Why Vonage Buying Vocalocity is Interesting, and Boring

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Just when I was complaining on Twitter how boring the last two weeks of VoIP-related news has been, Vonage buys Vocalocity. It's a very interesting move, but the underlying reason is a little bit uninspiring.

Let's start with interesting. Over the past four years, Vonage has mounted a comeback from doom that should be an inspiration to current slackers like BlackBerry and HP. The company screwed up its IPO, was losing tons of money, had a ton of debt, was spending hundreds of dollars to acquire customers and watching them churn out the door within a year if memory serves, got sued by Verizon, Sprint, AT&T, and Nortel for hundreds of millions of dollars of patent violations.

Today, Vonage is generating cash, opening up operations in Brazil, and continues its $100 million stock buyback program. The 2009 economic downturn ended up aiding the company by enabling it to take its higher interest rate debt and trade it in at 2010 lower rates.

For Vonage to be able to acquire anything of substance today has to be seen as nothing short of a stunning turnaround compared to its dark years between 2007 and 2009.

Vonage is shelling out $105 million in cash and $25 million in common stock for privately-held Vocalocity. Given Vonage's brand name, customer base and marketing engine, this has to be a big win and upside for Vocalocity. For the first half of 2013, Vocalocity had revenues of $28 million, 39 percent higher than the same period last year, EBITDA and free cash flow positive during the period and had 21,000 customers.

SMB customers generate higher revenue and everyone is predicting insanely large growth for the hosted portion of SMB, as well as the 5-20 employee segment of the SMB voice services market. According to stats in the Vonage press release, 85 percent of SMBs still purchase voice services from traditional carriers at rates "frequently 40 to 50 percent" higher than those offered by Vocalocity.

Now for the boring part – everyone sees the hosted SMB voice market as a big cash cow, so you've got everyone from established firms like 8x8 to new entrants such as Digium's Switchvox hosted product jumping into the space. Independents have to battle the will and might of cable companies, who are in it to win it.

I've seen the big run to the SMB space before. A decade ago, everyone had a startup aimed at the 5-20 business sweet spot, offering voice services via broadband and on-prem equipment. Few of those companies remain today.

The big losers in the SMB hosting boom so far are the legacy phone companies, specifically AT&T and Verizon. It would not surprise me to see Verizon put offers on the table for one or more hosted SMB operators as both an offensive and defensive action – offensive, because they need to get more effective knowledge, sales and marketing into the game and defensive in order to remove competition from the board and recapture revenue and customers.   Verizon supplemented its way into cloud services by purchasing Terremark despite the fact it already had the former DIGEX hosted assets in its portfolio, so swallowing up an SMB player or two has to be under consideration in order to counter the encroachment of cable in the market.

Cable companies appear to be happy by growing their SMB businesses organically so far. But selective acquisition of smaller SMB cloud players can't be ruled out in the future.




Edited by Alisen Downey

Contributing Editor

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