On this week's podcast, my guest was John Cunningham. He's the VP of Business Development with TalkSwitch, an Ottawa-based vendor who has been focused on small business telephony since 1990.
I've been trying to stay close to this market, and was looking forward to hearing John's thoughts on the opportunity he sees there and what PBX replacement solutions like his brings to SMBs. We also talked about the challenges of educating the market as well as why adoption of VoIP in the Canadian business market has lagged the U.S.
You can download the podcast here, as well as read more about John.
Speaking of TalkSwitch, fellow blogger Garrett Smith just posted about them today, commenting about their just-launched IP PBXs. Good timing, Garrett.
Technorati tags: SMB VoIP, Jon Arnold, TalkSwitch, VoIP podcasts, John Cunningham
Wednesday, November 29, 2006
Tuesday, November 28, 2006
Vonage/Telio Post - Rebuttal to Om
I've never done this before, but late last night I happened to come across Om's comment on my Vonage/Telio post from the other day. I'm commenting for a couple of reasons. First, I don't think Om's take on my post is accurate, and second, it has spawned a series of comments that seem to be echoing his commentary, so there's a ripple effect here that I need to respond to.
First, the title of Om's post - "Are VoIP Service Providers Making a Comeback?". The focus of Om's post seems largely about my post, and I don't see how anyone could conclude anything about a "comeback" from what I wrote about. I could see that if I was talking about Vonage showing a dramatic turnaround in their numbers, but I'm not. And they didn't. All I'm saying is that the news from their Q3 isn't all bad - but they're far from being in "comeback" mode. And regarding Telio, the news has only been good - there's no comeback happening there - just more of the same positive momentum they've had all along.
Second, Om, I just wanted to say that my post was simply a comparison between Vonage and Telio, esp since their quarterly numbers came out around the same time. Nothing more, nothing less. It should be pretty clear that I'm not commenting on the overall state of "CVSPs" - because on that front I would agree with you 100% - I don't think they have much of a business model, esp if they try to go big. I certainly am not forecasting "sunny skies for them", at least not for Vonage. That should be pretty clear from my post.
Telio is another story, and it's hard to argue with their success and how well they've positioned themselves for the mobile market. I think they're way ahead of Vonage - or the other CVSPs on this front, and that's a key differentiator to me. So, I really don't think it's fair to conclude from this that CVSPs are a "great business". As a category, I don't think they are, but I do think Telio has got it right. Sure it's much tougher to compete in the North American market, and when you go on a large mass-market scale. No question. But, as I've often said, small can be beautiful, and with the healthy gross margins I noted in my post, it can be a great business, even on a small scale. I've always felt that the network operators will always win in the end, but you can certainly make a go of things with the right focus.
That's it, Om! I just want clarity here and to make sure people don't reach the wrong conclusions about my post. I don't see any "comeback" for Vonage, and it's not "sunny skies" for all these players. But I do stand by my take on Telio, and for that matter Vonage, and I've been pretty consistent in my views on them in previous posts.
By all means, may the dialog continue - from anyone who cares to contribute - that's what blogging is all about.
Technorati tags: Om Malik, Jon Arnold, Vonage
First, the title of Om's post - "Are VoIP Service Providers Making a Comeback?". The focus of Om's post seems largely about my post, and I don't see how anyone could conclude anything about a "comeback" from what I wrote about. I could see that if I was talking about Vonage showing a dramatic turnaround in their numbers, but I'm not. And they didn't. All I'm saying is that the news from their Q3 isn't all bad - but they're far from being in "comeback" mode. And regarding Telio, the news has only been good - there's no comeback happening there - just more of the same positive momentum they've had all along.
Second, Om, I just wanted to say that my post was simply a comparison between Vonage and Telio, esp since their quarterly numbers came out around the same time. Nothing more, nothing less. It should be pretty clear that I'm not commenting on the overall state of "CVSPs" - because on that front I would agree with you 100% - I don't think they have much of a business model, esp if they try to go big. I certainly am not forecasting "sunny skies for them", at least not for Vonage. That should be pretty clear from my post.
Telio is another story, and it's hard to argue with their success and how well they've positioned themselves for the mobile market. I think they're way ahead of Vonage - or the other CVSPs on this front, and that's a key differentiator to me. So, I really don't think it's fair to conclude from this that CVSPs are a "great business". As a category, I don't think they are, but I do think Telio has got it right. Sure it's much tougher to compete in the North American market, and when you go on a large mass-market scale. No question. But, as I've often said, small can be beautiful, and with the healthy gross margins I noted in my post, it can be a great business, even on a small scale. I've always felt that the network operators will always win in the end, but you can certainly make a go of things with the right focus.
That's it, Om! I just want clarity here and to make sure people don't reach the wrong conclusions about my post. I don't see any "comeback" for Vonage, and it's not "sunny skies" for all these players. But I do stand by my take on Telio, and for that matter Vonage, and I've been pretty consistent in my views on them in previous posts.
By all means, may the dialog continue - from anyone who cares to contribute - that's what blogging is all about.
Technorati tags: Om Malik, Jon Arnold, Vonage
Monday, November 27, 2006
Oz Raises $34 Million - More Good News From Canada
Montreal-based Oz Communications looks poised to make some moves in the mobile messaging market, where they already have done some impressive things. They've got deals going with A-list Tier 1s like Cingular, T Mobile, AOL, Telfonica, Bell Mobility and Telus, plus all the major handset vendors.
Today they announced a second round raise of $34 million, which is quite large for a Canadian vendor. Mind you, I said the same thing last week about Natural Convergence, and that was only a $10 million funding, so in my books, this one definitely merits some attention.
Interestingly, 2 of the 3 lead investors were Quebec-based, which tells me some of the major fund managers see good potential here, and it's a good vote of confidence to support a homegrown company. I say this because Canadian money managers tend to be more conserative than in the U.S., and by local standards, this level of funding is a pretty hefty bet.
As the press release notes, they are not planning an IPO any time soon, but that time will surely come if they stay the course. With this kind of funding to support their strong momentum, I wouldn't be at all surprised to see them make some acquisitions to further establish themselves as a global player.
I've posted about Oz before, and am planning to do a podcast with them quite soon, so stay tuned as I continue to follow their progress.
Technorati tags: Oz Communications, Jon Arnold, mobile messaging
Today they announced a second round raise of $34 million, which is quite large for a Canadian vendor. Mind you, I said the same thing last week about Natural Convergence, and that was only a $10 million funding, so in my books, this one definitely merits some attention.
Interestingly, 2 of the 3 lead investors were Quebec-based, which tells me some of the major fund managers see good potential here, and it's a good vote of confidence to support a homegrown company. I say this because Canadian money managers tend to be more conserative than in the U.S., and by local standards, this level of funding is a pretty hefty bet.
As the press release notes, they are not planning an IPO any time soon, but that time will surely come if they stay the course. With this kind of funding to support their strong momentum, I wouldn't be at all surprised to see them make some acquisitions to further establish themselves as a global player.
I've posted about Oz before, and am planning to do a podcast with them quite soon, so stay tuned as I continue to follow their progress.
Technorati tags: Oz Communications, Jon Arnold, mobile messaging
Next Stop - Dallas - WiFi/Cellular Convergence
It's been a busy season for me attending conferences, which I always find to be the best way to meet companies first hand to learn about their business, and of course to network.
On Tuesday, I'm off to Dallas for Informa's WiFi/Convergence conference, where I'll be Conference Chair for the first day on Wednesday. Am quite looking forward to hearing about the latest in FMC, dual mode handsets, and the business case for mobile network convergence.
Technorati tags: WiFi, Jon Arnold, dual mode handsets, Informa
On Tuesday, I'm off to Dallas for Informa's WiFi/Convergence conference, where I'll be Conference Chair for the first day on Wednesday. Am quite looking forward to hearing about the latest in FMC, dual mode handsets, and the business case for mobile network convergence.
Technorati tags: WiFi, Jon Arnold, dual mode handsets, Informa
Friday, November 24, 2006
Wireless in Canada - It's Different Here
Just a quick post inspired by a 2 part series that ran in the Globe & Mail the past 2 days. Catherine McLean did a nice assessment of the state of wireless in Canada, and raised some valid questions as to why wireless penetration lags most other countries, as well as why we pay more up here. I've touched on these themes a number of times before, and it's just nice to see these ideas validated elsewhere.
Anyone who spends time with me at conferences in the U.S. knows that I only use my cell phone as a last resort. It's really hard for Americans to understand this, as it's very common to have long distance included in your plans, even for Canada. So, you don't think twice about making mobile calls to anywhere in the U.S. and often elsewhere. It's simply not the case for Canadians, unless you live on your cell phone and have a special plan that covers roaming and LD outside Canada. Simply put, I'm not a power user with my cell phone, and just don't use it enough to warrant having one of these high end plans.
Anyhow, back to the story in the Globe. The main thrust is to eaxplain that cell phone service is more expensive here, and there's a nice comparison of various plans, both in Canada and the U.S. Throughout the article, various points are raised to help explain why, namely:
- It's less competitive here. We only have 3 major carriers, and maybe 20 overall. Conversely, the article states that the U.S. has some 180 mobile offerings to choose from. Is it any wonder why prices are higher here? The majors - Bell Mobility, Rogers and Telus - make much healthier margins than their U.S. counterparts, and don't have a whole lot of pricing pressure from competitors.
- Our carriers can justify a higher pricing regime because the cost of building out their networks is more than the U.S. As the article says, they must cover a comparable geographic footprint to U.S. carriers, but with 1/10th of the customer base. There is some truth to that, at least in terms of building east to west. However, 90% of our population lives within 100 miles of the U.S. border, so it's not quite apples to apples. But still, it's a valid point.
- Our major wireless carriers are also our major wireline carriers - Bell and Telus. It's not quite like that in the U.S., but all these carriers face the same market realities. Wireline is declining, while wireless is a go-go business. So, both Telus and Bell rely heavily on the profits from wireless to offset their losses in wireline. In that light, it's a simple business decision to support higher pricing for wireless service.
- Wireless penetration is lower here. We're not as addicted to wireless - at least yet. There's a whole body of work devoted to explaining why wireless is less ubiquitous here, and I'm not going to address that now. The main point is that wireless still has lots of room to grow here - all the more reason for the majors to keep it a small club and to maintain high margins as long as possible. The article also notes that historically, our wireless carriers have been money losers, and it's pretty much taken until now for them to finally start making some profitable returns on the all infrastructure they've been building the last 20 years. So, following that logic, it's finally payday for them, and they deserve to recoup some of the investment.
- Another reason wireless isn't as prevalent here is the lack of LNP - local number portability. We haven't had nearly the amount of wireless substitution that's happening in the U.S. - largely for this reason. That's going to change early next year, and that's a key reason why all the mobile carriers are lining themselves up now for what looks to be an explosive year ahead for growth. I suspect you will see some price cutting next year once LNP comes into play, and the wireless operators will mount aggressive campaigns to wean people off their landlines once and for all - especially from operators who don't have a PSTN wireline business, like Videotron, Rogers, Shaw, Virgin Mobile or Amp'd.
- Foreign ownership restrictions make for a cozy three-way among Bell, Telus and Rogers. We do have other mobile carriers here, but they're pretty small or regional. If these restrictions were lifted or eased, that would open the door for U.S. operators or multinationals like BT or T Mobile. They could either acquire controlling interest in a domestic operator, or invest in one to build out their networks and acquire more spectrum. There are many possibilities here that could shake up the market big time, but I don't see this happening so soon.
I'm just touching on some of the big themes here, but there's certainly more to the story. The Globe pieces are both a good read, and as usual, the online versions are the most interesting because they have tons of reader comments submitted online.
So, once you've read this, hopefully you'll know where I'm coming from when I tell you I hardly use my cell phone when I travel.
Technorati tags: Wireless, Jon Arnold, Catherine McLean
Anyone who spends time with me at conferences in the U.S. knows that I only use my cell phone as a last resort. It's really hard for Americans to understand this, as it's very common to have long distance included in your plans, even for Canada. So, you don't think twice about making mobile calls to anywhere in the U.S. and often elsewhere. It's simply not the case for Canadians, unless you live on your cell phone and have a special plan that covers roaming and LD outside Canada. Simply put, I'm not a power user with my cell phone, and just don't use it enough to warrant having one of these high end plans.
Anyhow, back to the story in the Globe. The main thrust is to eaxplain that cell phone service is more expensive here, and there's a nice comparison of various plans, both in Canada and the U.S. Throughout the article, various points are raised to help explain why, namely:
- It's less competitive here. We only have 3 major carriers, and maybe 20 overall. Conversely, the article states that the U.S. has some 180 mobile offerings to choose from. Is it any wonder why prices are higher here? The majors - Bell Mobility, Rogers and Telus - make much healthier margins than their U.S. counterparts, and don't have a whole lot of pricing pressure from competitors.
- Our carriers can justify a higher pricing regime because the cost of building out their networks is more than the U.S. As the article says, they must cover a comparable geographic footprint to U.S. carriers, but with 1/10th of the customer base. There is some truth to that, at least in terms of building east to west. However, 90% of our population lives within 100 miles of the U.S. border, so it's not quite apples to apples. But still, it's a valid point.
- Our major wireless carriers are also our major wireline carriers - Bell and Telus. It's not quite like that in the U.S., but all these carriers face the same market realities. Wireline is declining, while wireless is a go-go business. So, both Telus and Bell rely heavily on the profits from wireless to offset their losses in wireline. In that light, it's a simple business decision to support higher pricing for wireless service.
- Wireless penetration is lower here. We're not as addicted to wireless - at least yet. There's a whole body of work devoted to explaining why wireless is less ubiquitous here, and I'm not going to address that now. The main point is that wireless still has lots of room to grow here - all the more reason for the majors to keep it a small club and to maintain high margins as long as possible. The article also notes that historically, our wireless carriers have been money losers, and it's pretty much taken until now for them to finally start making some profitable returns on the all infrastructure they've been building the last 20 years. So, following that logic, it's finally payday for them, and they deserve to recoup some of the investment.
- Another reason wireless isn't as prevalent here is the lack of LNP - local number portability. We haven't had nearly the amount of wireless substitution that's happening in the U.S. - largely for this reason. That's going to change early next year, and that's a key reason why all the mobile carriers are lining themselves up now for what looks to be an explosive year ahead for growth. I suspect you will see some price cutting next year once LNP comes into play, and the wireless operators will mount aggressive campaigns to wean people off their landlines once and for all - especially from operators who don't have a PSTN wireline business, like Videotron, Rogers, Shaw, Virgin Mobile or Amp'd.
- Foreign ownership restrictions make for a cozy three-way among Bell, Telus and Rogers. We do have other mobile carriers here, but they're pretty small or regional. If these restrictions were lifted or eased, that would open the door for U.S. operators or multinationals like BT or T Mobile. They could either acquire controlling interest in a domestic operator, or invest in one to build out their networks and acquire more spectrum. There are many possibilities here that could shake up the market big time, but I don't see this happening so soon.
I'm just touching on some of the big themes here, but there's certainly more to the story. The Globe pieces are both a good read, and as usual, the online versions are the most interesting because they have tons of reader comments submitted online.
So, once you've read this, hopefully you'll know where I'm coming from when I tell you I hardly use my cell phone when I travel.
Technorati tags: Wireless, Jon Arnold, Catherine McLean
US Thanksgiving - Canadian-Style
How American - is that in-your-face enough for you?
Last night, thanks to my Mother's urging, I did a first, even though I've lived here a thousand years and have been a dual citizen for some time. I attended a U.S. Thanksgiving dinner put on by Democrats Abroad, which does a great job of building community amongst American ex-pats, and in this case, here in Toronto. And yes, it's all about being a good Democrat, and revelling in the recent election wins that give Democrats very good reason to believe they'll be back in the saddle in 2008.
I really didn't know what to expect at this dinner, but it was a lot of fun, and even though I didn't know anybody, there was definitely a nice sense of cameraderie and shared values about a lot of things. Here are a few photos that will give you a better sense of what I mean.
As usual, photos are courtesy of my Nokia N90...
Yes, we're taking over Canada, in case you were wondering...
We certainly have a few things in common...
Good crowd - full house, I'd say. Treasurer Joe Green showing off a bumper sticker if you care or dare to show your true colors on the road! Small world - Professor Green was on the faculty at York University when I did my MBA there. I didn't study with him, but I sure remember him.
Technorati tags: Democrats Abroad, Jon Arnold
Thursday, November 23, 2006
Vonage and Telio - Quarterly Results Comparison
If you've been following my blog for a while, you'll know I'm one of a handful of people this side of the Atlantic following Norway-based Telio, who I long ago dubbed as the "Vonage of Europe".
Well, both operators released their quarterly filings recently, and having compared them before, I thought it would be a good idea to look into the state of the nation for both.
First off, I'd like to say that I didn't comment on Vonage's filing a few weeks ago, but there was no shortage of predictable gloom and doom from the bloggers. Sure, there were some poor results, and it's very easy to jump all over these and paint Vonage deeper into a corner. Frankly, I didn't think the numbers were so terrible, and despite the shortcomings, the news wasn't all bad, but nobody seemed to cut them any slack. Well, I will, but I'm also trying to be balanced. You don't have to look far to find trouble with Vonage - that's easy - but they're in a very tough market, and they're fighting hard to hold their own. Listen, it wasn't that long ago that people couldn't say enough good things about them, right?
This post isn't about a deep analysis of what they're doing right and wrong. Rather, I'm continuing my theme of Vonage and Telio, especially since their numbers both came out so recently. I'd love to see Vonage make it - don't get me wrong, but I also want to draw attention to how Telio is having success in the same business. Vonage is doing some important things right, but in my books, Telio is simply doing more things right, and I think they are showing the way for what it will take for a pureplay broadband operator to make it in VoIP.
So, let's first look at some Q3 highlights from Telio.
Overall, the news is good, with incremental quarter-over-quarter growth in all areas. Slow and steady - nothing wrong with that. Here are some key highlights...
- 8% revenue growth from Q2, at 76.1 million NOK
- Gross margins holding steady at 55%
- Pre-tax profit in Q3 of 2.8 million NOK
- ARPU holding steady at 300 NOK
- Economies of scale starting to be realized. They have a nice metric showing the ratio of Opex per subscriber, which makes a lot of sense. In Q1, it was 443 NOK, and has trended down nicely since then. In Q2, it was 361, and now it's 310. Clearly, as the subscriber base grows, their Opex is being held in check, and Telio is leveraging the power of IP economics nicely.
A few other highlights that round out the story...
- Telio is on track to hit 1 billion minutes of traffic this year. That's triple from last year, and they claim to now be carrying 7.2% of all residential fixed line traffic in Norway. That's pretty impressive for a company most of you have never heard of.
- They seem to have the ideal balance of price and quality for a value proposition that is hard to beat. Their presentation cites independent sources showing that their price per minute is the lowest of all local operators, and their quality rating comes out well ahead of the pack.
- Telio is by far the dominant broadband VoIP player in Norway. Similar to Vonage, there is a lot of distance between them and all the other broadband operators. They have a nice chart comparing Telio's revenues and gross margins against their peers, and the numbers speak for themselves. In Norway, there's Telio and everybody else.
These numbers alone tell a good story, but the best news is about where Telio is going. They've got a great business model for fixed line VoIP, but it's just the base. What really distinguishes Telio is their focus on FMC, and to me, this is where the paths with Vonage start to diverge. It's not hard to see that mobile VoIP is the big story right now, and Telio very much at the vanguard. They're already doing voice to a small extent, which not only reduces their costs, but makes for a tighter relationship with subscribers. Next year, Telio will be adding SMS, MMS and video, and this will continue to expand once WiFi comes to market later next year.
And you'll never guess who they're partnering with for mobile VoIP. Nokia - what a surprise! In fact, they are the first operator to deploy FMC on the Nokia Service Suite, with support for the N80 and E61 handsets. When you look at how far Telio has taken VoIP, it only stands to reason that Nokia would go to market with them before anyone else. Their partnership was announced on October 31 at the VON show in Berlin. I wasn't there, but I know it was a small show by VON standards, so this news didn't get much coverage. Now you know!
On to Vonage, and some key highlights.
- Their Q3 results came out the same day as the Telio/Nokia news, and I doubt anyone connected both events at this time.
- I found it interesting to note how they describe themselves in the press release - "a leading provider of broadband telephone service". Wasn't that long ago that Vonage was THE leading provider, but times have changed!
- Several key metrics are going in the right direction - revenues are up 12% and losses are down 12% from Q2, and even better, losses are down 18% from Q3 2005. So, sure they lost $53 million in Q3, which is the better part of a half a mil a day, but at least the trend is positive.
- ARPU was flat at $26.33, which is on par with Telio. In absolute terms, Vonage's ARPU is up $1.49 from last year, but this eaten up most by E911 charges, so they're not really growing the business revenue-wise on a per subscriber basis.
- Direct costs continue to decline, and are now at $6.86 per line. Again, a similar story to Telio - Opex is being held in line. However, the big difference is the marketing spend, which of course is what's killing them.
- Marketing spend was 57% of revenues in Q3, at $91 million. So, not only are they spending $1 million a day in advertising, but they're losing about half that amount in terms of earnings. The good news, however, is that the trend is down - in Q2, marketing spend was 63% of revenues. Comparatively, Telio's marketing spend is only 11% of revenues.
So, what's not going right?
- The pace of subscriber growth is slowing - but only slightly . Vonage added 204,591 subs in Q3 compared to 213,937 in Q2. A lot of people jumped all over that, but I don't see such a big red flag there. We all know how competitive this market has become and it's only going to get tougher. It's still a big number, so to me, this is neutral metric - there's both good and bad news here.
- Churn has edged up to 2.6% from 2.3% in Q3 2005, and yes, that's a big concern. Again, this comes with a competitive market, and churn effects everyone. We all know that reduced churn is key for Vonage's survival, so let's move on.
- The cost of doing business is increasing. If you look at the line items a bit closer, there's one that caught my eye - their CPE subsidy. It's up from $24.48 last year to $29.79 in Q3. Again, we all know how competitive things are, and this is symptomatic of what Vonage needs to do to stay top of mind with both subscribers and their retail partners.
And finally, a bit of guidance from their CEO, Mike Snyder - "we anticipate we will generate adjusted operating profits as early as the first quarter 2008".
Well, then, there you have it. Just 6 more quarters to go to be in the money - maybe. When you're a public company, it's all about the profits and returns to shareholders. I think this quote sums it up nicely, especially in comparison to Telio who is already in the black. I'd love to see Vonage be profitable by then or even sooner, but that is such a long time away, and there are so many variables that could derail their plans at any point in time.
All I can say is that based on what Telio has shown us to date, one can only imagine where they will be in Q1 2008. Again, Vonage can still be a good story, but in my mind, Telio is a good story today, and one that I think will unfold more favorably if they continue to execute well.
Technorati tags: Vonage, Jon Arnold, Telio
Well, both operators released their quarterly filings recently, and having compared them before, I thought it would be a good idea to look into the state of the nation for both.
First off, I'd like to say that I didn't comment on Vonage's filing a few weeks ago, but there was no shortage of predictable gloom and doom from the bloggers. Sure, there were some poor results, and it's very easy to jump all over these and paint Vonage deeper into a corner. Frankly, I didn't think the numbers were so terrible, and despite the shortcomings, the news wasn't all bad, but nobody seemed to cut them any slack. Well, I will, but I'm also trying to be balanced. You don't have to look far to find trouble with Vonage - that's easy - but they're in a very tough market, and they're fighting hard to hold their own. Listen, it wasn't that long ago that people couldn't say enough good things about them, right?
This post isn't about a deep analysis of what they're doing right and wrong. Rather, I'm continuing my theme of Vonage and Telio, especially since their numbers both came out so recently. I'd love to see Vonage make it - don't get me wrong, but I also want to draw attention to how Telio is having success in the same business. Vonage is doing some important things right, but in my books, Telio is simply doing more things right, and I think they are showing the way for what it will take for a pureplay broadband operator to make it in VoIP.
So, let's first look at some Q3 highlights from Telio.
Overall, the news is good, with incremental quarter-over-quarter growth in all areas. Slow and steady - nothing wrong with that. Here are some key highlights...
- 8% revenue growth from Q2, at 76.1 million NOK
- Gross margins holding steady at 55%
- Pre-tax profit in Q3 of 2.8 million NOK
- ARPU holding steady at 300 NOK
- Economies of scale starting to be realized. They have a nice metric showing the ratio of Opex per subscriber, which makes a lot of sense. In Q1, it was 443 NOK, and has trended down nicely since then. In Q2, it was 361, and now it's 310. Clearly, as the subscriber base grows, their Opex is being held in check, and Telio is leveraging the power of IP economics nicely.
A few other highlights that round out the story...
- Telio is on track to hit 1 billion minutes of traffic this year. That's triple from last year, and they claim to now be carrying 7.2% of all residential fixed line traffic in Norway. That's pretty impressive for a company most of you have never heard of.
- They seem to have the ideal balance of price and quality for a value proposition that is hard to beat. Their presentation cites independent sources showing that their price per minute is the lowest of all local operators, and their quality rating comes out well ahead of the pack.
- Telio is by far the dominant broadband VoIP player in Norway. Similar to Vonage, there is a lot of distance between them and all the other broadband operators. They have a nice chart comparing Telio's revenues and gross margins against their peers, and the numbers speak for themselves. In Norway, there's Telio and everybody else.
These numbers alone tell a good story, but the best news is about where Telio is going. They've got a great business model for fixed line VoIP, but it's just the base. What really distinguishes Telio is their focus on FMC, and to me, this is where the paths with Vonage start to diverge. It's not hard to see that mobile VoIP is the big story right now, and Telio very much at the vanguard. They're already doing voice to a small extent, which not only reduces their costs, but makes for a tighter relationship with subscribers. Next year, Telio will be adding SMS, MMS and video, and this will continue to expand once WiFi comes to market later next year.
And you'll never guess who they're partnering with for mobile VoIP. Nokia - what a surprise! In fact, they are the first operator to deploy FMC on the Nokia Service Suite, with support for the N80 and E61 handsets. When you look at how far Telio has taken VoIP, it only stands to reason that Nokia would go to market with them before anyone else. Their partnership was announced on October 31 at the VON show in Berlin. I wasn't there, but I know it was a small show by VON standards, so this news didn't get much coverage. Now you know!
On to Vonage, and some key highlights.
- Their Q3 results came out the same day as the Telio/Nokia news, and I doubt anyone connected both events at this time.
- I found it interesting to note how they describe themselves in the press release - "a leading provider of broadband telephone service". Wasn't that long ago that Vonage was THE leading provider, but times have changed!
- Several key metrics are going in the right direction - revenues are up 12% and losses are down 12% from Q2, and even better, losses are down 18% from Q3 2005. So, sure they lost $53 million in Q3, which is the better part of a half a mil a day, but at least the trend is positive.
- ARPU was flat at $26.33, which is on par with Telio. In absolute terms, Vonage's ARPU is up $1.49 from last year, but this eaten up most by E911 charges, so they're not really growing the business revenue-wise on a per subscriber basis.
- Direct costs continue to decline, and are now at $6.86 per line. Again, a similar story to Telio - Opex is being held in line. However, the big difference is the marketing spend, which of course is what's killing them.
- Marketing spend was 57% of revenues in Q3, at $91 million. So, not only are they spending $1 million a day in advertising, but they're losing about half that amount in terms of earnings. The good news, however, is that the trend is down - in Q2, marketing spend was 63% of revenues. Comparatively, Telio's marketing spend is only 11% of revenues.
So, what's not going right?
- The pace of subscriber growth is slowing - but only slightly . Vonage added 204,591 subs in Q3 compared to 213,937 in Q2. A lot of people jumped all over that, but I don't see such a big red flag there. We all know how competitive this market has become and it's only going to get tougher. It's still a big number, so to me, this is neutral metric - there's both good and bad news here.
- Churn has edged up to 2.6% from 2.3% in Q3 2005, and yes, that's a big concern. Again, this comes with a competitive market, and churn effects everyone. We all know that reduced churn is key for Vonage's survival, so let's move on.
- The cost of doing business is increasing. If you look at the line items a bit closer, there's one that caught my eye - their CPE subsidy. It's up from $24.48 last year to $29.79 in Q3. Again, we all know how competitive things are, and this is symptomatic of what Vonage needs to do to stay top of mind with both subscribers and their retail partners.
And finally, a bit of guidance from their CEO, Mike Snyder - "we anticipate we will generate adjusted operating profits as early as the first quarter 2008".
Well, then, there you have it. Just 6 more quarters to go to be in the money - maybe. When you're a public company, it's all about the profits and returns to shareholders. I think this quote sums it up nicely, especially in comparison to Telio who is already in the black. I'd love to see Vonage be profitable by then or even sooner, but that is such a long time away, and there are so many variables that could derail their plans at any point in time.
All I can say is that based on what Telio has shown us to date, one can only imagine where they will be in Q1 2008. Again, Vonage can still be a good story, but in my mind, Telio is a good story today, and one that I think will unfold more favorably if they continue to execute well.
Technorati tags: Vonage, Jon Arnold, Telio
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