The problem for Vonage is that while its subscriber base is growing, it is still losing money. According to the IPO filing, Vonage lost $189.6 million on sales of $174 million in the first nine months of 2005.



The company spends so much on marketing that it is almost impossible to make money from low spending subscribers. Average single line subscribers paid $26.73 per month in 2005. But the company spent $213.77 per subscriber on marketing. That means it would take more than 8 months to recoup their up front marketing costs.

Market share is also shrinking and the competition is ramping up. Google, Yahoo and Microsoft are all aggressively entering the market.

They are also getting squeezed on the expense side. Currently VOiP providers like Vonage offload the carrier costs to internet subscribers. But the major telcos are lobbying hard for approval to charge providers like Vonage extra tool fees for the ramped up level of service required to make wide scale VOiP possible.

Pure VOiP providers like Vonage are eating into the traditional market of the telcos. So it seems almost inevitable that the telcos will retaliate in various ways to either hold on to their customer base, or convert customers to their own services.

**Other developments in VoIP

Microsoft - Gates and company will be entering the VoIP market aggressively in 2006. The new version of MSN Messenger, called Windows Live Messenger will have advanced VoIP capabilities, and an interface with the traditional phone system through an agreement with MCI. This alliance with MCI is Microsoft's way of avoiding the threat of telco toll charges.

As with Skype, PC to PC calls will be free using Windows Live Messenger. Microsoft and MCI claim that PC to landline calls will cost only a few cents a minute, and much less than some other alternatives currently being developed.

Google - Much like Microsoft and Yahoo, Google is putting the pieces together to offer a comprehensive PC to PC chat/voice service, as well as a PC to landline service. That would take Google just one relatively small step from becoming a complete VoIP provider.

Google released Google Talk last August, and recently announced the release of Gmail Chat which integrates GMail and Chat. For voice capability, users still have to download the Google Talk client, but it is just a matter of time before there is one client for all three services (mail, chat, talk).

The company has also confirmed that it is working with VoiceOne, a Florida company owned by VoIP Inc. VoiceOne is providing Google with "click-to-call" services. This free service lets people speak directly to Adwords advertisers who come up in searches, with the costs, presumably, being covered by advertisers.

Yahoo - Yahoo announced in December that they will offer two new fee-based voice over IP services so customers can make voice calls from a PC to a telephone and receive phone calls on a PC.

The new VoIP services are called Phone Out and Phone In and are part of Yahoo Messenger with Voice.

Phone Out will let users to make calls from a PC to traditional or mobile phones in more than 180 countries. Projected cost will be $0.01 per minute to the U.S. and less than $0.02 per minute to more than 30 international countries.

Phone In will let users receive calls on a PC from traditional or mobile phones for $2.99 a month. Multiple phone numbers will be available for travelers, and phone numbers in different countries will be available so people who call them from that area will only pay for a local call. This is very similar to Skype's current offerings (see below).

Skype - EBay bought Skype in 2005 for $2.6 billion, so chances are they have big plans for the service. Skype offers a range of VoIP services, but so far all require at least one user be tethered to a PC with a broadband connection. Services include free computer-to-computer calls, as well as paid calls from a PC to the public network (SkypeOut) or public phone to PC (SkypeIn).

With the release of Skype 2.0, the company has announced a number of enhancements to their core service such as teleconferencing capability, and video calling. Another useful service is Skype VoiceMail. Callers from anywhere can call your number and leave a voice mail on your computer.

Judging from their web-centric approach to VoIP, Skype does not have plans to directly compete with the telcos for traditional phone business. However, they are well-positioned to offer click-to-call services to everything from community and dating websites, to EBay itself.