Pissing on Vonage – A Popular Pastime

In Saturday’s WSJ there was a brief writeup forecasting gloom for them on the grounds of a) the patent litigation they’re in with Verizon and b) increasing competition, specifically from Skype which is they say charging $29/year (that’s not really true of course). Combined with Vonage’s amazing marketing spend of $575 per new subscriber, this all does seem rather gloomy, doesn’t it?

Personally I give those guys a ton of credit for creating a market that would otherwise never have gotten off the ground. What else? Well, on the patent front, who knows. I won’t comment.

On the competition side, I never thought there was a viable long-term business model for consumer VoIP. We have a couple of old telecom industry angels who invested in Aptela in ‘04 and screamed for us to get a consumer product in place. We all knew that paying for the privilege of talking over a wire has a limited shelf-life, and with it the business model of arbitrage on telecom costs. Still though, Vonage did a great job of sealing off the space from any viable challenger (other than perhaps Sunrocket which got in under the wire). Who says you can’t make a go of that model while it’s still viable and ride it to the ground while they come up with new revenue streams. It’s exactly what Verizon and AT&T want to do, and they have the pockets and political clout to extend the life of that business model indefinitely. So if you can get yourself into the party along with those guys and ride it out, more power to you. People love to scoff at Vonage but the folks at NEA are pretty happy with their early investment. Vonage has 3-4 thousand new customers a day signing up for their service! And while $575 per is way too much to spend on acquiring new customers, people are losing sight of 2 things. One, while their per subscriber acquisition cost is rising the % of their total revenue marketing consumes is down from over 70% a year ago to just over 50%. Their revenue is skyrocketing. They can probably get profitable within 18 months, with $200 million left in the bank. And, they can ratchet down their marketing costs at any time – there’s no law that says they have to keep spending $100 million a quarter.

I think it’s funny that people who scoff at Vonage always seem to love Skype. Now Skype has happier early investors that Vonage (or just about any other company on earth for that matter). But it’s not like Skype ever had a viable business model. They just sold out for amazing dollars to someone who could maybe figure one out. Personally I think it was a justifiable acquisition for one and only one buyer – and they happened to get them to do it at an insane price! (remember, markets are conversations and 50 million people in a self-organizing community talking to each other on a computer was one of the few legitimate threats to eBay’s core business).  Sure, Skype will get their share of gearheads who want to wring every last dollar out of their budgets and go through whatever pain and suffering it takes to pay $67 a year for what Vonage charges $300 for. And at some point Vonage will have to respond both to them and to – more importantly – to the RBOCs and cable guys who will bundle voice in their “triple play” packages. But when they do they’ll be a $1 billion + company with over 3 million subscribers and very healthy margins once you rip out their over-the-top marketing costs. Existing customers are far easier and cheaper to sell new services to, and telco and cable guys aren’t going to be coming up with anything particularly innovative or exciting. So yes Vonage will have to figure out their Act II. But  they’ll have a hell of a customer base and deep pockets to do it with.

Web 2.0??!!

I just sat on a panel at a local “boot camp” event for entrepreneurs; probably about 250 attendees. Our panel topic was “Opportunities in Media and Telecom Convergence” with myself, an exec from a prominent local company that provides mobile phone & app distribution, and 2 VC’s. The VC’s were pretty well versed in the space and had about $300 Million between them; at least one was of the sort that might actually invest in a very small deal. And there was at least one more VC in the audience, who does only small early stage deals. Definintely a TRE for an aspiring entrepreneur.

The market opportunity around this topic is, to put it mildly, ENORMOUS. US telecom spend is about $875 Billion (!!) a year, and the media market is so large it’s undefinable. Both markets are being transformed by convergence and new technologies and concepts. Tens or hundrerds of billions in spending will be redistributed in this space before the end of the decade, and who knows how many billions in wealth will be created.

And …….We had maybe *3 dozen* attendees in our room. (!!!!!) Meanwhile, a session next door entitled “Opportunities in Web 2.0″ was overflowing. The panel had nobody in particular on it, and with all due respect to those guys, nobody who would be of any real help to a startup.I challenge them (or anyone) to define any tangible market for “Web 2.0″ – it’s a buzzword, and an old one at that – O’Reilly picked up the phrase about 4 years ago to define concepts born years before that. But like lemmings they flocked to seek out fame and fortune in a buzzword. And ignored one the largest market opportunities in history and a room flush with expertise and dollars to chase it.

I learned a lesson today about the power of a buzzword that people think is cool. I think PT Barnum must have had a similar epiphany.

What’s up with VoIP demand???

So, the graph below is a pretty fascinating one that we were discussing in our board meeting last week. Google search volume for VoIP from ‘04 through the end of ‘06. Surprising, isn’t it? Maybe we’re on the early part of the Gartner hype curve, but I’d have though we were there 2 years back.

I should also add it’s a particularly sucky graph when you were preparing your ‘06 growth projections for your VC right about point ‘C’.

The Comvolution

Back in 1995 we used to talk about the 5 C’s – Communication, Community and Commerce along with Collaboration and Content – as the keys of a web-centric world. I always figured what really mattered was the first 3 (collaboration is a product of community and communication, and content will always find its way to a new communications medium). Back then we thought there was a revolution underway, and in some ways there was, but in retrospect it was much more evolution that that. It’s more than 10 years later, and we’re still working on breaking down the barriers we thought would crumble years back. But hey, the bubble burst hit hard, and monopolies don’t die easily. But we’re getting closer. Close enough that I feel like I should re-join the dialog.