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Taking a punt on Vonage IPO

Despite Wall Street's slating

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Opinion Last week, analysts on Wall Street castigated the Vonage IPO, effectively driving the price down from $17 a share, to under $14 in three days. The price is now recovering a little despite their broadside.

The analysts' highly televised arguments were around Wall Street's judgement that Vonage had the wrong technology (VoIP), the wrong business model (internet), the wrong price (too high), the wrong management team (deemed too weak), and the wrong strategy (going for growth over short-term profitability).

I've never seen such Wall Street consensus since they advised us to invest in what became the internet bubble. But at that time, although the sentiment was pitched with the same passion, it was going in the opposite direction!

So being bloody minded, I feel Vonage may be worth a punt. Truthfully, us technologists have always been totally defeated by Wall Street's logic, or what appears to be a lack of it. Let's look at a few things the frenzied Wall Street analysts missed in their condemnation of Vonage.

First, Vonage grew its customer base from around 100,000 to over 1.5m in three years - a fifteen fold market increase. And it did so without missing a beat.

Secondly, on recently entering the European market, Vonage has started to become a global telephone player, successfully competing in a marketplace now dominated by geography entrapped, high priced local telephone companies.

Thirdly, Vonage plays in a well articulated niche within the telephone market - home and small business - using its low cost call tariff to dramatically undercut the incumbents' pricing. And its high feature product (including bundled internet and email access to voice mail) puts them to shame.

Its service also builds on the reality that people rely on their mobile phones first and use their "wired" phones as back up, mainly to avoid the expense of long distance and international mobile calls.

Whether connected to a home telephone (connecting the adapter to a single point on the home wiring), or used on the road via a high speed internet connection in a hotel or office, Vonage provides a low cost telephone service pivot.

Finally, Vonage has room to grow, and can do so by continuing to leverage the internet to avoid expensive infrastructure, building on exponential broadband expansion and exploiting its almost zero-cost, self-service administration model.

In my own use of Vonage's $14.99 monthly service, outages were rare, call quality was better than on a mobile phone and, even in the worst case (my internet connection takes a hit), callers still get my Vonage voice mail.

Vonage's biggest competition in this arena (apart from the large telcos) is Skype, which uses a PC rather than a telephone, so in my mind is a very different niche. And anyway, collectively, Skype, Vonage and the cable companies have less than .01 per cent of the traditional telephone market, leaving plenty of room for growth.

These positive aspects of Vonage's business - growth figures, established niche positioning, global presence, future price/profit upside - were absent from the Wall Street analysis and discussion.

In contrast, look how excited Wall Street gets with traditional technology players - Microsoft, Oracle, HP, IBM, for example. These guys work in a business space that is maxed out and crowded, desperately competing for the one per cent to three per cent of business revenue that represents the ever shrinking IT budget. They also face incredible downwards pricing pressure, and know that their differentiation is increasingly hobbled by standardisation and commoditisation.

Over the last five years, the big IT players have delivered close to zero inflation/currency adjusted growth, and some mind-numbing losses due to "transitional" write-offs. Their short-term profit and cash flow comes mainly from servicing their already installed base - this revenue stream is their anchor, and has to be sustained by endless downsizing and associated "transitional" hits to the profit line.

I'm not sure if Vonage will succeed, but the comparison between it and the old guard technology companies is amazing. More amazing than Wall Street's unbridled enthusiasm! ®

About Cormac O'Reilly: Late sixties IT industry entrant with early developer gigs in London at Abbey National, Unilever & BOC. Senior IT oil field trash in the eighties and nineties; Schlumberger (Houston TX) and Shell (The Hague). Board IT big-wig at Costain (London) before CIO/CTO at Digital and Wang Global/ Getronics (Boston). Non-exec director at two flame-out dot.coms; now spending ill gotten gains and being provocative in Newburyport, MA

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