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Internet telephone pioneer Vonage heads for Internet-size IPO
By PETER SVENSSON
AP Technology Writer
The Associated Press
Vonage (News - Alert), the company that popularized the idea of using broadband Internet connections for phone calls, is set to go public this week at a price that appears to be drawing in plenty of investors, but skeptical glances from some analysts.
As a small but well-funded company, Vonage Holdings Corp. has set the pace in the market for voice over Internet Protocol, or VoIP, but its future is far from assured now that the giants of the telecommunications industry, in particular the cable companies, have started getting serious about the business.
The Holmdel, N.J., company is expected to sell 31.25 million shares in its initial public offering, with trading to start Wednesday on the New York Stock Exchange under the symbol "VG."
The company expects to get $16 to $18 per share, an estimate it reaffirmed in a regulatory filing Monday. The actual IPO price is expected to be set Tuesday night, and could still fall outside the estimated range depending on demand.
Interest in the IPO appears strong, according to analyst James DeStefano of Renaissance Capital, which tracks IPOs.
"It's coming at a pretty attractive valuation ... people are attracted to growth," DeStefano said.
Vonage has added customers faster than any other VoIP service, thanks to a ubiquitous Internet advertising campaign. Its banner ads feature pictures of attractive women or the message that "No Nerds" are needed to install Vonage's phone adapter, which routes calls over a broadband Internet connection.
If the shares price at $17 each, the value of the entire company would be $2.6 billion. The company had 1.6 million subscribers on April 1, meaning the upper end of the IPO range values the company at about $1,600 per subscriber. It's a high price considering it charges the bulk of its subscribers $25 a month for unlimited calling to the United States, Canada and parts of Europe.
By comparison, major cable companies that are rolling out their own Internet-based calling plans are valued at about $2,000 per subscriber, even though they have valuable infrastructure and vastly higher revenue.
The cable companies were relatively slow in offering voice services, but now have substantial traction: Time Warner Cable, part of Time Warner Inc., is the largest VoIP provider after Vonage, with almost 1.4 million subscribers.
Vonage's valuation assumes that the company will keep growing rapidly. DeStefano estimates that the IPO price is just $600 per subscriber, if calculated by the number of subscribers Vonage is likely to have next year.
That's not out of line, DeStefano said, with other growth companies like satellite radio broadcasters.
Another point of reference: 8x8 Inc., the second-largest noncable VoIP company, is valued at about $730 per subscriber.
The cable companies may have more room to grow than Vonage. They charge more than Vonage for voice service -- $30 and up as part of a bundle -- but also provide installation services, while Vonage simply mails a phone adapter to new subscribers with installation instructions. The adapters also can be bought in stores.
Research firm TeleGeography notes VoIP services from independent providers like Vonage mainly appeal to early adopters, while cable VoIP appeals to a more mainstream audience.
Vonage is also in the awkward position of being dependent on high-speed Internet access provided by its competitors, the cable and phone companies. The Federal Communications Commission has prohibited blocking of VoIP by Internet service providers, but there is some concern that more subtle means could be used to degrade service.
Richard Greenfield, a cable industry analyst at Pali Capital, believes the IPO would be attractive only below $10, due to competition not only from the cable companies, but from computer-based calling services like Skype (News - Alert).
Skype was bought by eBay Inc. last year for $2.6 billion, and it then had 54 million registered members, far more than Vonage. It now has more than 100 million members, but derives little revenue from them. It charges nothing for computer-to-computer calls and low per-minute fees for calls to the traditional phone system.
Skype adoption has been fastest overseas. In an attempt to crack the U.S. market, it recently made calls from its software to cell phones and landlines in the United States and Canada free.
Skype charges subscribers if they want to receive calls from the traditional phone system. AOL, another subsidiary of Time Warner, just introduced free inbound calls to users of its Instant Messenger.
An unusual feature of the Vonage IPO is that the company has set aside up to 13.5 percent of the IPO shares for its customers. It notified customers by e-mail, and in some cases, by voice mail to their Vonage numbers.
It may be the first time a company has promoted its IPO to customers via voice mail, and it gave some recipients the impression that they were being spammed or that the company was desperate for their investment.
DeStefano said the allocation of shares to customer was more likely a goodwill gesture by the company, which shouldn't have a problem selling its shares through traditional channels.
The voice mails apparently stumbled in another way: Vonage said Monday that the messages did not include a name and address from which a prospectus could be obtained. It could be seen as violating complicated Securities and Exchange Commission rules on IPO marketing, but the company believes it has "meritorious defenses" against such claims.
Longtime Vonage user Mark Aridgides in Burlington, Vt., has applied to get 4,000 shares through the customer allocation program but doesn't see it as a long-term investment.
He plans to watch trading closely on Wednesday to see if there's interest from the big financial players in the deal. If not, he may dump the stock quickly.
Using Vonage "saves us a ton of money," Aridgides said. "Whether or not they can make any money doing it, that's the big question."
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On the Net:
http://www.vonage.com
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