The folly of "Vonage service is great, so the stock is

Posts: 111 · Vonage Forum Senior Joined: Jun 15, 2006 Posts: 111

My wife uses Vonage for her home business and we both use it and like it. Several of her friends do as well. One has had major problems and canceled in anger. We have not had any customer service issues in more than 6 months, and the others were all minor. But my experience is still that it is not quite the same as a voice line. Still a good deal however.

That doesn't mean that you should buy the stock however. Vonage spends 42.50 PER LINE per month (not per subscriber). They would have to charge $46 or so, therefore, to make a decent profit. Yet instead they charge $27 on average, and apparantly they will drop the price to $20 if you call up and pretend to want to cancel.

Now, would I be satisfied if I had to pay $45? No. And I suspect they would lost most of their customers if they charged that much. So knowing this they have subsidized each and every customer.

This is only going to get worse as they expand. Their first customers were tech-savvy early adopters. We were less likely to need our hand held and call up customer service.

Now their newer customers are going to be people who saw their TV ads and are looking for price and price alone. Many will barely know how to use their computer. Many will have bad credit. I am not saying all new customers will be like this, just that the average "quality" is going to go down.

And Vonage's price advantage is soon going to get a even smaller. Right now it doesn't have to pay the universal service fee. Soon it will, probably in the next couple months. That will add 5-8% to the cost of Voip.

So, in conclusion, if Vonage is going to make a profit they are either going to have to cut costs drasticly, or else charge about $48 or 50 a month (42.50 is their cost, plus the new fee of about $3, plus a little profit).

If you think they can charge $48 a month, then by all means buy this stock. But don't for a minute think unlimited service at $25 a month is viable. Vonage can't subsidize its customers forever, its money is very quickly running out. Before the IPO I estimated this would take about 16 months, which is why I sold the stock short.

Now with the many lawsuits against the company, the news of the Skype and Verizon price cuts, and the impending universal service fee, I don't think the company will even last 12 months.

It's time you guys swallowed your pride and sold. I think it is really awful what the investment bankers and Jeff Citron have done to the people who bought the IPO.

Sure, you knew you were taking a risk, but that doesn't mean it is right for them to massively overprice the IPO. Most IPO's are priced slightly below fair value so they can get a little first day "pop" and start things off on a postive note. It was completely reasonable for you guys to expect that to be the case here.

This company should have been priced at about 4. If it had, it would have "popped" up to 5, and many of these lawsuits never would have happened, and you'd all be happy campers.

Posts: 1424

While I don't disagree with your subject, some of what follows is not correct or logical.

BigTime wrote:

That doesn't mean that you should buy the stock however. Vonage spends 42.50 PER LINE per month (not per subscriber). They would have to charge $46 or so, therefore, to make a decent profit. Yet instead they charge $27 on average, and apparantly they will drop the price to $20 if you call up and pretend to want to cancel.

But Vonage has not ever claimed to be interested in turning a profit at this point.

BigTime wrote:

Their first customers were tech-savvy early adopters. We were less likely to need our hand held and call up customer service.

Now their newer customers are going to be people who saw their TV ads and are looking for price and price alone. Many will barely know how to use their computer. Many will have bad credit. I am not saying all new customers will be like this, just that the average "quality" is going to go down.

You are asserting that Vonage's existing customer base is made up of tech savvy early adopters? Nonsense. Most customers get the service working without additional help. Vonage will only need to scale their customer service at the rate at which they grow the customer base, perhaps less.

BigTime wrote:

And Vonage's price advantage is soon going to get a even smaller. Right now it doesn't have to pay the universal service fee. Soon it will, probably in the next couple months. That will add 5-8% to the cost of Voip.

This could actually be a help to Vonage in fending off the price competition from below. Vonage is in a much better position to collect these fees than some of the smaller players. The ILECs can't afford to reduce prices from the top because they are funding their fiber roll outs. Yes, Vonage is going to be squeezed, but the USF won't make the difference.

In fact, the USF may provide an additional source of revenue for Vonage if they can figure out a way to tap into it.

BigTime wrote:

So, in conclusion, if Vonage is going to make a profit they are either going to have to cut costs drasticly, or else charge about $48 or 50 a month (42.50 is their cost, plus the new fee of about $3, plus a little profit).

Vonage is not attempting to turn the corner on a short term profit. If they did, they would die. The only way Vonage can be successful in the long term is to become large and multinational.

That gives them the advantage of being able to subsidize markets under intense competition with other markets experiencing less competition (see our discussion in the Canadian forum on pricing). And to offer packages that other providers can't match (see our discussion on how the free calling to Europe countries match up with virtual number availability.)

So, as long as Vonage needs to grow they are going to need to advertise. Those advertisement dollars are the real drain on the company but they are critical to Vonage's long term survival.

If Vonage turns its back on its expansion plans in favor of short term profits, that is the time to get out of the game.

Now, as far as your $48 figure. Vonage could still be successful at that price point. There are many people who are paying more than that currently for local service alone. It would not have been a large enough difference to get people to abandon traditional companies but Vonage could, if necessary, increase prices to the level that cable companies are using for their very similar services. It just wouldn't make sense to do so during a time where Vonage is trying to actively lure customers away from traditional phone companies.

BigTime, you are not the first person to come to the boards are try to push a path to short term profitability. We were discussing this issue long before the IPO and it has never been Citron's game plan.

I hesitate to say at this point that Vonage will be successful in the long term. I do not have a good enough feeling about that to be betting my own money. However, any move to short term profitability to soothe share holders is a death knell for Vonage.

Posts: 94 · Vonage Forum Senior Joined: Jun 17, 2006 Posts: 94

To put a cost of $45 per subscriber line is intellectually incorrect.
Vonages's cost per subscriber line are fixed costs (not variable)

Similarly to airlines, the company needs to add customers (ie. fill empty seats)

The variable cost per subscriber line is almost zero.

The more customers they add, those revenues go straight to the bottom line. Also the lower they price their service, the more difficult it will be for startups to reach that critical mass.

Posts: 111 · Vonage Forum Senior Joined: Jun 15, 2006 Posts: 111

Quote:

The variable cost per subscriber line is almost zero.

What on earth do you base this statement on?

Quote:

You are asserting that Vonage's existing customer base is made up of tech savvy early adopters?

No, just that the average quality of customers is going to decline now they are getting so many of their customers from TV advertisements.

Quote:

Vonage will only need to scale their customer service at the rate at which they grow the customer base, perhaps less.

Here we disagree, I think customer service costs will grow per customer as they add people they recruit from TV commercials.

Quote:

(regarding the USF fee) This could actually be a help to Vonage in fending off the price competition from below. Vonage is in a much better position to collect these fees than some of the smaller players. The ILECs can't afford to reduce prices from the top because they are funding their fiber roll outs. Yes, Vonage is going to be squeezed, but the USF won't make the difference.

I don't see how you can view a tax that Vonage previously was avoiding, but will now have to pay, as anything but bad for the company.

Quote:

Now, as far as your $48 figure. Vonage could still be successful at that price point.

With the Cable/DSL companies offering service from $25 to $40 a month? I don't think so.

I thank you for your post Scerruti, you have obviously have done much more research than most people who own VG stock, which is perhaps why you don't own any yourself.

I think the main thing we disagree on is Citron's intentions. I think his goal all along has been an Internet IPO to get rich off of, and never been concerned with profits, short-term or otherwise.

We also disagree about whether there is any way whatsoever Vonage could ever be profitable. I think it is impossible to start up a big and profitable phone company, no matter how talented and honest the company's management are (and Vonage's are neither, IMO).

Could the best people in the world start up a profitable integrated steel manufacturing company today? Probably not. Phone service, I believe, is likewise a mature industry with no room for new entrants. Changing the type of wire it is delivered on is not enough of an innovation to change this reality.

Posts: 81 · Vonage Forum Senior Joined: Feb 27, 2006 Posts: 81

Quote:

To put a cost of $45 per subscriber line is intellectually incorrect.
Vonages's cost per subscriber line are fixed costs (not variable)

Similarly to airlines, the company needs to add customers (ie. fill empty seats)

The variable cost per subscriber line is almost zero.

The more customers they add, those revenues go straight to the bottom line. Also the lower they price their service, the more difficult it will be for startups to reach that critical mass.

Now that I've gotten up off the floor, that was the best laugh I've had all week.

The variable cost is NOT zero. They subsidize the adapter, there is switching costs, interconnect costs to the PTSN, customer support costs, billing costs, account administration etc. It's true, as you gain a larger base those cost curve will go down, but it will not EVER be zero or even close to it even if you take out marketing costs.

BTW: The cost to fly those empty seats on the airline is lower than putting a person in it. There are costs to process your ticket and payments, additional fuel consumption due to additional weight, even additional flight delays due to the time it takes to board additional people. There are countless costs you don't see.

Posts: 94 · Vonage Forum Senior Joined: Jun 17, 2006 Posts: 94

[quote="ShelChgo"]

Quote:

BTW: The cost to fly those empty seats on the airline is lower than putting a person in it. There are costs to process your ticket and payments, additional fuel consumption due to additional weight, even additional flight delays due to the time it takes to board additional people. There are countless costs you don't see.

Are you trying to argue that airlines don't try to fill their empty seats at any revenue because their variable costs for that seat are fairly high?

If you are, you'll have to rewrite a lot of cases and textbooks that are in the curriculum of almost every business school in the country.

Posts: 81 · Vonage Forum Senior Joined: Feb 27, 2006 Posts: 81

Quote:

Are you trying to argue that airlines don't try to fill their empty seats at any revenue because their variable costs for that seat are fairly high?

If you are, you'll have to rewrite a lot of cases and textbooks that are in the curriculum of almost every business school in the country.

No. Just trying to explain that there are additional costs and the sale of a seat that may fly empty is not pure profit. Just as Vonage adding a customer carries additional costs beyond marketing expense, and that the expenses are variable. The $42.50 cost to add a subscriber everyone likes to quote is average cost based on the actual expenses amortized over the subscriber base. The airline seat was his analogy.

Posts: 1424 · Posted: Wed Jun 21, 2006 8:03 am Post subject:

Specifically BigTime, but others as well, please attribute your quotes by using [quote="original poster"] especially when you are quoting multiple posters in the same post.

BigTime wrote:

I think the main thing we disagree on is Citron's intentions. I think his goal all along has been an Internet IPO to get rich off of, and never been concerned with profits, short-term or otherwise.

Yes, I do disagree. I think Citron originally intended to build a successful company. I believe the IPO was about attempting to salvage some of the original investment. I think Citron will remain in the game for the long haul, I think he just wanted to spread the risk.

BigTime wrote:

We also disagree about whether there is any way whatsoever Vonage could ever be profitable. I think it is impossible to start up a big and profitable phone company, no matter how talented and honest the company's management are (and Vonage's are neither, IMO).

I think you should search for and reread the comparisons of Vonage to MCI. I think a lot of people thought the same way about any company trying to enter into the long distance market against AT&T.

We know that all phone traffic will eventually be Voip. The only question remains is will there be large monolithic phone companies managing the network or will it be structured like email where any company with the bandwidth could run a phone service? If the former, the question remains can Vonage get enough market share to survive once the incumbents enter the game in force?

Posts: 5 · New Forum Member Joined: Jul 23, 2004 Posts: 5

For these two features ALONE:

1. Virtual Phone Numbers
2. Portability