Vonage: Raise a Lot, Spend a Lot
According to ClickZ, Vonage spent $21.8 million in April on advertising. As Om Malik succinctly puts it: now you can see why they needed to raise $200-million in private equity recently. Clearly, Vonage believes it's in an “Amazing Race” to establish itself as one of the VOIP service providers in North America before the cablecos and carriers take over the market. Vonage CEO Jeffrey Citron knows the art of making the deal (see previous entrepreneurial success stories: Datak and Isand ECN), and Vonage is just following the formula of creating a large business and then selling out at the right price. If spending $21.8 million a month on advertising is how the game needs to be played, Vonage will follow the rules. The big question is when someone will step up to the plate and spend the $1-billion to $2-billion to take out Vonage? Frankly, I do not believe this company will ever do an IPO unless it's backed into a financial corner. Unless Vonage's balance sheet (i.e bottom line) suddenly becomes a lot healthier, it will try to avoid the scrutinization of the investment community. For the time being, you have to wonder how long Vonage will/can keep up the advertising spend. I'm thinking it will be for as long as it takes to lure of suitor and/or several hundred more thousand subscribers.
By the way, if you're at all curious about the top online advertising spender in April, it was a Tickle by Emode, which is an IQ test, that spent $23.7-million. The company Tickle is called Progressive Boink, which emerged from the ashes of Whatever-Dude.com.
June 2nd, 2005 at 10:32 am
Mark,
You hit the nail on the head. They are simply in a market share game to build a subscriber base to critical mass and then sell to highest bidder which I guess they figure will be one of the incumbent telcos who are getting into the voip market late. I heard Vonage's customer acquisition costs are something like $1000 a head. At $30 bucks a month that's almost 3 years before you move into the black. So the $200M should get them another 200K subscribers. I guess the question becomes what is critical mass in terms of a subscriber base? What is also intriguing about this is if you look at a multiple of 3-5X revenue, the numbers are not that bad. For example, if Vonage spends $200M to acquire 200K at $30/mo. that equates to $72M a year in revenue. At 5X revenue, those customers alone would be worth $360M or an 80% return on the $200M. It would be interesting to know what % of the co. the PE investors got for $200M.
Don Rodriguez
don | at | cdpllc | dot | biz