Vonage Needs A Miracle?

There's an interesting post on the Mr. Blog site from over the weekend rebutting my Saturday assertion that Vonage must ramp marketing spending to survive.  David says it won't work, for the following reasons:

1. "Limited market size - Vonage’s niche of people willing to act for cheaper phone service is small
2. Reaching beyond that niche will require Vonage to spend more per subscriber
3. Intense competition and low barriers to entry adds more to customer acquisition costs
4. Market dynamics reduce the value of the “cheaper phone service” message, further increasing customer acquisition costs "

He's basically saying that Vonage is wasting their money and needs to "do something radically different, not just increase their marketing spend singing the same old song." 

You know, he could be right.  It could be that ramping up marketing spending at Vonage won't produce the same results it did two years ago.  In any case, it's a thought-provoking post and I encourage you to head over to Mr. Blog to give it a read.

It's one thing to say that ramping marketing spending won't work, and quite another to suggest something that will work instead.  I think that Vonage was trying to change the game for itself when it announced it would re-sell Covad DSL service last week.  However, "resale of a resale" can't be considered "radically different", so Vonage is still left searching for a solution.

My guess is they don't have anything radically different in their plan, and therefore are stuck trying the old solution of ramping marketing spending, knowing that there is a risk that it may not work as well as it used to.  It will be interesting to watch the results.

If the company doesn't show progress, then the customer base will probably be sold.  Unfortunately for Vonage shareholders, the "milk it" value of the customer base, at current churn rates, may only be enough to pay off the $253M debt (even counting cash on hand), leaving little for the equity holders at the end of the day.  If you believe the Vonage brand has value, then you might throw a little more money into the sale price.

My guess is that Vonage has about a year to show some progress, and even less time if they can't refinance the debt.   The clock is ticking.

Comments

[Ike Elliott]

Mr. Blog, you and I are in the same boat - I haven't figured out a viable rescue plan for Vonage, either. If ramping up marketing spending doesn't yield positive results then they might be toast.
Ike

[Mr Blog]

Yeah, Ike. We're both right. :)

I agree that it's much easier to say what won't work than propose something that will work. Unfortunately, I have to say that I can't help Vonage on this one. I don't believe there is a business there nor an exit for investors - never was, in a sane world at least.

One thing that bothers me about the Vonage history is you didn't really have to be a genius to see the economics weren't going to work, even back in 2003. It had to be "sold" by people that knew better to people that didn't - and that smacks of Enron. I could be wrong, and there may be some people at Vonage's core that really are that naive and believe they always had a real business on their hands, and if so, I take it back and I'm sorry it didn't work out. But it looks more like a scam from the get go to me.

[Dan Caruso]

Good post Ike. I agree with Mr. Blog's point that ramping adverstising is likely throwing good money after bad. And I agree with yours that this leads to a "then what do we do?" question. Many companies make a huge mistake when they get into this mode--they frantically ramp up spending in hopes of discovering an answer.

Here I go again...writing a detailed comment when I could be filling up bearonbusienss space. I will continue this there.