Friday, October 19, 2007

VoIP Follies

This post to Small Cap Copy was generated amidst a Voice-over-the-Internet (VoIP) “black out.” Uncharacteristically, I was an “early adapter” to VoIP, establishing phone service for Crystal Equity Research with VoicePulse (private) in 2003 and transferring my home phone number to Vonage (VG: NYSE) in 2004.

Until this week, there has never been a hitch in either service other than that related to Internet connectivity. Of course, neither Vonage nor VoicePulse have anything to do that issue. I learned early that a handset designed for digital phone service is helpful to get the best sound with Vonage, but I wanted a new phone anyway! Today switch issues are frustrating the installation of new equipment.

There are other VoIP services, such as Packet8 from
8X8 (EGHT: Nasdaq) and Fonality (private) for businesses and Speakeasy (private) specializing in home phone services. Of course, the cable and satellite television providers are also trying to get into the digital phone service business as well.

My question is this….if VoIP works as well as it has for my personal and business use, why has it not been a better investment opportunity? You only have to ask investors in Vonage to learn that the service provider segment is a bust. VG shares sold at $17.00 in the May 2006 IPO and now trading near $1.50.

EGHT shares are not as storied as VG, but are no more successful. The stock climbed above $7.00 a share in early 2004, but since sunk to a buck and change. 8X8 posted its first net profit in the June quarter, but that was from other income. Operations still posted a small loss but are trending toward profitability.

The other tactic is to invest in the equipment providers.
Cisco (CSCO: Nasdaq) has cashed in on the user premise market with their Sipura and Linksys phone adapters. Avaya, Inc. (AV: NYSE) is another player in the market for VoIP PBX for businesses. Of course, of these names are not VoIP pure plays and their stocks do not trade on the success or failure of the VoIP market. They have been successful by sticking to what they do best, selling easy to install equipment.

Another equipment provider
ShoreTel, Inc. (SHOR: Nasdaq) is an up and comer in the VoIP business with $6.0 million in net income on trailing sales of $97.8 million. ShoreTel is proving that focused product line and small scale are enough to generate value in the VoIP sector.

Wireless is the next frontier for VoIP.
eBay’s (EBAY: Nasdaq) Skype service is expected to be a player in the wireless VoIP service segment. The 2005 acquisition has not been a successful venture for eBay, but Meg Whitman’s team is still confident they can turn things around.



Neither the author of the Small Cap Copy web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

4 comments:

Anonymous said...

FYI, Sipura is owned by Linksys (Cisco) now.. I dont think they ever had anything to do with Motorola...

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