Wednesday, May 17, 2006

Skype Free Call Offer "F-ing Brilliant" Vonage IPO-Killer?

Russell Shaw of ZDNet shared a rather astute observation on a possible link between the recent Sype "free call" offer and the impending Vonage IPO. Doesn't look like Skype's move is by coincidence.

Skype Free Call Offer "F-ing Brilliant" Vonage IPO-Killer?
Russell Shaw

Yes, F(Financially, wink wink)-ing brilliant, indeed.

Former hedge fund manager Andy Kessler thinks that Skype's introduction of free calling within the U.S. is an effort to "toy with the mouse" before you kill it.

And writing on GigaOm, Kessler thinks the mouse is Vonage.

"The buzz on the Street is that the Vonage IPO is on the rocks. They HAVE to raise money or they are in a world of hurt," Kessler writes. "Their investors don’t want to put another penny in and the company seems to still be bleeding cash, $75 million in the first quarter of 2006. Geez, Vonage is begging customers to buy 20% of the deal - not a great sign.

"What better way to do away with the Vonage IPO and raise their cost of capital then scare investors even more," adds Kessler.

To make his point, Kessler does the math.

"At Skypeout = zero, its infinite minutes. The value of what Vonage provides has just gone from $25 per month to somewhere close to $0, goose egg, nada," he writes. "Tough to get a return on equity with those kind of numbers.

"F-ing brilliant," adds Kessler, saying that he would like to shake the hands of the person that thought this out.

Well, it may not be eff brilliant, but it is smart.

Still, I have to wonder, what does Skype do at the end of the year, when this promo is supposed to cease? How can it dare to sunset this offer when even cheaper calling plans are sure to be in play?

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I've been saying for sometime that Vonage is built on an expensive marketing campaign with an annoying jingle....not a strong product, infrastructure, customer service, and management leadership which is where longevity would come from. The reality is that their bleeding money doesn't bode well for being around in their current form for long. If they survive at all they're likely to be gobbled up by some enterprising Telecom (hmmmm.....can you say SBC?).

In fact......it is being reported that Vonage shares will be offered to the public via their IPO at a projected $17 a share. But it appears Vonage does not believe the Value of these shares will increase in the short term. In fact,the opposite is projected to happen:

"As a new investor, you will experience immediate and substantial dilution," Vonage points out in their Prospectus. Geez....they say the actual value will actually turn out to be something like $2.78 per share!! That's a HUGE drop in value.

Now what idiot is going to invest in THAT!

Like I've been saying for a long time. Vonage sucks. For stability and staying power....go with Packet8.

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