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VoIP Still Giving Investors a Busy Signal

Vonage and Skype have yet to turn a hot technology into shareholder value.

Maybe some ideas that can transform industries and change how we communicate aren't destined to make investors money.

Take voice-over Internet protocol, or VoIP. By allowing callers a nearly free option to make long-distance calls, VoIP was supposed to find fast adoption and undermine a key source of revenue for the giant phone carriers.

And considering that


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Skype unit has 171 million users, nearly 90% of them outside the U.S., the quick adoption part of that prediction, at least, is coming true.

But as eBay CEO Meg Whitman admitted during the company's recent earnings report, "While Skype continues to experience stellar growth in terms of its user and adoption rates, the monetization efforts we outlined at the time of the acquisition are not developing as quickly as we had hoped."

Skype's revenue in the fourth quarter of 2006 was $66 million, up 33% from the previous quarter. The good news is that revenue grew faster than the 26% increase in subscribers for Skype, which means eBay is getting more money per subscriber.

The bad news is that it still isn't very much money. At 171 million subscribers, Skype brought eBay 39 cents per subscriber. eBay's marketplace business, which boasts 220 million subscribers, brought in net revenue of $1.24 billion, or $5.64 per subscriber.

Skype may open up eBay to more customers, especially abroad. And it may offer intriguing opportunities to integration with auctions, retail and PayPal. But it's not what you'd call a cash cow today.

More evidence of VoIP's poor returns for investors came on Thursday, when


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delivered its fourth-quarter earnings. While the company's loss of 42 cents a share was smaller than a year ago and in line with analyst forecasts, there was plenty in the financial numbers to discourage investors.

Vonage's earnings report sent its stock down 9% on Thursday to close at $5.30, a new record for its closing price. Much of the selling was prompted by discouraging guidance for the coming year. (The shares were recently at $5.44.)

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As Scott Moritz pointed out in

his coverage of Vonage's earnings report, the company is calling for total subscribers to reach 3 million year by the end of this year, an increase of 750,000 new lines. That is smaller than the 955,000 new subscribers that Vonage signed up last year.

That slower subscriber growth is likely to come despite Vonage's plans to increase marketing spending to between $400 million and $425 million this year, above the $365 million it spent last year.

Dishing out more money to bring in less revenue than investors were expecting isn't a recipe for investor confidence. The midpoint of Vonage's revenue guidance range is $875 million, or nearly 10% below what analysts had been forecasting for 2007.

In the earnings call, Vonage CEO Michael Snyder said that the recent "brand-building" ad campaign that had sucked up some of the $365 million marketing budget last year wasn't working very well.

According to

Eric Savitz's blog over at


, Vonage spent $579 for every net subscriber addition in the fourth quarter, up from $445 in the third quarter and $352 in the second quarter.

That's a 65% increase in marketing per new customer over a six-month period. And now Vonage is vowing to spend even more next year for fewer new customers.

I'd be glad if Vonage simply mailed me a check for $579 to sign up for the service -- I'd do it in an instant. According to the home page of Vonage's Web site, a year of local and long distance calling is $24.99 a month, or $299.88 a year. So if Vonage gave me $579, I could use their service for two years for less than the cost of one month's subscription.

Instead, that money is being wasted on commercials that the company admits aren't working.

Perhaps Vonage could eke out a profit if it managed its marketing budget and other expenses a little more judiciously. But the disappointing performance that eBay has seen from Skype suggests the problems may be broader than Vonage's spending strategies.

For both Vonage and Skype, the companies are signing up subscribers, but the economies of scale seem to be undermining their hopes for strong revenue and profit growth. Raising monthly fees is one option, but that would surely scare away many current subscribers.

VoIP companies that have to answer to public investors, either directly like Vonage or indirectly like Skype, must get creative about generating revenue and profit growth. If they don't, the technology will be quickly dominated by other companies that can roll it into a suite of services.

Who are those companies? Cable providers and the phone carriers that VoIP was supposed to undermine.