Vonage--An IPO filing like it's 1999

Critics say profit-challenged Vonage is going to have a tough time convincing Wall Street it's a good investment.

Do executives at Vonage think it's 1999 again?

Like the founders of many an Internet company in the late 1990s, executives at the Holmdel, N.J., upstart--which has widely marketed its low-cost voice over Internet Protocol (VoIP) service--seem to believe that profits can wait.

"We are pursuing growth, rather than profitability, in the near term to capitalize on the current expansion of the broadband and VoIP markets and enhance the future value of our company," Vonage said in a filing Tuesday with the Securities and Exchange Commission that lays the groundwork for an initial public offering.

No one denies that Vonage is targeting a potentially hot market.

But now that the 5-year-old company has filed for an IPO that could raise $250 million, that "invest now to make money later" strategy is going to be harder and harder to justify.

In fact, Vonage's filing offers eye-popping insight into a company that's captured lots of attention among the technorati without turning that interest into profits. In the first nine months of 2005, Vonage lost $189.6 million against $170 million in sales. It cost the company $213 in marketing dollars to acquire every customer--up from $137 per subscriber the year before. That means, based on Vonage's most popular, $24.99 monthly residential subcription, it would take roughly nine months to break even on marketing costs for each new subscriber.

It gets worse. The average revenue from the company's various pricing packages has dropped to $26.63 per subscriber--from $30.99 a year ago. Vonage officials would not comment for this article.

While Vonage has increased sales at a respectable clip--from $18.7 million in 2003 to $174 million for the first nine months of 2005--its losses have also mounted. The company has lost about $310 million since it started selling its service to consumers back in 2003. Vonage readily acknowledges that its losses, largely due to marketing costs, have increased every quarter and will likely continue for the foreseeable future.

Of course, no one denies that Vonage is targeting a potentially hot market. Forrester Research expects 14 percent to 15 percent of all households in the United States to switch to a VoIP phone service as their primary phone service by 2010. Today, the firm estimates that 4 million of the 107 million households in the U.S. currently subscribe to VoIP.

Cable isn't the only competition for Vonage to worry about.

That's a big target for a small company like Vonage, which has rapidly been signing up new customers. The company more than tripled its subscribers in 2005, and as of Wednesday, it said, its VoIP service had more than 1.4 million subscribers.

But Vonage isn't the only company chasing the VoIP dream. Cable operators have aggressively pushed voice service as part of their service bundles, which also include television programming and high-speed Internet access. And they've already seen huge success. Time Warner Cable reported 1.1 million subscribers at the end of 2005. Cablevision brought its total to roughly 600,000 in the first nine months of last year.

And cable isn't the only competition for Vonage to worry about. EarthLink and AOL are also offering IP telephony services to replace traditional phone service with products that are very similar to Vonage's service. Wireless operators also plan to enter the VoIP market with dual-mode phones that support 3G and voice over Wi-Fi. Sprint Nextel has already joined forces with several cable companies to get this underway.

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