Vonnage Headed In New Direction

by Jim Barthold
Tues. May 13, 2008

Vonage Holdings has withstood a flurry of patent infringement and other legal action which pretty much brought the company to its knees. Now it’s trying to re-energize itself as it transforms from a VoIP provider focused on cheaper voice services to a VoIP provider with a package of broadband capabilities.

When Vonage started, people needed a cheap voice alternative that voice-over-IP provided. That vision was changing before the company was distracted by a series of devastating lawsuits. Now it’s coming around again to recognize that today’s consumers can get cheap phone almost anywhere; they want features and services that make that voice more attractive, said Jeffrey Citron, Vonage chairman.

Vonage cut a wholesale DSL partnership deal with Covad and is preparing to launch a “prosumer” offering, Vonage-Pro, that takes the VoIP provider’s base products into the commercial space for business users.

“We have quire a few customers who call up … looking to buy the Vonage voice solution but they don’t have broadband. This led us to talk to Covad about wholesaling their platform and then putting together a Vonage bundled with allowed these customers to buy both digital voice and the broadband they’re asking for (and need for VoIP),” Citron said.

The partnership with Covad gives Vonage a nationwide broadband footprint so it’s no longer dependent on marketing to customers who already have DSL service, generally attached as part of a phone bundle, or cable modem service, which increasingly is bundled with digital voice. It also opens up a market of satellite subscribers who have no high-speed Internet or voice bundle.

“We’ve been talking to them about it for quite some time and we’re thrilled they’re finally ready to go to market with broadband,” said Lisa Graham, senior vice president and general manager of Covad’s wholesale division.

To be fair, Vonage has been a bit preoccupied. The company was hammered by multiple copyright infringement lawsuits from the likes of Verizon, AT&T and Sprint and took a beating in court. For a time, it appeared it was over for Vonage, but about this time last year the company developed a new strategy on which to focus and start anew. Since then Vonage has recorded three straight quarter of operating cash flow and positive EBITDA for two quarters said Citron and is working on a proposal to refinance its debt.

The company announced what Citron believed are good first quarter results.

“There was a point when I first took over after the loss of the Verizon (patent) case and there was a lot of uncertainty in our future and there were a ton of things we had to fix,” he said. Those were not minor fixes: “Fix the fundamentals of the business, fix marketing, fix cost management, fix customer care then strengthen the core relationship with the customers and grow from that core. Today’s announcements with Covad and Vonnage-Pro (demonstrate) we’re starting to get good traction in the marketplace and that’s going to lead to accelerated growth in the second half of the year. At this point we have a lot of the historic problems behind us.”

Vonage-Pro is ahead, providing a package that bundles most residentially oriented Vonnage services and features into packages for business consumers.

The company is also going to spend money, he promised.

“This past quarter we spend about 27 percent of our revenue on marketing (and) we expect at the end of the year we’ll be spending between 30 and 32 percent. The company has $150 million in the bank and we’re going to use that money,” he said.

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