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Vonage IPO: too late to start the engine?

As he gets ready for Von Spring this year, Jeff Pulver should be anticipating making a big return on his pioneering investments in Vonage.

But will he? When two perceptive analysts both frown sadly over a forthcoming IPO, and they are as perceptive as James Enck and Om Malik, the subject should be nervous.

 It's only two years since Enck was marching Vonage around his banking clients and fund manager friends. This week, he says: "One very bright fund manager stressed his view that, despite the small subscriber numbers of the time, the market would be inclined to be generous in its assumptions of future growth, and accordingly he thought the company would command a valuation of $1bn."

Now, the VoIP pioneer is looking to go public. Enck doesn't think they're in time.

"Legacy telco pricing, after all, provides the essential raison d’etre for access-independent VoIP as a commercial proposition. Once it goes, there is no model. I think the smart money has already moved away from this issue," he mourns. An "exit strategy" is really all they have, is his opinion: "I just don’t understand why Vonage has waited so late to begin the exercise. I don’t necessarily think the ultimate fate of the company would have been any different, but I do believe getting the deal to fly would have been a lot easier three years ago than it may be today."

Malik is  less generous, in some ways: he says it costs Vonage so much to acquire new voice customers that it can't make a profit unless it keeps the new ones for a year and a half.

The picture Om paints is actually rather gorgeous for Vonage, in that the "churn" they report is startlingly low, compared with the figures some mobile phone companies have.

But his worry is that if the churn rate starts to climb (which it almost certainly will!) and if the revenues don't increase rapidly (which you would suspect they won't) then profitability and growth become impossible. "This means they are going to suck cash as they grow" he finished.

My take: actually, both analysts could be completely right, and still turn out to have got it wrong. The thing is that there are so darned many VoIP companies, and none has a commanding position. All it takes is for someone with a few billion rotting in low interest accounts (there are lots of these!) deciding to start out an acquisition program, and using Vonage as the vehicle (instead of, say, CallServe or another of that ilk) and the rules of the game change.

There is the risk that the incumbent telcos may wake up and smell the coffee, and actually turn themselves into truly sharp bit-pipes, with value add sold separately. It's a risk which, frankly, I rate around the risk of being hit on the head with a pebble dislodged from Mars by a US space probe.

If I were Jeff Pulver and a big shareholder in Vonage (Jeff is) I wouldn't put off buying that extra lens for the big camera. Enck is certainly right that it would have been easier to sell Vonage to the City when it was a 20th of the size it is now, but I'm not convinced that the extra effort won't be rewarded.