Vonage’s Bain,VoIP’s Pain

For those of who have lived through the bubble of the late 1990s very well know that there is something called dumb money. And in many cases it was the likes of Bain Capital, who were glad to provide that. Hello again … for now they have jumped into the fray with a massive cash infusion into Vonage, which just raised another $200 million from Bain and previous investors who have upped their ante. (More details here on Business Week’s Deal Flow blog!) Just in case you forgot, Bain Capital was one of the late stage funders of WebVan, and you know what happened there. Global Food Exchange and Interpath anyone.
SiliconBeat is impressed and sum it up succinctly in one word: balls. (Word!) Balls are for sports, not for investments, but hey that’s just me. Matt (thanks for the links!) goes on to pose all of the important questions: “Is this really just an outrageously aggressive land-grab? Or are they going to buy up other VOIP companies? Or is this to assure big corporate customers they’re big enough to stay the course? Or all of the above?”
My attempt at answering those questions: Corporate customers can stitch their own network, they just priced themselves out of the acquisition market, and the only option is an initial public offering. Business Week suggests a 2006 IPO, and it will be sometime before the investors can fully liquidate their holdings. By 2007, the incumbents would have everything in place – to launch a fierce counter attack.
The latest round of non core money flowing into Vonage is the first sign of VoIP froth. I expect more dollars to flow into this nascent market – just like it did into the @Home and other early DSL providers – and it will once again evaporate into thin air. It is interesting to see what yardstick the new investors are using for Vonage – even by most optimistic estimates this is a highly risky investment. The total residential market for 2008 is being forecast at about 20.8 million lines by Infonetics Research.
With Cable operators growing the way they are right now, it is going to be hard for Vonage to retain its pole position. (Sure they are the undisputed champs for now, like Yankees were in 1999. Yanks are last in the AL East with a $200 million investment.) Comcast wants 4 million lines, and the other three carriers are not too far behind – and if these guys can carve out 15 million lines, what’s left on the table is scraps. Over which many will be fighting. Notice, I have not even factored Bells into the equation. Then there is the whole issue of 3G wireless. It is all about voice – cheap, and tons of voice minutes – and that means that independent VoIP Service Providers will have a lot to content with. And then there is Skype! Not to mention the quality issues that incumbents can create for Vonage on their pipes. The biggest problem Vonage and others of its ilk are going to face is the increased and more more brutal scrutiny from FCC.