Vonage Prepares Its Exit Strategy

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The leader in Internet phone calling appears ready to cash out

THE GROWTH of Edison-based Vonage-a 4-year-old company that claims more than 1 million subscribers for its Internet telephone service-is already one of the biggest New Jersey business stories of the 21st century. Now the chatter on Wall Street is that the company is preparing to go public or perhaps begin talking to buyers.

Either route would enable venture capital firms that have poured more than $400 million into Vonage to cash out. But both strategies face potential problems. Just last week a smaller Internet phone company called Cbeyond Communications had to slash its IPO offering price when investors showed litde interest. And big phone companies and other prospective Vonage buyers like cable TV companies can easily roll out their own Internet calling service. Many already have.

Vonage executives are mum, but published reports say the company has already selected four banks to manage an initial public offering of its stock that could raise $600 million.

Whether that number is realistic is anyone's guess, says Stephan Beckert, research director at TeleGeography Research, a technology research firm in Washington, D.C. "No one knows how profitable they are or aren't-and people won't know until they file," he says. "One thing we do know: They are adding subscribers at an impressive rate and they have established a market that didn't exist a few years ago."

Representatives at the company's operations center answer questions and solve problems for a growing number of subscribers.

Some analysts say now would be the perfect time for Vonage, which announced it had reached the 1 million-subscriber mark on September 6, to go public. As an alternative, a sale of the company in the near future could bring as much as $1.5 billion from a buyer-such as one of the Baby Bells-that could then bundle the service with its other offerings, analysts say.

An IPO makes sense, says Robert Rosenberg, president of Insight Research, a Boonton-based telecom industry analysis firm. "They are venture-backed and when you have venture [capitalists], the strategy is to take the company public to make their money back," Rosenberg said. 'An IPO is not an 'if', it's a'when.'"

He considers a sale a longer shot, since the Internet phone technology can easily be replicated. An IPO, and maybe even a sale, could work while Vonage leads the market, he says. "It's a question of timing. They have ereated brand-name recognition and they have a customer base, so there is an attraction there."

Vonage came on the scene in 2001, becoming one of the first companies in the U.S. to successfully sell Internet telephone service using Voice over Internet Protocol (VoIP) to large numbers of residential and small-business customers. The company, which is headed by CEO Jeffrey Citron, a founder of brokerage Datek Online, grew fast. It has raised $408 million in venture capital and spent much of it on advertising and getting its hardware into stores like Circuit City and Radio Shack.

VoIP Subscribers by Service Provider

The company has 1,400 employees, up from 250 two years ago when it had less than one-tenth the current number of subscribers. Vonage has announced-but not commenced-a plan to move to larger quarters in Holmdel.

Vonage's incredible growth will likely slow as large telecommunications carriers such as AT&T, and cable television providers like Cablevision and Time Warner, grab more of the market, TeleGeography predicts.

Telecom carriers and cable operators are in a position to easily bundle services and offer attractive package deals, butVonage still leads with 25% to 30% of the VoIP market. While Vonage releases only consolidated North American and U.K. subscriber figures, TeleGeography estimates that at least 750,000 of its customers in the second quarter were U.S. and Canadian subscribers. Time Warner follows with some 600,000 U.S. customers; Cablevision has 500,000.

Vonage has some advantages over the competition. "In some cases, it's cheaper," Beckert says. "Its service has been more consistent than some cable providers. And it is more portable." Cable and telephone providers' Internet phone products can be hooked up only in the areas where the companies already do business, while Vonage's hardware can be hooked up anywhere high-speed Internet access is available. "It moves with you," Beckert says.

Vonage offers residential telephone service that gives users unlimited local and longdistance calls for $24.99 a month, a price that traditional phone companies can't touch for their landline service. Vonage's edge: It avoids telecom taxes because its phone calls are routed over the public Internet, not the heavily taxed traditional phone network.

Analysts say that the sound quality with Internet phone service is not as good as with land lines, but better than cellular phone service. "It occasionally has hiccups, pops or bursts of static." Beckert says. "But it's a heck of a lot better than cell phone connections."

What drives Vonage's growth? "Their status as first in the market, word-of-mouth, advertising and their aggressive pricing," says Beckert.

"[Vonage's] service has been more consistent than some cable providers. And it is more portable."

Stephan Beckert

Research director, TeleGeography Research

E-mail to sgoldstein@njbiz.com

Copyright Snowden Publications, Inc. Nov 7, 2005

Source: NJBIZ

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