SunRocket, Happy To Be Number 2

It should hardly come as a surprise that we remain highly skeptical of the competitive voice service provider business, especially in light of recent shutdowns and overt reliance on discount pricing as a lure for the customers.

It was the same skepticism with which we approached our interview with Lisa Hook, Chief Executive Officer of SunRocket, the Vienna, VA.-based CVSP that has also raised substantial amounts of venture capital investment. Now it is a company that has been put under the microscope by us, and others who have bitterly complained about company’s infrastructure.

Hook, talked to us about her company, and the industry in general, and why she thinks SunRocket is going to be around, despite doubting Thomases. She was quick to point out that the company has grown from 50,000 subscribers at the start of 2006 to over 175,000 subscribers.

“We are taking a long term approach to the market, and are focusing on breaking even,” says Hook, “We are not interested in growth at any cost.” It was a subtle swipe at folks like Vonage, which are spending millions on marketing.

She believes that Vonage’s madcap spending is actually helping SunRocket, because it is creating a barrier to entry for smaller players. She acknowledged that there is no barrier to entry from technical standpoint, and the only barrier is capital.

“Why do we have to be number one? We are happy being number two to Vonage,” says Hook, and explains why. In the US, the Baby Bells and cable companies are the two incumbents, with Vonage as the third “voice” option. Cable operators, for instance are bundling their voice service at about $35-to-$40 a month, while Vonage and SunRocket compete on price.

Hook argues that cable operators have decent margins on their voice business, which allows them to maintain their current market capitalization. If they cut the prices too much, their EBIDTA will decline, and the stock markets would put pressure on their market capitalization. “They are not dropping prices anytime soon,” she says, which means that if you have enough fiscal discipline, keep your customer acquisition costs in check, you can survive in this cut throat business.

She argues that the numbers are big enough for SunRocket to build a big business. There are between six-to-10 million phone lines up for grabs every year, and Cable operators can easily take half of that market. It still leaves enough for the likes of SunRocket, she argues. “We have to focus on getting cash flow positive,” she says, “And then offer more than just cut rate voice service.”

SunRocket is planning on offering new devices including phones that will allow it to offer value added services including contact management, presence and find-me, follow-me type features. More than that, the company needs to address its biggest problem: poor after sales service.

Hook acknowledges that has been a problem in the past, and the company is working hard to rectify those issues. Hook says the company has a new billing system, a new ATA vendor (Linksys) and is spending on Network to address the customer complaints. “We have moved our customer care back to US from Philippines,” she says, “And we are spending a lot of time in Missouri to keep improving it.”

So while these are all encouraging steps by the company, and good arguments by Hook, we shall watch their progress closely, before being completely convinced of their chances.