Internet Phone Service Becomes Big-Time Market


Cites Annual Ad Spending at More Than $50 Million

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SAN FRANCISCO ( -- Under assault from the biggest names in telephone and cable networks, Internet-phone-service pioneer Vonage Holdings Corp. is putting its marketing money where its business is: on the Web.
Vonage is now under seige in the new Internet-based phone service niche it helped pioneer.
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And Vonage expects to continue focusing on the Internet, even in the face of an onslaught of competition. AT&T Corp., for instance, made a $25 million Olympics push on TV, while regional phone companies and cable operators, which have started marketing voice-over-Internet protocol (VoIP), are expected to barrage the sector in a variety of media channels.

Dean Harris, chief marketing officer, said Vonage has been spending more than 50% of its marketing budget on Internet advertising. Marketers typically spent just 3.4% of their overall advertising budgets online in 2003, according to an eMarketer study.

Vonage, in the midst of an agency review, indicates its ad account is in the $50 million to $75 million range. However, according to TNS Media Intelligence/CMR, Vonage spent $2.7 million in 2003 and $831,000 for the first five months of 2004. Media measured does not include online spending.

WiFi phone
"The online media works very well for us," Mr. Harris said, adding Vonage plans to use the medium when it begins selling a new WiFi phone that will allow users to access Vonage service at WiFi hot spots, as well as at home and at the office. The WiFi set, scheduled for release in the fourth quarter, signals the opening of a "tremendous new market for us." (WiFi ia a radio-based connectivity system that works like a telephone or cable connection without the jacks or wires.)

Mr. Harris said a strong Web presence is a natural for the Internet phone company. "We embrace online advertising to a much greater extent than others because to use Vonage, you need broadband," he said.

But that's only part of it. Because the cost of customer acquisition is easier to track online than offline, Mr. Harris found that as he refined buys, the cost of acquiring an individual subscriber has dropped "hundreds of percents." He said that simultaneous advertising online and offline brought the best results, but declined to discuss specifics on acquisition costs.

Online buying methods
There are two ways to buy online media: targeted media that carry a high cost-per-thousand viewers (CPM), and lower-CPM, non-targeted buys on places like a portal's home page. "In certain cases, one cannot assume targeting is the way to go," he said. "That large premium is not always justified."

Mr. Harris said the same holds true for fancy online ads using rich media. "In some cases it's efficient and in some cases it's inefficient," he said. Search works well for the Edison, N.J.- based marketer, which deals with large portals such as MSN and Yahoo!, and has partnerships with and Fastclick, he said.

One of Vonage's better-performing spots, he said, was produced for Unicast's Video Commercial test earlier this year, which featured TV-quality ads on the Web, including audio. "It did well with brand metrics and it did well with the cost of customer acquisition," he said.

High stakes
Vonage's formula needs to be right because the stakes are high. A new Yankee Group report expects the U.S. VoIP market to grow from 131,000 subscribers at the end of 2003 to over 1 million subscribers by the end of this year and 17.5 million U.S. households four years from now. The study noted that although Vonage now dominates the market with almost a quarter million subscribers, cable operations are predicted to have 56% of the U.S. VoIP market by the end of next year. Share for the alternative providers, such as Vonage, will drop to 19% in 2005.

Some 20 shops were in the initial review for the Vonage account, including incumbents Korey Kay & Partners, an independent New York shop that handles offline creative; online media buying and creative agency Freestyle Interactive, part of Aegis Group's newly formed Isobar entity; and Inter/Media Advertising, Encino, Calif., which handles direct marketing. A handful of shops will be invited to presentations planned for late September.

Category pioneer
Mr. Harris is bullish on the prospects for Vonage to remain an important player in a category it helped pioneer, in part by turning around VoIP's perception, built in the 1990s as a cumbersome technological innovation applicable only to techno-geeks. He pointed out that Vonage's DNA doesn't have the baggage of an AT&T brand, which he described as a "heritage of business built on something else." Meanwhile, Vonage benefits from AT&T ads educating the public about the promise of VoIP service.

"I think we can move faster and be more innovative and entrepreneurial," he said. Besides, Mr. Harris added, he is continually in a state of experimentation. "Who knows what will work six months from now? We are constantly in test mode."

Mass-market challenges
Even if Mr. Harris figures a way to outgun his competition through Web-marketing savvy, Vonage faces challenges as it moves into the mass market. Consumers have less tolerance for inconvenience in the name of price savings, said Kate Griffin, the Yankee Group's senior analyst for consumer technologies and services. Vonage also is a small company that may be unable to provide the handholding that mass consumers expect.

"Vonage can succeed in a niche way if it keeps focus on customers they have today and doesn't overreach," she said.

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