psyclepump

Vonage Churning Subscribers, Stomachs

Vonage seems to have a real problem now - non-strategic investors don't like them anymore.

With better market positioning, they can start to compare themselves to the cable/fios and they still have a strong value proposition: more features to help you be more effective. They may actually be in a superior position since their patent settlements give them open license for their current technology that they supposedly ripped off from entrenched telcos. No single telco can provide the same package as Vonage or they will face similar lawsuits. Since VG has already settled, this means they can continue to operate, whereas a competitor has to develop that technology from scratch. If those features represent value to the customer, then there is some intrinsic value to VG beyond the customer base.

Ultimately, VG is a strategic acquisition if they can prove this value. Big if, and it has to occur before some new technology wipes out their comparative advantage. Longer battery life in a cell phone is one advantage that will spur the transition to all cell phone life. But let's face it, people's consumer preferences are not homogeneous and choice of telecom is also a generational issue.

Ironically, they still face the same inertia from potential customers, that is, "Will Vonage work if I switch from my normal (POTS or VOIP) provider?" People who have taken the plunge to trust Vonage love the features and what this allows them to do.

There is the whole other issue of more intelligent VOIP, like what you can get from a business class VOIP system. They could look to acquire another company in this space, but with their "currency" so depressed this looks unlikely.

I don't think Skype or MagicJack presents any real competition. It is just not the same customer experience. Vonage is easy, and you can use the same old phone. Plus it has features, which gives it more value than the other VOIP choices.

So VG is a small permanent call option in the hope it will be acquired by some larger telco to get instant customer of ~2.6m plus technology. I think I saw that one customer is worth $375 to the telcos. And that is close to what Vonage pays to acquire in terms of marketing costs. Add a small premium for the cost to replace (or defend) its IP and you get a valuation north of $1B. I am sure that someone will discount this figure for integration costs and lack of marketability for its shares and so forth. I dunno. But at current capitalization structure, that amounts to about 5.42 per share. Just some thoughts.

The Convertibles Collapse Offers Investment Lessons for All Investors

Excellent Analysis. What other asset classes are out of balance?