Competition, Lawsuits, Failing Strategies - Is Vonage a Sinking Ship?

| About: Vonage Holdings (VG)

Vonage (NYSE:VG) was one of the companies that helped pioneer the VoIP (Voice over IP – or Internet phone calls) market, and make the acronym a household name. But now, their future is in doubt.

Last week, the New Jersey based company, after losing a patent infringement lawsuit with Verizon (NYSE:VZ), almost had the “Closed For Business” sign put on its front door – luckily, a judge gave them a "stay of execution" and allowed Vonage to continue to sign up customers.

But the fight is a ways from being over, and the company is still getting ready to do battle with Sprint-Nextel (NYSE:S) very soon in yet another patent suit.

Now the CEO has resigned and the founder/Chairman, Jeffrey Citron, has once again taken the helm.

Truth be told, Citron never really stepped down from running the company he founded seven years ago – he remained on as the Chairman and Chief Strategist as well as acting as the public face for the company.

The only reason Snyder was ever named CEO was due to pressure from investors when the company attempted to go public last year. As it turns out, Citron had a bad run-in with the Securities Exchange Commission back when he was with Datek, which called for a $22 million settlement.

So now this guy is back in the captain’s chair and trying to steer his ship around.

But the lawsuits and unethical CEO aside, Vonage has bigger worries.

It’s about to be eclipsed by Comcast (NASDAQ:CMCSA) as the number one VoIP provider.

That’s not a big surprise – VoIP services are delivered over broadband connections. Comcast (and other cable providers) deliver high-speed internet connections to peoples' homes.

These companies already have a foot in the door and HUGE distribution channels. All they had to do was smack a product together, and they could roll it out over their existing networks at a minimal investment in technology and marketing.

As a side note, this is one of the biggest things that worries me about all this buzz occurring around Internet videos. Now that set-top boxes have been standardized, what's to stop the largest cable companies from cutting sweetheart content deals with every major studio on the planet?

Especially vertically integrated companies like Time Warner (NYSE:TWX).

But that's another story ...

So while Comcast has used existing channels to build a subscriber base, Vonage, on the other hand has become the largest online advertiser in the world – a tactic the company has finally admitted to be ineffective, as it plans to scale back ad spending by over $100 million.

Then there are a number of Internet-based companies that are taking market share from Vonage. Services such as eBay’s (NASDAQ:EBAY) Skype offer similar services and use the web as a distribution channel for its systems and services.

So here’s the situation in a nutshell:

1. The company is getting hit with multiple patent infringement suits.
2. The company is no longer executing a successful operating and marketing strategy.
3. The company is being bombarded by competitors – and the competitors are winning!

Would you invest in a stock like this? Neither would I.

Even though revenue was up by a significant amount this last quarter, Vonage still needs to trim costs further, and head count cuts just aren’t going to do the trick. What this company really needs is massive subscriber growth without using its traditional advertising methods.

And even then, there’s no guarantee of success ...

When you’re no longer going up against industry giants like Verizon, but other giants such as Comcast, there’s no way you can hope to keep your head above water.

It's what the famed business strategist Michael Porter would call "being stuck in the middle."

Vonage is competing on two-different fronts and against two different sets of companies. It's like trying to fight two guys in the street at the same time – you're likely to end up on the losing end of that beating.

I mean, it’s not like Vonage invented something unique here. We’ve had VoIP calls since the late 90’s (Net2Phone, etc.).

That means that Vonage has no real competitive advantage, and in my opinion will eventually become a case study for students at Harvard Business School.

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