Precarious Positioning-Learn from Vonage

Precarious Positioning-Learn from Vonage
By Thomas E. Ambler

Since opening their doors in 2001, Vonage has taken a very costly journey to become the leading player in VoIP (Voice over Internet Protocol) communication services. We can learn much from their experience, hopefully avoiding the tendency to take cheap shots at others' judgment based on our 20/20 hindsight. To be as even-handed as possible, we will focus mainly on their decision to play the hand that was dealt rather than the way they have played it.

Background on Vonage and Its Competitive Environment

Offers a flat-rate per month service over broadband using a standard telephone set with a purchased analog-to-digital converter
Service includes voice mail, call interrupt, caller ID, long distance calling etc. offered at no additional charge
Early equity of $65 million from founders, later supplemented by $35 million of venture capital
Dramatic growth rate (see graph)—4-year average over 200% per year

Entered into an alliance with Office Max to sell the hardware
Initiated an IPO in February, 2006 to raise $250 million
Stock price has dropped dramatically (around 50%) in the weeks since the IPO, even to the point that the stock was given a hold rating by Citigroup, one of its lead underwriters
Has yet to turn a profit and is currently bleeding at a rate in excess of their record revenues
Has experienced a very high customer churn (turnover) rate
Monthly flat rate prices of all forms of voice phone services have been steadily declining
As many as 60 direct VoIP competitors—12 perched to do their own IPO
One of the largest direct competitors is Skype, recently acquired by eBay to provide free voice communication on-line to facilitate eBay's more complex and risky transactions-has just announced free phone service to any US phone (not just to other Skype users)
Internet access provider Earthlink has just announced unlimited phone service with its fast Internet service
Large cable companies like Comcast, Time Warner and Cablevision are offering inexpensive phone services to draw consumers to their cable and high-speed Internet services

Overall it appears that Vonage is in a pickle.

Let's take a look at the difficult hand Vonage chose to play, generalize on it and see what broad strategic insights we can glean.

Favorable for Success:

Found a way to dramatically reduce the price to the consumer by exploiting a free and ubiquitous utility, the Internet, and took advantage of the brick-and-mortar telcos who have little appetite for cannibalizing their own revenues
Initially found a rapidly growing niche market that was below the radar screen of the communications giants
Picked a flexible product technology with short time-to-market
Garnered sufficient capitalization to ''do things right'' and penetrate the market quickly
Built brand identity and share dominance in the VoIP niche in a short period of time (unfortunately this is the closest they come to having a barrier to entry)
Built an Internet ''community'' (1.6 million subscribers) that can be a strategic asset for some other Internet enterprise they choose to enter (like eBay/Skype)
Sought out strong strategic marketing partners like Office Max to gain complementary strategic competencies and customer bases

Unfavorable for Success:

Chose a market where success would inevitably take them head-to-head with the core business of giants (e.g., the telcos and cable companies) who can squeeze them by offering Vonage-type services essentially free like eBay
Entered a very large commodity market in which their only differentiation was a low price advantage that was not sustainable due to likely competitive response from direct and indirect competitors
Entered a competitive arena where they knew that supplier consolidations, inherent technological turbulence and the convergence of major electronic technologies like TV, computer and telecommunications would likely spawn powerful and sometimes surprising competitors
Accepted a weak position in the supply chain—they are vulnerable to all competitors who either offer a broader line of services (e.g., Earthlink) or have customer intimacy (like the physical telephone or cable connections to buildings of Verizon and Comcast)
Chose a business model dependent on high volumes at unit margins that will likely never exist, given the competitive environment
Selected a market with low barriers to entry for direct competitors (other VoIP providers)
Committed to high marketing cost due to a super-fragmented market where every consumer is a separate buying entity, has very low switching costs and no reason to be loyal
Failed to position themselves to be a prime acquisition candidate on desirable terms

Can Vonage be a long-term winner by themselves? What would we recommend they change to make their future positioning less precarious? Should they have entered the VoIP business in the first place? Neither they nor we can change their past. However, we can choose to learn from it and raise our odds of selecting a winner as our next market opportunity. Identifying a growth market is not enough. We must also avoid precarious positioning, and that requires understanding all of the external forces that determine market dynamics.

Tom Ambler is a Consultant with Center for Simplified Strategic Planning, Inc. He can be reached via e-mail at

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