One on One: Vonage CEO Citron

8/17/2003 8:00 PM Eastern

While most cable operators are dragging their feet on IP telephony deployments, Vonage is offering cable subs a way to make cheap phone calls on the Internet by using their cable modems. The catch: the cable operator doesn't get a cent from Vonage, unless the operator agrees to partner with Vonage. National Editor Steve Donohue recently caught up with Vonage CEO Jeffrey Citron to talk about how he hopes to crack the cable industry.

MCN: What's your incentive to partner with a cable company?

Jeffrey Citron: What a cable company can bring to Vonage in terms of roles and responsibilities is to be able to market to its existing customer base a lot more efficiently than Vonage can market because it has an existing relationship with those customers. They know a lot more about them then we do, and therefore in theory a cable operator should be able to eliminate or greatly reduce Vonage's cost of acquisition.

MCN: You just launched in Rockford, Ill. In order for you to reach broadband subs, you have to market to the entire market. But if you had partnered with Insight, the incumbent operator, you could use their subscriber lists to target their high-speed data subs?

Citron: Exactly. We just actually announced two cable transactions — with Armstrong Cable and Advanced Cable Communications — and here is a great example of how a partnership works. Armstrong has a natural relationship with its customers. Vonage will market the Vonage digital voice solution product to Armstrong's customers under the Armstrong brand, and then Vonage will be able to provide that service on a no capex basis, and Vonage's cost for getting those customers onto our service is very low, and money we'll save will be transferred in the form of a revenue share to the cable operator.

MCN: What kind of revenue split are you offering operators?

Citron: It's typically about 25%.

MCN: The operator gets 25%?

Citron: Yes, Vonage's most popular plan, which is a $40 all-you-can-eat plan, unlimited calling including anywhere in the U.S. and Canada, with all of the features included in it, and operator can earn $10 per month for signing up a customer to Vonage.

MCN: You've launched recently in Illinois, Wisconsin, Indiana and Michigan. How do you decide which markets to launch in?

Citron: Vonage has an entire network operations team that basically scouts out potential locations for a launch. Driving launch are basically two critical criteria. One is we're in about 150 area codes today, which covers about 85 major markets. So obviously we're trying to figure out the second-tier markets, which markets we want to make our way into. Our goal is to cover the top 100 markets by the end of this year, and that's obviously one of the primary considerations for market selection. The second element, and part of that market consideration, is broadband penetration in the market, and the third is partnerships.

MCN: Do you look at competitive factors? If you learn that a cable operator is going to launch telephony service in a certain market, would you want to get there first?

Citron: Of course, we look at all kinds of data points like that. Today there hasn't been any big launch from any cable operator with telephony. There are a number of trials that are ongoing, and with all markets except for one, we're already in all of the markets that currently have service deployments in them.

MCN: You have about 42,000 customers now?

Citron: Yep, 42,000 customers — we're adding 1,500 to 2,000 customers a week right now on average.

MCN: How many subscribers do you expect to have a year from now?

Citron: We are targeting about 100,000 subscribers by the end of this year, and we're targeting about a quarter million by the end of next year.

MCN: I stopped by your booth at the National Show in June, and when I was there Cox CEO Jim Robbins and some of his team came by, and they were talking to your guys about whether you were looking for equity partners. Are you talking to Cox or other MSOs about investing in your company?

Citron: We're not talking to any MSOs about investing in our company, but we are having ongoing discussions with all of the major MSOs with regard to business relationships.

MCN: If someone offered to deploy Vonage only if you sold them equity, would you take an offer like that?

Citron: That's a very difficult question to answer without other pieces of information. Clearly Vonage would look at every single opportunity and evaluate those opportunities, and we would evaluate them from two perspectives. One, the perspective of the long-term strategic implications of taking on any such partnership, and of course couple that with the strategic implications of shareholder value creation.

If we were talking about a transaction that involved an equity component as part of a business deployment that had certain guarantees of commitments from that operator … and if the valuation was appropriate, then I think the company would be excited to move forward in that direction.

If it hurts the company long-term strategy or the value proposition isn't there or shareholder value isn't being realized, then the company would decide to pass and not cut that deal. But to date, I don't know necessarily that investment is a requirement for deployment or vice versa.

MCN: Are you close to cutting deals with any of the top five operators?

Citron: We are talking to all of the top six or seven operators. Are we close? It's always hard to say with these operators. You were in the booth — obviously you saw the enthusiasm Jim [Robbins] and his team had for Vonage. It's an exciting time for us. And it's an exciting time for these operators. And I think later this year or next year is when you'll really start to see everything come together. I definitely wouldn't want to be the owner of an RBOC right now.

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