Friend and colleague Don McArthur sent me a note in email asking for my thought's on his comment below in response to a post by Om Malik.

[Don said] Here's a test of our alleged 'free-market system.' Without a doubt Vonage will reach for a legislated solution via some bought-'n-paid political hack:

[From GigaOm] Will SkypeFree KO Vonage IPO? This is a classic high stakes Wall Street sucker punch. The buzz on the Street is that the Vonage IPO is on the rocks. They HAVE to raise money or they are in a world of hurt. Their investors don’t want to put another penny in and the company seems to still be bleeding cash, $75 million in the first quarter of 2006. Geez, Vonage is begging customers to buy 20% of the deal - not a great sign. Ebay knows this, why not toy with the mouse before you kill it. What better way to do away with the Vonage IPO and raise their cost of capital then scare investors even more. Every prospective buyer on this deal asking the same questions: what about pricing, why will anyone pay a flat fee per month when skype connects in the US for 2 cents a minute. $25 per month to Vonage is the equivalent of 1250 minutes. At Skypeout = zero, its infinite minutes. The value of what Vonage provides has just gone from $25 per month to somewhere close to $0, goose egg, nada. Tough to get a return on equity with those kind of numbers...

It's pretty clear that Skype sucker punched Vonage, but Vonage stepped up and stuck their jaw out lately. I don't know how effective the Skype punch will be. Remember AOL used AIM and took a swipe and SKype's game too. And let's not forget that Verizon whacked rates and took a pretty swift kick at Vonage too. Their's was the first shot lately.

Vonage's options are limited. They can hold their ground to try and maintain IPO value, but everyone's taking a shot at them now. They can drop back to price wars, but Skype already won that fight (at least for the rest of the year). Skype vs. Vonage or Verizon vs. Vonage doesn't matter. Neither is really a fair fight of equals.

I think Don's on the right track, but I think any attempts Vonage makes in appealing to regulators are going to fall on somewhat deaf ears. Bigger and badder telcos have the regulatory ear already, and those folks wouldn't mind seeing Vonage get squashed either. I think Vonage's best chance is to re-architect their business plan quickly and pick three strategic partnerships. Partnering with a major cable provider, and someone like say iotum, then add in a strong IMS play like BridgePort Networks brings and Vonage could find themselves defining a new game in town. But they'll have to work really hard to pull it off. Vonage is in trouble.

Technorati Tags: Skype, Vonage, Verizon, AOL, iotum, BridgePort Networks, VoIP