Why Vonage's IPO projections make service contracts likely

Big day for Vonage today. A new logo and a new outlook on life.
Written by Russell Shaw, Contributor
Big day for Vonage today. A new logo and a new outlook on life.

You see the logo on top of this post. But as to their new outlook, a Securities and Exchange Commission filing Vonage made late Friday indicated that on the strength of a growing subscriber base now at 1.6 million, they expect their stock to trade at $16 to $18 a share when it goes on sale a couple of months from now.

That sale, as well as some options available to underwriters, might generate as much as $530 million, the company believes. 

The math shows me a future strategy for Vonage that I consider highly likely.

First, Vonage has never been hesitant to plow back cash flow into marketing. In fact, from January to March this year, it spent $88.3 million in marketing, tipping the balance sheet to a loss of $72.8 million on revenue of $118.9 million.

Things are different when you are a public company, though. Large investors may tire of this tail-chase, and demand real profits.

In response to this pressure, Vonage probably won't cut down on marketing and advertising. What they will try and cut down on is subscriber churn-a problem for any technology service.

This could take the form of making it uncomfortable for all these new signees to leave. But I think that Vonage will take a kinder and gentler stance.

I envision Vonage - if it doesn't sell itself - will adapt a pricing strategy that rewards those users who sign service contracts. I see Vonage citing build-out and E911 costs as a rationale for raising prices on their $24.99 unlimited North America monthly calling plan to say, $29.99. But if you sign a one-year agreement, then maybe you stay at $24.99.

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