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Arm wrestling with the giant telcos

It may have looked easy for Vonage, the broadband phone company that has been tearing up the rules of the US telecommunications market over the past couple of years, but Jeffrey Citron, its impossibly young looking chief executive, insists it was not.

OK, so the company has gone from a standing start to 700,000 customers in the space of three years, establishing itself as the leading broadband phone provider on the way. And its success may have allowed it to launch international operations first in Canada, and then last month in the UK, and investment might be flowing through the door like a flash flood every time Mr Citron puts his hand up.

But it has been far from easy. Most telecommunication start-ups of the last 30 years have not, for example, had to contend with this problem: “Our first big challenge was just, like, getting a dial tone.”

And after a dial tone: “Getting a phone on the table and making it ring, And after making it ring actually talking and making voice paths. Paths of calls. And then the big challenge came when I said, ‘I wanna take this phone home, right, to my house and I’m gonna pick this phone up and it’s still gotta work. And it worked!”

Vonage is the fastest growing wireline telecommunications group in the US, where in the last nine quarters it has added more new subscribers in each three month period than any other provider. It is terrifying the established carriers by threatening the very foundations of their business models with a flat rate all-you-can-eat offering that is having the same sort of impact on consumers that a honey pot does on bees.

And Mr Citron knows it. If there is any single attribute shared by the new breed of broadband entrepreneurs springing up in the US creating a second wave of internet businesses it is a supreme self-confidence and the willingness to express it.

In the chief executive of a more established business this might comes across as arrogance, pomposity or in many cases bravado, but in the case of Mr Citron and his ilk, it appears the fearlessness and certainty of youth.

He has needed all of it.

“When we told people what we were doing, everyone in the world told us this will never work, and so when we got to 10,000 customers signed up by the end of 2002, people told us we’ll never get to 25,000, and of course we’ve got there, and then 100,000, a quarter of a million and now 700,000 and climbing.

“So I think people have gone past the issue of whether it’ll work or not. It works really well and people are pleased with it,” he says.

Not everybody is pleased with it, of course. Vonage has got incumbent operators on the run, or at least those who have taken their heads out of the sand long enough to realise that a competitor operating a flat rate service over IP networks spells the beginning of the end for the pay-by-the-minute communications world that has poured gold freely into their coffers.

In Vonage’s home market the US, where Vonage fights on a low price ticket against cable operators and traditional carriers, AT&T has responded by launching its broadband service, but Mr Citron is almost contemptuous of its impact.

“AT&T put a big stake in the ground to getting a lot of customers, but only ended last year with 54,000 and today has perhaps 75,000 or 80,000 customers, so they’re still struggling to achieve what we’ve been able to achieve,” he says.

And as Mr Citron launches the Vonage assault on the UK market he encapsulates their uncomfortable dilemma.

“A lot of these telcos don’t want to see their (broadband) voice business succeed because it threatens their revenues, but they have to tell the market place they have something to offer to compete with Vonage.

“And you see a lot of that here, in BT territory, because it faces the same problem. BT’s had voice over IP for 18 months, and it has a few thousand customers on the product – a few thousand, not tens of thousands, not hundreds of thousands, not millions – that’s a pretty poor figure for a company offering a service for the last 18 months,” he says.

Aside from a first mover advantage in the broadband phone arena that has helped propel the group to its early success, Mr Citron says Vonage has also benefited from its focus and a network of enthusiasts around the world.

“We’ve got a lot of knowledge and expertise, and quite frankly we have developers supporting us around the globe, almost 2,000 people out there helping us, and it’s been a real big advantage, because all we do is voice over IP, it’s easy for us,” he says. t is not the only dedicated broadband phone company, of course, but Mr Citron does not lose any sleep over competition from other start-ups.

“The US has no fewer than five notable pure plays and thousands below that, but all of them are inconsequential at this point and most of them will probably get wiped out because they just won’t be able to compete with us,” he says.

One of the keys to the rapid spread of Vonage has been developing a sales and marketing strategy that has evolved to fit each segment that Mr Citron and his team have targeted. “One thing I told people was, you can have the greatest technology in the world but if you can’t sell that technology you’ve got real issues. And we spent nearly all of 2002 trying to figure how to explain this and sell it,” he says.

And so Vonage opted for the “broadband phone company”, reasoning that a simple explanatory message was best for something so new and not easily grasped. As ever, early adopters were relatively easy to convince, and were ready to take Mr Citron’s product and try to make it do other things.

“It was interesting that in 2003 they were trying to do more stuff with the technology than really technology could have handled at that point. And they were always, like, ‘can’t I just do that and that? Why can’t you do this thing here?’” he recalls.

Nerds are easy enough to reach online through direct sales channels, but early adopters rarely make a mass market and so to facilitate its move from the hundreds and thousands into the millions, Vonage headed for the mall and the high street.

“We’ve had to add a new component to reach our customers, a retail component, which we launched about a year and half ago in the US and today it accounts for about one out of five of our sales in the US which a pretty healthy number. It accounts for about one out of four in Canada, and we’re just launching our service here in the UK with it.”

So, don’t say you haven’t been warned. If you’re the chief executive of major telecoms group, or an innocent consumer caught in the broadband crossfire, Mr Citron is coming for you.

■Jeffrey Citron, now 34, went straight from high school to work as a trader at Datek Securities, making his first million dollars at 21.

■In 1995, Mr Citron founded The Island ECN, a computerised trading system. Instinet paid $503m for the company in 2002, creating one of the world’s largest financial exchanges.

■By then, Mr Citron had already created Datek Online Holdings, which he built into the fourth largest online brokerage in the US, before moving on to found Vonage in 1999.

Copyright The Financial Times Limited 2019. All rights reserved.

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