The Stalwart: Vonlink, Earthage?

Already, much of the discussion about Vonage has turned to the company's exit strategy. That's strange for a public company, but after their rough IPO last week, not altogether surprising. New York VC kicks of the discussion, arguing that Vonage should should merge with the Earthlink, the aging ISP:

The financial press says the problem with Vonage is that it cannot point to near term profits. That is certainly a big problem.

But I think the biggeest problem with Vonage is that it can’t compete on a level playing field with its rivals, most importantly the cable companies who are offering the triple play - voice, video, and data. Bundling is a powerful marketing tool used with great success by many powerful technology, telecomm and media companies.

Earthlink is one of the oldest Internet brands. It trades at a $1.2bn market capitalization and it brings a number of key assets to the party. First, Earthlink is profitable with operating cash flow of around $180 million per year. That could go a long way to addressing the profitability issues at Vonage. Earthlink also has 1.6 million broadband internet customers and an additional 3.6 million dial-up customers, some of which will convert to become broadband customers of Earthlink (and Vonage voice) in the future. And Earthlink owns 50% of Helio, the broadband wireless MVNO started by Sky Dayton, the founder of Earthlink.

But most importantly, Earthlink would get Vonage into the access business, where it has to be to compete with the cable companies who are coming after Vonage.

Earthlink, of course, has its own issues, most notably its ongoing loss of dialup customers.

Vonage has to date competed effectively by providing a voice service that rides on top of the commodity infrastructure of internet access. It is able to deliver voice without delivering the pipe. But when the competitors who have the pipe can offer the exact same thing you are currently offering, you have three choices; sell out to them, figure out how to level the playing field, or watch your customer base slowly churn over to your competitors.

If Vonage and Earthlink were to merge, I'd suggest they go after the "quadruple play" by offering access, voice, IP TV (partner with Microsoft on their IP TV effort?) and mobile (Helio). How cool would it be to have one provider for voice at home, voice on the road, access, and video?

Earthlink won't be the last company mentioned as a good partner for Vonage, any speculation on who else? Comcast? AOL? Microsoft? Let the guessing begin.

What is This?

The Stalwart is a blog written by Joseph Weisenthal, covering such topics as stocks, business, economics, politics, technology, gambling, chess, poker, economics, current events, music, math, Chinese food, science, randomness, kurtosis, sports, evolutionary fitness, and anything else of the author's choosing. The words contained herein are the author's own, not affiliated with any other firm or employer.

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Vonlink, Earthage?

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