Vonage Canada president smiles through the gloom: full conversation

Under the cloud of a troubled initial public offering and a lawsuit from Verizon, Vonage Canada president Bill Rainey put on a brave face during an interview with Network Letter last month. He talked up the VoIP provider's plans, and explained how the firm expects to create a brighter future for itself, customers and shareholders.But as we hit the Internet, Vonage in the US was slapped March 23 with a permanent injunction regarding the continued use of Verizon patents. A judge had ruled earlier this month that Vonage was in fact infringing on patents held by Verizon. Vonage has asked for a stay of either 120 days or until its appeal is heard. Network Letter will continue to monitor the situation and will bring you information as it happens. The Bad New DaysNL: A year ago, Vonage seemed to be on top of the world - the plucky VoIP company taking on the incumbent providers. Now, headlines describe your firm as troubled, not growing so quickly, financially shaky. What happened to your darling status?Rainey: I would answer that by saying I don't believe it's no longer the darling. We have a business plan and a strategy that we stay very focused on. It differentiates us in the marketplace. We've stuck close to what we've done well.You may question subscriber lines. Our growth has been phenomenal, and it continues to be phenomenal. Any company that goes from startup to high growth eventually slows down. But define "slow down." We've gone from hypersonic to light speed.The focus after the IPO was on profitability. That was built right into all of the documents we filed with the Securities and Exchange Commission. It's what you expect from any company that goes from startup to high growth, and goes public. You've gone through your investment mode; you've gone through lots of money to build your capabilities, the network, the customer base, your quality of service. Then you start looking at building the profitability, so you diminish those losses more and more, every year. That's exactly where we are. We're right on track.Vonage's Sweet SpotNL: You mentioned that Vonage focuses where it will do well. Where is your market today? Rainey: Right now, we chose the residential customer market first. That's our sweet spot. If you can provide a service - and I'm speaking in Canadian terms - for $20 or $40 a month and run a business with very strong margins and deliver a great level of service to your customers, it's a heck of a good business.As opportunities become available, you look at where customers want to take the service. Are you considering wireless? Are you considering small business? These are all things we've made public. Those are logical next steps - but only at a particular point in time. First, get your business growing, start to become profitable in the time your business plan says you should, and then diversify. That's exactly where we are today.WirelessNL: On wireless, many people are discussing the possibility of Vonage becoming a mobile virtual network operator (MVNO) in the US. Would you consider that in Canada?Rainey: Absolutely. We're a global company - we just happen to be in the US, Canada and the UK right now. We have facilities in Europe. The United States is a number of years ahead of Canada and the UK in terms of development. It makes sense, since we're a global organization, that most of the things the US would look at would eventually become global capabilities. We've been fairly aggressive about the wireless market. That's no surprise. We launched a Wi-Fi phone some time ago. It's market that's too big not to look at. It suits VoIP very well. It becomes another application platform.NL: Speaking of Wi-Fi, would Vonage Canada consider partnering with municipal Wi-Fi operators such as Toronto Hydro Telecom Inc. and the City of Fredericton to provide Wi-Fi VoIP connectivity? Rainey: Anything specific, you know I can't share. But on a strategic level, obviously if we're considering building out wireless capabilities, municipal hydros are logical partners.The Business MarketNL: What about the business market? We haven't heard very much about Vonage's small to mid-sized business (SMB) offerings in Canada.Rainey: We have two small business rate plans here in Canada. We've always, from day one, catered to the small of small business - the SOHOs (small office, home office). We have some very happy customers in that segment. As you build out - your capabilities, your applications - and move up market, it's a logical extension, especially if you're looking at wireless as well, to move from SOHO to more of a small business play.NL: Some people say we're experiencing a "trickle up" effect in technology right now - consumer technology is influencing enterprise technologies. Vonage is a consumer technology, but it could ride the elevator up into big businesses. What do you think of that?Rainey: There are significant challenges. It's something phone companies have done very well. They've played in the enterprise space. That's not something we've had our eye on. It's a very complex business.There are a couple of fairly specific opportunities in the enterprise space that might make sense. An example might be a distributed sales force - like a real estate company. You have independent agents all over the country. It's not like a bank, where you need a giant IP-PBX tying everybody together. They hardly ever come into the office - in fact, they might never come into the office. You could give them a V-Phone (which resides as software on a USB drive), a laptop and let them go. It's a wonderful application for them. If you consider that an enterprise play, it's a great application. But it's not something that we're super focused on. It's not our core skill or our core strategy.SkypeNL: Vonage has a global, nearly free competitor in Skype, which now offers a business class service. Millions of people have downloaded the Skype client. How do you combat that? Rainey: Nothing is ever free. You may provide a free service, but at the end of the day, it was not a profitable company. How long is that sustainable? It's nice to start that way, but eventually you have to charge for service. That's exactly where they're going. Then they come into our space. We provide a complete telephone replacement service for consumers and small business.NL: Are you worried they'll beat you? Rainey: Sure. And are they our size? No.NL: But Skype claims 100 million people have downloaded the Skype client. Surely Vonage can't claim the same. Rainey: I think the distinction there is understanding the difference between people who sign up for services, and people who use services.NL: So you're saying although many people may have downloaded the client, not so many people are necessarily using it.Rainey: How many millions of people have a Hotmail address and never use it? It's the same concept....And I think the difference in our model is you're able to build a very long-term relationship with the customer. It grows over the years with other applications, as our company grows. It's a lot easier to do with our business model.DeregulationNL: The government is trying to deregulate the local phone service market in Canada. What do you think of their methods?Rainey: We've always, from day one, known this market would move to deregulation. It has to. It's the right thing to do....The issue in our minds, which is what people are struggling with today, is what's the orderly transition to get there? We think it's unrealistic to think you can just press a button and all of a sudden you have a deregulated market. You have to make sure things are happening to get you there.All we've ever questioned is, is there a transition process? First the CRTC created one. They had a pretty darn good plan.NL: This was the plan that suggested incumbent service providers had to lose a certain percentage of a given market's share before the commission would grant forbearance from regulation, yes?Rainey: Right. They thought it through. They're experts. They may be a government group, and that may come with certain connotations, but they are absolute experts. They got it right, in ours and a lot of other people's estimation, including the cable companies, all the other independents. The only people to question it were the ILECs - with good reason. It's their market share. You'd expect that.NL: But Industry Minister Maxime Bernier proposed a less stringent forbearance formula that does away with the market-share percentage portion, and counts the number of facilities-based competitors in the area instead. What do you think of that?Rainey: We feel it's a little unreasonable to think that just because you have facilities, you have competition. It could be wireless, which today hasn't matured to the point of wireline for VoIP services. Does that mean you have competition - especially when some of those companies happen to have both wireless and wireline? Do we really have what the minister is looking for? Innovation, choice for customers, hopefully some price savings, and most of all sustainable competition - we're suggesting that won't be the outcome. It's not in the best interests of the incumbents to move in that direction. We're suggesting that whichever way you go as long as there's a transition plan that allows competition to be sustainable, we wouldn't be against that.NL: But it's not the government's job to protect companies from the risks of competition.Rainey: In theory, we should let market power show its end result. The problem in a world of a monopoly is it abuses its market power to squash the competition. Let me give you an example: phone companies are known for building networks. They're not known as well for innovating new services. They're masters at taking someone else's idea and mass marketing it. A good example is VoIP. Who brought VoIP to Canada? Vonage. Primus launched, then we re-launched. Small companies are the ones that innovate....It's that innovation that makes the world go ‘round.

Vonage Canada president smiles through the gloom: full conversation

News | March 26, 2007

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