So Vonage is filing an Initial Public Offering. What does this mean for the VoIP business? Are they a good IPO prospect? Would purchasing Vonage stock be a good idea? Is the IPO irrational exuberance?

Well, let’s look at some facts.

- The VoIP business is the real deal. Broadband phone service is here to stay, and digital media delivery over IP is the new standard. Vonage’s IPO doesn’t directly prove this, but it certainly helps quiet the naysayers who still don’t believe in the concept of everything running on IP.

- Vonage is NOT a conventionally appealing IPO. Sure they have amazing revenue growth, but it has come at a huge, huge loss. The company has never posted a profit, and its marketing budget alone was higher than its operating revenue in 2005. If I’m a Wall Street prospecter, I’m not exactly jumping for joy. $250 million bucks? Vonage may rip through this cash before you can blink. Let’s hope the revenues follow.

- Despite the negative financials, including Vonage (and 8×8??) stock in one’s portfolio is a good idea, and here’s why. Vonage has pushed IP telephony into the mainstream and consumers recognize it as a brand leader in the sector. Vonage is considered by many mainstream consumers to be “the new phone company”, and, unlike the previous generation of CLECs who couldn’t offer any unique value, folks actually recognize the distinction between Vonage and Ma Bell. Also, compared to blue chip telecom stocks, which are going to get beaten down by fleeing revenue streams (fleeing to companies like Vonage), big telecom union contract costs, bloated legacy equipment costs, and ancient telecom regulations that are largely tripe, Vonage’s stock appears to have much upside potential. Vonage didn’t have to drop 2 billion dollars in order to capture a user base either (ie. Ebay buying Skype); Instead, Vonage’s users base is 100% paid (unlike Skype’s) and paid at a premium (remember, Vonage is charging 5 bucks a month more than many of its competitors).

- This IPO isn’t exuberant. In order to be irrational, we’d have to be talking about a money-losing outfit (which Vonage IS) which has a non-traditional business plan (which Vonage ISN’T) and which cannot be described in terms of upside potential (which Vonage ISN’T). Two out of three ain’t bad.

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Most every time that a corporation files its intent to publicly trade its stock- as Vonage did yesterday- the company has to include a “Risk Factors” section in its Securities and Exchange Commission filing.

Think of “Risk Factors” as a type of disclaimer- not unlike the ones you see on those 60-second pharmaceutical ads where a recitation pretty much anything that could ever go wrong is added to the script. You know: hives, migraines, you-know-whats (as if) lasting more than four hours.

Or, those “in the event of a water landing” recitations you get at the start of a flight that will cross no water deeper than a farm pond.

With those “could happens” in mind, I wanted to see what Vonage thinks their risk factors are. I checked the filing, and oh, there are many.

First, the boiler-plate pre-amble:

“An investment in our common stock involves a high degree of risk. The following risks, as well as the other risks discussed in ‘Risk Factors,’ should be carefully considered before participating in this offering: (indents are Vonage’s comments, boldfaced outdents are mine):

Our history of net operating losses and our need for cash to finance our growth;

Yes, they have been losing money, and are paying several hundred bucks for each new subscriber they sign up. Yet since they only get about $24 or $25 bucks of revenue for each subscriber, their return on investment for subscriber acquisition marketing falls into the several-year time frame.

The competition we face, including from companies with greater financial resources;

Like, oh, let’s see: Verizon, AT&T, Comcast, Time Warner, many others.

Differences between our service and traditional telephone services;

E911 inconsistencies, not owning your own transmission infrastructure, etc.

Uncertainties relating to regulation of VoIP services;

Net neutrality may not pass. Big telecom and big cable have lots of money and lots of friends.

System disruptions or flaws in our technology;

Bugs, security concerns, and stuff that cannot even be anticipated yet.

Our ability to manage our rapid growth; and

We’ve all seen companies that grow too fast, and have system performance, equipment shipping, and customer service issues as a result. For example, what if this “rapid growth” brings in lots of newbies who need quite a bit of handholding? Will phone help line wait times increase to unacceptable lengths, disillusioning these new customers and pissing off experienced users who are calling with problems?

The risk that VoIP does not gain broader acceptance.

“Crossing the chasm” between early adopters and mass acceptance is a real concern for all growing companies selling newer technologies.

OK readers, can you think of any other “Risk Factors” Vonage should have put in their filings? If you can, let us know by posting a TalkBack!

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