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Story URL: http://www.silicon.com/research/specialreports/voip/0,3800004463,39159130,00.htm

Vonage shares off to a shaky start
Investors sceptical of future prospects?

By Marguerite Reardon

Published: Thursday 25 May 2006

Shares in internet phone provider Vonage dropped more than 14 per cent from its initial offering price after the stock completed its first day trading on the New York Stock Exchange.

The dip could indicate that investors are wary of the company's future prospects.

Vonage shares had dropped $2.45, or about 14.41 per cent, to $14.55 at the closing bell. The company's IPO was priced on Tuesday at $17 per share, which resulted in $531m for the company.

Many on Wall Street have kept a close eye on the Vonage IPO to see how investors would receive it. And so far it looks as if investors could be sceptical about the company's future.

Vonage, which sells a service that turns broadband connections into phone lines, has never been profitable. And it has admitted that it may never be profitable, as it continues to rack up debt by increasing its marketing efforts.

The company has reported losses in every quarter since it first started in 2001. As of 31 March this year, it had a deficit that reached $455m, according to a filing with the Securities and Exchange Commission.

In addition to competing against big phone companies such as AT&T and Verizon Communications, Vonage is increasingly facing competition from other internet telephony players. AOL, Google, eBay's Skype and Yahoo! all offer free VoIP services that could compete with Vonage. But these services differ slightly from Vonage's because they are not marketed as regular phone replacements.

The biggest threat to Vonage appears to be the cable companies, which are vigorously marketing their telephony services as replacements to traditional telephone lines. Cable providers such as Comcast and Time Warner have seen tremendous growth in their customer base as they bundle their voice service with high-speed web access and TV service - so-called triple-play.

Time Warner added 270,000 digital phone subscribers in the first quarter of 2006, its biggest gain ever. And Comcast, the largest cable provider in the US, added 211,000 new phone customers during the quarter, more than it had signed up during all of 2005.

Marguerite Reardon writes for CNET News.com