Coming Up: Vonage wireless‾

For years, Vonage (VG) has built its business around one service: inexpensive Internet phone calls. Well, all that's about to change. This year, Vonage could remake itself into a wireless service provider and start selling broadband access and content services nationwide.

Vonage says it will start offering wireless services to subscribers during the second half of 2007. The company also expects to announce new agreements to resell other carriers' broadband Internet access services, as well as new content deals later this year, according to a spokesperson.

This Way to Wireless

Analysts anticipate Vonage will start providing wireless services under its own brand, as a mobile virtual network operator (MVNO), reselling another carrier's service but with its own content. The company could even name itself Vonage Wireless, to reflect a new range of services, analysts say. While Vonage won't divulge any details, it did confirm after its Feb. 15, fourth-quarter earnings call with analysts, that it will start selling dual-mode phones offering cellular as well as Wi-Fi access, in the second half of the year.

The move is not unprecedented: Norway's VoIP (voice-over-Internet protocol) provider Telio (TLIOF) began offering a mobile service in December. Another rival, Skype, which is owned by eBay (EBAY), has been striking deals to put its software onto wireless phones as well.

As a wireless service provider, Vonage might have a better shot at profitability. Rival MVNOs that already use other carriers' networks to market wireless services under their own brands, including Virgin Mobile USA and Helio, have been steadily making gains selling to youth and young professionals (see, 2/14/07, 'IPO Time for Virgin Mobile USA‾'). Vonage, in effect, caters to the same market: Many of its subscribers are young, early adopters of the latest technology.

Slowing Growth

Why does Vonage want to move into new areas‾ This last holiday season, its growth slowed thanks to packages of services offered by rivals"”cable companies such as Comcast (CMCSA), Cablevision (CVC), and Cox. Cable companies have made an aggressive push into VoIP, or Web-calling, grabbing 67% of the market by the end of 2006, according to Telegeography.

As a result, while companies such as Comcast added more phone users in the fourth quarter of 2006 than in the same period of 2005, Vonage saw its net line additions, at 166,267, plummet almost 20% from 2005's fourth-quarter levels. The company still managed to add a net 975,073 new lines for the full year, which was more than it added in 2005, but the fourth-quarter trend worries analysts.

The holiday season slowdown 'gets at the heart of [what Vonage was supposed to be about]"”a fast-growth company,' says Clayton Moran, an analyst at Stanford Financial Group. 'Its growth is slowing already. The initial subscribers were early tech adopters. But that market appears to be largely tapped. They are finding it more difficult to have success in the mass market,' which prefers bundles.

Diversification Strategy

The company needs to start offering bundles of services for consumers and small businesses similar to those already offered by telecoms and cable companies, says Will Stofega, an analyst with consultancy IDC.


A small business should be able to use Vonage for Web hosting, broadband access, and VoIP. 'The basic phone service is an important part of that, but you need to spruce it up,' says Stofega. Vonage has begun rolling out new devices, such as its V-Phone, that appeal to business users (see, 2/5/07, 'Vonage's Peculiar V-Phone').

Consumers should eventually be able to buy wireless service, Internet access, and, perhaps, TV programming from Vonage as well. Vonage has resold Charter Communications' (CHTR) broadband access to customers in Charter's territories, including the Los Angeles metro area and Tennessee. The company is working on similar resale deals with other Internet service providers.

Vonage is also looking at offering new content as part of its bundles. Small businesses, for instance, might be able to look up stock quotes or news headlines. Services similar to its Valentine's Vonage-grams might proliferate as well: This Valentine's Day, more than 20,000 customers sent their loved ones a pre-recorded poem coupled with a short personal message through Vonage.

Vonage's diversification plan isn't without risk. The company may have trouble matching cable's extensive bundles, particularly the TV programming, and prices. And as Vonage tries to differentiate its services, operating costs could rise, says Albert Lin, an analyst with American Technology Research. Marketing costs might rise, too, as Vonage tries to spread the word about the new offerings. During the Feb. 15 earnings conference call, the company's executives, however, promised to lower their customer acquisition costs, which ballooned 25% year over year, to $306 per subscriber, in the fourth quarter. That may be a tough promise to keep.

Kharif is a reporter for BusinessWeek Online in Portland, Ore.

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