Vonage Customers hurt by IPO allocation?...I'm going to need a very small violin

The world is abuzz with Vonage's IPO debacle. While I won't comment on the merits of the deal, I did want to highlight something Henry Blodget said on his blog:

I don't mean to jump on the sick-horse-kicking bandwagon, but it appears Vonage has invented a new kind of leverage.  The company reserved about 14% of its IPO shares for its customers.  In other circumstances, this might be seen as a perk: Buy the service, get hot stock.  In this case, however, at least in the early going, it's proving to be an efficient way to engender widespread customer frustration. 

At this writing, Vonage customers who took the company up on its offer have lost 15% of their money.  Some of them, presumably, are now selling their stock to non-customers who were savvy or fortunate enough to wait until the stock started trading.  Even if the stock recovers from here, Vonage customers will no doubt remember that they could have done better.  And if the stock continues tanking...well, then, even Vonage customers who love the VOIP service will feel nothing but bile toward the company.

While I think Henry is correct in pointing out the potential customer service fallout this broken IPO will have on Vonage, I have to cringe at some of the comments I'm reading already from Vonage customers who feel "cheated" or "ripped off" by the direction of the Vonage stock price.

"I'm not a big stock market guy ... when I got the option to buy the IPO, I figured it was a chance to make some quick cash," Sgroi said. "I was planning to sell within a week or so anyway."

He sold the stock Wednesday morning at a loss. Now, he plans to cancel his Vonage account and switch to the local cable company's competing service, which he said would save him $10 a month.

"I'll try to recoup some of my losses that way," Sgroi said.

Since when doesn't Caveat Emptor apply?

The implication that many of these Vonage customers turned IPO shareholders are somehow being taken advantage of because they're not savvy investors doesn't hold much water, in my opinion. They, like all of us, had access to the information in the S-1 filling and certainly have been exposed to the same deluge of analysis (both positive and negative) about the company and its IPO prospects. And as users of the service, they arguably understand the pros and cons of the company's long-term business model better than many.

So if we're to assume that most of the Vonage customers didn't do any fundamental analysis on their own, but DID indicate interest for IPO allocation per their right, it's akin to any other type of game of chance. They were hoping it would payoff with a ripping IPO, but they had no factual reason to assume one way or the other. That's no different than visiting the casinos in Atlantic City (not too far from Vonage's own headquarters) and letting the chips fall where they may.

Would these same ill-fated customers...

• Self-diagnose intense abdominal pain? [no, they would see a doctor]
• Rebuild their car's transmission? [no, they would see a mechanic]
• Repair their tornado-destroyed roof? [no, they would hire a contractor]

So why didn't these customers take the time to talk to investment professionals and solicit their opinions? Unless their capital isn't a valuable asset to these IPO-damaged customers, it's hard to feign sympathy for the resultant outcome.

Note: At the time of this writing I, and/or funds I maintain discretionary control over, did not maintain a position (long or short) in VG.

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Comments

[Jason Wood]

Kevin,

Don't get me wrong, I think Vonage's strategy to offer IPO shares to customers was, at best, gimmicky, at worst, a very bad marketing and retention decision. But plenty of others are beating up on Vonage and championing how the KNEW it was a bum deal; I just felt the need to point out that anyone "burned" by this deal on the retail side was doing so with visions of a quick profit dancing in their heads.

Jason

[KevRich]

Your point is well taken and the financially-wounded Vonage customers who invested in the IPO do not deserve immediate sympathy. However you must agree that Vonage advertised their IPO as kind of a beneficence to their supposedly valued customers when in reality, they most likely aimed to take advantage of their powerful brand name to lure their ignorant victims into a fiscally unwise move. Reversing their increasing churn rate trend was Vonage's goal, not showering quick riches on its upper middle class customers. Vonage figured that they would ride their customers to a higher level, but failed to consider the opposite effect...now they must!