Vonage Hope Vaporizes

The flop of the Vonage(VG Quote) IPO is only the beginning of the troubles facing the Internet phone company.

Shares of Vonage opened with a thud Wednesday. Vonage posted the biggest decline of any IPO during its first day of trading this year, according to the research firm Deallogic. Shares fell 13% to $14.85 after pricing late Tuesday at $17.

"People may have been hesitant to buy into a hyper-growth company losing so much money," says James DeStefano, an analyst with Renaissance Capital, which invests in IPOs. "People are looking longer term at the risks of this company, at the growing competition."

Internet voice service is increasingly being offered by large Internet, telecom and cable companies at little or no cost. In fact, eBay's(EBAY Quote) Skype and other large companies are now offering some of their Internet phone services for free.

"We are really in a race to zero," says independent consultant Jon Arnold of J Arnold & Associates in Toronto. "The real money in this play is in the video. Voice is the sweetener."

Verizon (VZ Quote), which is making a huge push into the television market, recently cut the prices on its Internet phone service. Comcast (CMCSA Quote) and Time Warner's(TWX Quote) cable unit also are trying to gain phone customers.

Vonage is already feeling the effects of competition. As of March 31, Vonage had an accumulated deficit of $467.4 million. First-quarter revenue from its 1.6 million customers was $119 million.

That financial performance, coupled with the growth in competition for video, was enough for David Menlow of Iporesearch.com to urge his clients to take a pass on the Vonage IPO.

"The money isn't going to be in voice over IP," he says, referring to the technical name for Internet phone service. "If Vonage had something that was totally unique, we would have taken a different tone."