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Vonage, the US voice-over-internet protocol (VOIP) telephone company, on Wednesday announced plans to raise $250m through an initial public offering in order to maintain the rapid expansion of its heavily loss-making business.
The company’s pursuit of a stock market listing comes despite a warning that it expects to continue to report big losses for the foreseeable future as it tries to cement its early lead over big telecoms and cable TV companies in the new VOIP market.
Vonage’s decision to seek a stock market listing rather than an outright sale of the company was a surprise given the push by bigger rivals into the internet telephony market, some analysts said.
“I would have thought it would have been cheaper for [a cable company] to buy Vonage than to build it themselves,” said Ford Cavallari, an analyst at Aventis. Some cable and telecoms companies have started to “bundle” internet telephone service with their other services, bringing a new level of competition for stand-alone providers like Vonage. With little more than 1m users, the company needs to invest heavily to increase its customer base and start to benefit from economies of scale of the telecoms business, said Mr Cavallari.
In preparation for its IPO, Vonage also said on Wednesday that its founder, Jeffrey Citron, had stepped down as chief executive officer, though he would remain chairman. Mr Citron was banned from the securities industry by the Securities and Exchange Commission as part of a settlement of accusations surrounding Datek Securities, an online trading firm he founded, though he did not admit any wrongdoing.
In a filing with the SEC on Wednesday, Vonage revealed that its marketing spending in the first nine months of last year, at $176m, exceeded its revenues of $174m. According to internet measurement firm Nielsen NetRatings, it spent more on internet advertising last year than any other company.
While Skype, the VOIP company that was bought by eBay last year, has been able to amass a broad global audience thanks to the “viral” effect of the internet, Vonage’s business model is closer to that of a traditional telecoms company.
It charges users a flat monthly fee for its service, and uses traditional marketing and distribution channels to attract customers. However, by relying on the broadband services of cable and telecoms services to deliver its service it avoids the infrastructure costs of bigger competitors, allowing it to charge a low monthly price of $24.99 for its US domestic residential service.
Vonage’s decision to go public to raise more cash comes as it prepares another significant ramp its marketing spending in an effort to outrun its bigger rivals. The company said it had also raised $250m through a private sale of convertible securities over the last two months. Together with the cash from an IPO, that will take its total funding to date to more than $850m.