Saturday, May 21, 2005

Industry insiders estimate Vonage

Andy Abramson - VoIP Watch



will have to spend $60 million just to get E-911 up and running and about two million a month to keep E-911 working for their customers.
While Paul thinks this is a victory of sorts and that Vonage will be the winner over the other VoIP providers in the USA. I politely disagree as the cost and added burn rate to Vonage is a burden they and the other early stage companies all have, which companies like AT&T, Verizon and the cable operators don't have. If Vonage and the other newcomers have not factored te expenses into their budgets, then their previous multi-billion dollar range valuation are likely to flatten faster than the dot.com bubble. As a matter of fact all of this and what follows speaks directly to the valuation of VONAGE and other VoIP players who have to either buy or build E-911 capability into their system.
First this just added dollars to the cost of acquisition of customers, something Vonage already has, which is reportedly one of the highest in the VoIP industry.
Second, as they grow, they have to make sure each and every customer is E-911 active, or incur the wrath and costs associated with FCC administrative actions, hearings and sanctions. In this regard, you can bet, given the fact that at least three states now have open investigations going regarding their past E-911 faux pas, that others are likely lining up with copy cat efforts and that contributes directly to burn rate.
Then there is pending litigation. Smart money says the possible negligence in Texas law suit when filed will be a paltry sum compared to the Florida infant death. Vonage would be smart to settle both before the 120 day period is up, and to keep the settlements sealed. If those cases go to court, then they and the entire VoIP industry go on trial, and the cable companies and RBOC's get cannon fodder to work with every day the cases are in the news.
Lastly, if Vonage cost per acquisition is now in the $500 or so range per subscriber, factor in another $36.00 per year before laid in cost to add the E-911 service. If that's the case add $3.00 a month to the base billing and remove that from potential income or revenue streams because it's money in and out, with no positive movement to the bottom line. At five years that makes the CPA closer to $700, a number some would likely argue is closer to what it really is today.
As such, if it would have taken four to five years for Vonage to pay back the CPA (cost per acquisition) of a customer, add another year. Given Vonage also has churn, add at least another three to four months, to that period, before a customer starts making Vonage money.
So while Paul makes a good point, and I agree Vonage has a war chest, I think other companies are more likely to rise as the purchasers of the companies that know how to do thinks right before Vonage gets grabbed due to too many overhanging clouds of doubt right now.

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