Vonage Facing Trouble: Falling Shares, Possible Lawsuits, and Fierce Competition

The theory is that you have to spend money to make money, and Vonage has followed that theory to the hilt. Their marketing campaigns have acquainted millions of television viewers with the company, and their online spending continues to pump ads to Internet browsers.

It's this very tactic that has caused the company to operate in the red since it opened in 2001. Add to that the falling shares, more than 30% drop since Vonage's debut, possible lawsuits, and some fierce competition, and you end up with a company that is staring in the face of coming storms.

Shares and Lawsuits

The Internet phone company, Vonage, debuted in the stock market as the year's biggest failure. Falling shares and reports by analysts like Richard Greenfield from Pali Research urging shareholders to sell have put a cramp on Vonage's finances for some time, and the negative media generating attention to Vonage isn't boosting hopes of rounding the corner.

In a report Richard Greenfield released, he said that his recommendation to sell Vonage shares revolves around the rise in customer cancellations and still-higher marketing expenses. "Despite our increase in rating, we remain concerned that near-term results may be impacted by higher churn and/or marketing expenses resulting from the troubles surrounding the IPO's directed share program and the negative media attention Vonage has received since their IPO."

The latest backfire the company is facing is all about those shares. When Vonage filed their prospectus with the Securities and Exchange Commission and emailed prospective participants, their goal was to boost customer loyalty. Instead, the email they sent failed to contain a link to the prospectus itself, and has raised concerns that the email offer and the first page of a website about the initial IPO offering (vonageipo.com) could be an illegal offer in violation of securities laws.

Vonage's share prices tanked after the IPO.

Because of the mistakes made in the IPO offer, some customers who participated in the program may be able to seek damages and require Vonage to buy back shares at their IPO price of $17 per share, The Wall Street Journal reported. A huge loss for the company that allowed approximately 10,000 customers to take part in the offer; current shares are about $6 less than the price these customers paid.

Strong Competition

As technology continues trying to adjust to the demands of its users, the forms that Internet phone service has taken evolves on an almost-monthly basis. Instant messaging programs like AOL Instant Messenger, and Yahoo! Messenger have gotten in on the game, providing the ability for users to call telephones from their computer. Phone and cable companies with a strong hold in the loyalty of their customers and well-versed in marketing tactics also prove to be strong competition, offering all-in-one packages that include voice, Internet, and entertainment.

Perhaps Vonage's strongest competition, though, are Google and eBay's Skype service. Skype, in particular, has made a massive run on the competition by releasing two things Vonage hasn't: free service, and telephones available in every local department store with the Skype brand all over them.

Unlike Vonage, Skype hits the Internet phone service in a variety of ways. It provides free computer-to-computer services, instant messaging services, SMS, and - until the end of the year - free computer-to-phone calling anywhere in the U.S. What this means is that anyone with a free Skype account can dial up any U.S. number and talk as long as they want for free. No long-distance charges, no calling plans ... you're paying nothing but your normal Internet bill.

Vonage also provides traditionally-styled phones that customers can pick up at their local Wal-Mart, for example, but they refuse to redeem offers (like the first month free offer they give standard to users who enroll online) to customers who enroll offline. Skype, free to begin with, has cashed in on the popularity of slim cell phones and styles their product after the same thing.

As troubles continue to grow for the company, experts predict mass customer defections due to dissatisfaction. The weak IPO has already seen a serious negative impact, but the stronger impact on Vonage's already-troubled finances may come from customers turning to the competition.