With its fast approaching IPO, Vonage looks like it is barely going to make it to the starting gate. First, a really nasty article in today's WSJ called Vonage Faces User Complaints As IPO Looms. I was actually going to write about this a few weeks back, but decided against it after running the idea by a few friends. Now, it seems like I was right, so here goes...(serves me right for listening to them)
According to the article. it seems that Vonage needs a helping hand on the customer service side especially when trying to transport your number. I've also experienced problems when dialing Vonage users with the call not going through or cutting off. Also, I've encountered an old narrow-band term called "network busy" when the calls don't complete or get dropped.
I wrote back in my original Vonage post called What The Vonage about their really high marketing acquisition costs as a danger sign. Guess what? The numbers are still bad as you can read for yourself in this link to a recent filing with the SEC. Their 1Q'06 Marketing Cost Per Subscriber is a pathetic $209 which is an increase of 5.6% over same time in 2005. Maybe it was all of that direct mail the marketing geniuses decided to drop. Look, if you are bombarding the internet and TV with your bad ads and I've ignored them, what makes you think direct mail will be a good channel for me?
You know what else is a danger sign in the telecom industry? You guess it fans, high customer care costs and high churn rates. So, let's take a look at that recent filing again. You know what I see? Increasing customer care costs and increasing churn rates. Average monthly cost per subscriber line has gone from $7.83 to $8.74; that's a bad trend especially for an internet company. At AT&T we were starting to move our costs down because we pushed people to e-bills and e-care, but if you are already there... well you guessed it.
How's the churn game going for them? Well, bad. It has increased from 1.70% to 2.11% per month and that's a really, really bad trend. Why? Well, as a veteran of the mid-90's telecom wars between AT&T and MCI I can tell you that when you couple high churn with high acquisition costs, you are in a lose-lose situation as your costs spiral out of control. It reminds me of the lunch my mom used to make me in grammar school - peanut butter and sardines. I wonder what our let's get rich now folks have to say about churn; read this from the risk section:
Our rate of customer terminations, or average monthly customer churn, was 2.11% for the three months ended March 31, 2006. During those three months, approximately 77,000 of our customers terminated. Our churn rate could increase in the future if customers are not satisfied with our service. Other factors, including increased competition from other providers, also influence our churn rate.
Because of churn, we have to acquire new customers on an ongoing basis just to maintain our existing level of customers and revenues. As a result, marketing expense is an ongoing requirement of our business. If our churn rate increases, we will have to acquire even more new customers in order to maintain our existing revenues. We incur significant costs to acquire new customers, and those costs are an important factor in determining our net losses and achieving future profitability. Therefore, if we are unsuccessful in retaining customers or are required to spend significant amounts to acquire new customers beyond those budgeted, our revenue could decrease and our net losses could increase.
More customer complaints, higher churn, higher cost, and higher customer acquisition costs in a space with a lot of growth opportunity is a recipe for disaster. Like the sandwich my mom made me, I'm sure they will have a lot of lunch partners to trade with. If they end up like I did in the cafeteria, they'll just gulp it down as quickly as possible before their friends and family found out what mom actually hid in the sandwich.