general disruptive force, it’s not going to happen with this model. And I said as much over five years ago.

It’s a slightly different story for the Cable companies and their version of PoIP service because they are leveraging network/access assets they already must build-out to support their TV service, so the econmonics are more favorable, in terms of both customer acquisition costs and operational costs. It doesn’t change anything in terms of expanding out-of-maket etc. but adding a PoIP offering in the areas they already serve can work (and Cable companies are already familiar with fighting regulatory issues on a more equal footing with telcos), but this could hardly be described as disruptive.

So maybe it wouldn’t come as fast, but soon enough, Vonage would be faced with these same issues, even without this Verizon suit and other pending litigation. In fact, it would be far better IMHO if they win this case against Verizon, because the more I look at it, the more it appears to be totally bogus and we should all be standing up to defend Vonage.

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