Don’t Buy Telco Stock – That Includes Vonage

The telegram business disappeared last month with barely a whimper.  The telephone call business is going to go the same way sooner rather than later. Not a good time to invest in that business.  BTW, once-upon-a-time AT&T stood for American Telephone and Telegraph.  Now, it’s just letters; it doesn’t stand for anything.

I’m a Vonage user but I’m not planning to buy Vonage stock.  Vonage is in the telephone call business and that business is in its last decade if not last few years.  They sell phone calls – cheap.  Used to be a good business; I was in it myself.  But the phone call business is poised to disappear.  That’s not good for investors in telephone companies whether that company is Verizon, at&t, or Vonage.

Doesn’t mean a lot of other people won’t buy the stock and drive the price up to the advantage of those who are agile enough to jump off at the right minute.  But since I’m not a very good jumper-off, I’m not going to be a piler-on.  If you’re a skilled speculator, ignore my advice.  Actually, maybe everybody should ignore my investment advice, but I’m going to give it in this post anyway.

Others have done a good job of analyzing Vonage financials both pro and con.  For example, Om Malik points out that churn (telco speak for customers who unsubscribe) is high and that is expensive since each new customer costs over $200 to acquire.  Ted Wallingford posts here that Vonage stock is appealing in part because “Vonage has pushed IP telephony into the mainstream and consumers recognize it as a brand leader in the sector.”

Even though their conclusions disagree, both of them are right in the facts they cite.  My problem with the Vonage stock is more fundamental: even if they’re doing a good job, they’re in the wrong business at the wrong time.

Computer-to-computer voice is already free anytime, anywhere (or anywhere there are computers and broadband connections).  So far the utility of computer-to-computer calling has been restricted by lack of interoperability among providers: a Skype user can’t make a computer-to-computer voice call to a user of competing computer-based service like Google Talk.

But Google has already announced that it will use the SIP standard to achieve interoperability with other providers (see eWeek story here).  I posted previously about Microsoft and Yahoo promising instant messaging and voice interoperability.  Market dynamics mean that that everybody has to band together and use interoperability to overcome the lead Skype currently has as a non-interoperable service.  That will happen.  Moreover, eBay proper if not its Skype division will want to be voice interoperable in its mainstream auction business.  The interoperability problem is going way.

But that’s all geek computer-to-computer stuff.  Real people use phones, don’t they?  Well, increasingly not.  They use little computers aka mobile phones.  Those little computers act like they’re part of the phone network today because of the archaic and overpriced technology that connects them to their towers. Increasingly those little computers aka mobile phones are being connected to data networks.  Within a year or two most of them will also be able to connect to the growing mesh of wifi networks.  Voice will quickly migrate to the data connection.  Voice will be just one more data application – or part of an application as in gaming or voice annotation of photographs or video sharing.

IP voice is already better than the voice offered by telcos.  It has presence management – like instant messaging.  If you want them to, people can know when you’re available. IP voice can be integrated with the other applications people use every day and the games they play.  And IP voice – since it is available for just the cost of bandwidth – doesn’t get more expensive with distance or when it crosses national borders.

The only time IP voice costs real money today is when it has to be connected to the traditional telephone network.  Yes, today most of the time at least one end of a call IS on the traditional phone network.  Vonage’s money making business is undercutting the cost of these connections for their many users who still do make most of their calls to and from people on the traditional telephone network.  But the number of people with data connections (IP connections) and/or data capable mobile phones is growing while the number of traditional phone lines is shrinking.

The cost of putting traditional phones in the developing world is prohibitive.  All the growth is in mobile and VoIP.

So most speech will then be computer to computer (counting mobile phones).  Where the old phone network persists, its per call pricing will implode. 

We won’t think about discreet “calls” soon except for prearranged conferences (meetings).  We’ll talk to people the same way we IM them – when we’re both available.  If we’re not both available at the same time, we’ll leave a voice, or text, or video message.

Meanwhile I do continue to use Vonage service.  I prefer them to Verizon; they’re cheaper and have a better service.  Customer service is equally awful. And I use Verizon wireless voice when I’m not in a hotspot or on some other data connection where I can use VoIP.

But I’m not buying Verizon or Vonage stock because five years from now I won’t be making phone calls – just talking from time to time.