Gearing up for his recent move to a new home in south Florida, David Pietrowksi knew he would be making a lot of long-distance calls to family back home in the Midwest. Surfing the Web one day, the 31-year-old sales executive saw an ad for Vonage at Yahoo.com and signed up for its discounted offer of $15 per month VOIP service, complete with a free adapter.
Why not, he figured? Monthly local calls alone would have run him around $30 with a company like Southwestern Bell. "It was a no-brainer," he said.
Pietrowksi bought wireless headsets to go with the service, which allows him to forward calls to his cell phone and send voicemail to his e-mail account, and added a business line for an extra $40 monthly fee. "My wife can talk on one line and I can do business on another," he said. "It's color-coded. Anyone could set it up."
Perhaps, but Pietrowksi's early-adopter status (which he's confirmed by jumping on the satellite radio bandwagon and purchasing the latest Xbox PlayStation2 the day it was released) means that he is not just "anyone." For Vonage to reach critical mass with its Voice Over Internet Protocol (VOIP) service, it must continue to convince not only tech-savvy consumers like Pietrowski to dump their phone lines, but also a fair number of people who are still dialing up to the Internet, if not asking their kids to program the VCR.
"We are beyond early adopters now; we're in the early majority stage," said Dean Harris, 55, chief brand officer at Vonage. "You can't have our numbers and have them be only early adopters."
Others may debate that point. In the meantime, Vonage has been so successful in pioneering the early growth of the category known as Internet telephony, Harris has more pressing matters on his hands. His Edison, N.J., company is now facing an uncertain future, one that includes fierce competition and the possibility of a public offering or buyout.
How Vonage got to that stage, of course, is the reason Harris has been selected as one of our Marketers of the Year. Through a combination of its strong value proposition and eccentric message--complete with a missive to warn consumers against doing "stupid" things--Vonage has established the definitive VOIP brand. It currently leads the category with one million subscribers (a third of the U.S. market), up from 300,000 last November. Time Warner is second with about 600,000 subscribers, followed by Cablevision with 250,000.
Many analysts predict that the market for VOIP in the U.S. is set to explode, which explains why both cable companies and Internet giants like eBay, Google and Microsoft have jumped into the fray. Research firm IDC, Framingham, Mass., forecasts the total number of U.S. residential VOIP subscribers to grow to 97 million by 2009, up from three million in 2005. More than half of households that subscribe to the service have disconnected or replaced their landline phones, per research group Telephia, San Francisco.
Perhaps most noteworthy is eBay's $2.6 billion-plus purchase of Skype, the Luxembourg-based company whose free peer-to-peer Internet phone service has 54 million users worldwide. (Skype users talk via computers with a headset or a mike, whereas Vonage and other like-minded providers require a broadband feed to talk through cyberspace using a regular telephone.)
Reports are mixed on how eBay's purchase of Skype changes things for Vonage, though an acquisition of such magnitude surely legitimizes a new product category. Some argue that eBay may use Skype simply to enhance its auction process, thereby lessening Vonage's concern. But eBay users might be introduced to Skype during a buyer-seller transaction and then continue to use the technology because its peer-to-peer communication works so well. Others say new "SkypeBay" or "Skype-Pal" options may take a cut of each call that takes place when a consumer "skypes" a commercial business.
Microsoft, meanwhile, bought the VOIP software provider Teleo, San Francisco, earlier this year, while Google introduced its GoogleTalk VOIP service. AOL and Yahoo! are also making inroads with VOIP offerings of their own.
Analysts believe that cable companies, led by Comcast and SBC, may have the inside track. "It's very difficult to prevent the owner of the pipe from providing a competitive service, and if you can get it all bundled from one provider, why go to Vonage?" said Fred Burr, senior director at Interbrand, New York. "Vonage may have created the category, but watch for the likes of SBC and Time Warner to come in and take ownership."
Others note that new rivals could soon throw their hats in the ring. "VOIP is easy to build and distribute. No one's stopping, say, TurboTax from entering the business," said Jim Nail, an analyst with Forrester Research, Cambridge, Mass.
So, how does Harris, a former ad agency executive and dot-com marketer at HotJobs who came to Vonage as chief marketing officer in 2002, plan to beat back competitors and negotiate the rapidly changing VOIP landscape?
"Through a combination of excellent product and a robust feature set," he declared. "We represent value and our brand certainly helps. VOIP is becoming more mainstream. The category is growing and so are we."
Harris has reason to be confident, given that much of Vonage's marketing is measurable. The company continues to build its customer base through an aggressive direct response campaign that combines TV, print, radio and online advertising. Chalk up that lesson in accountability to Harris' dot-com days.
"I learned how to move quickly and how to be accountable," said Harris. "One of the lessons [of that era] is that it isn't just branding. It's also about results."
Internet users have likely caught the flood of Vonage pitches, many of which include an offer for a free month's service and a call to action to its Web site. In an implicit recognition of its early tech audience, a recent banner ad insists that "no nerds are needed" to take advantage of the service.
Of the $189 million that Vonage spent in the first half of this year, nearly two thirds ($122 million) was devoted to the online medium, per TNS. Vonage consistently ranks in the top five companies in terms of online ad impressions. The company increased the number of unique visitors to its site to 6.2 million last month, up from 1.3 million a year ago, according to Internet tracker comScore Media Metrix, Reston, Va.
Offline, Vonage has produced some of the most distinctive clutter-busting ads of the past year with its "Stupid Things" campaign, featuring a series of punch-drunk TV spots via Arnold One, Boston.
With its infectious "woo-hoo" musical backdrop (a tune courtesy of the 18.104.22.168's band on the Kill Bill soundtrack), the ads culled footage from a variety of sources including America's Funniest Home Videos and online forums. Individuals were shown attempting an assortment of boneheaded stunts, such as skiing off a roof, attempting to balance on a rolling treadmill or sawing a tree that falls on a car roof. In one spot, a child wielding a baseball bat swings and misses, and the bat goes crashing through a sliding glass door.
The message: Humans do stupid things, but paying too much for phone service shouldn't be one of them.
Some observers might assert that crafting a message that's tantamount to insulting your target audience is itself "stupid." In retrospect, however, the campaign looks pretty shrewd.
Harris, of course, only agrees with the latter. "I don't think we insult. We got people's attention and provide them with a solution," he said. "Humor is a proven way of getting attention, and the ads have a degree of humanity."
Arnold execs say one of the keys to the effort was to avoid the usual pitfall of barraging consumers with a list of features when introducing a new technology to a general audience.
"The temptation is to go into [things like] antilock brakes," said Matt Lindley, svp/executive creative director at the agency. Instead, his team reeled people in with price as a lure, but in the context of irreverent humor. As evp Greg Johnson said, "We're snarky, a little bit of a smart ass, and very cheeky."
while Harris argues his VOIP service reaches varied audiences--"our demographic skews are wide-ranging, including over 40," he said--sports is an important component of the strategy. Harris recently launched an ad (independent of Arnold) with Phil Esposito, the former hockey player who once famously crashed into the ice rink. The ad, which runs on cable channels from Lifetime to Spike, shows a tape of Esposito's spill from 1972, with the modern-day man claiming he's smarter now that he's a Vonage customer. An 800-number urges consumers to sign up.
"Sports is a part of American life and that is another good way to connect with Americans," said Harris, who approached Esposito after discovering he was a Vonage user, then shot the ad in the ex-hockey player's living room. "[Phil] isn't an overly aggressive male; he gives a human performance and he seems really likeable."
To celebrate its one millionth subscriber milestone, Vonage partnered with professional athletes on a consumer promotion to thank its customers. Nine select Vonage subscribers last month received surprise "thank you" visits from a sports hero, who installed a new Vonage device for them with a free year of Internet phone service. The star visitors included the NBA's T.J. Ford, Daniel Ewing and Sean May; and the NFL's Keith Bulluck, Desmond Howard and Chris Simms.
Vonage has sponsored Major League Baseball, launching a campaign during the start of the 2004 MLB season with national cable and radio touting price deals such as 500 minutes of local and long-distance service for $14.99 per month. The ads featured a fictional head of a major phone company on the verge of a nervous breakdown.
Vonage also built awareness by latching onto other areas of entertainment. The company is currently sponsoring its second season of MTV's The Real World, with the Austin, Texas, set featuring product placement including a Vonage videophone and branded mouse pads, as well as a PC screensaver showcasing a "Stupid Things" advertisement.
According to Harris' colleagues, one of his personal strengths is a willingness to try new things. "Dean is always up for experimenting," said Caroline Finch, director of marketing at Vonage. "He's a bright, innovative guy who loves marketing and has a sense of humor."
Harris' own characterization of his style is "participatory." He said, "I'm collaborating. I would hope people think I'm fair. I used to run an agency, so I've been on both sides of the fence."
As an example of experimentation, Finch got the green light from Harris to run an ad test in movie theaters in Boston and Denver this summer. Dubbed "Psychic Powers," the ad looks like a Beavis & Butt-head cartoon, with a character who hopes for a world in which he gets the dinner he ordered and asks the phone company not to overcharge him. Arnold execs are still weighing the merits of the ad. "We'll get the results and decide whether to give it a wider rollout," noted Finch.
Winning customers has been the name of the game for Vonage to this point, but it won't necessarily remain the same. Competition will force already low prices even lower, and the problem of customer "churn" looms.
Analysts estimate that Vonage's cost-per-acquisition (CPA) is around $250 per head, with each customer representing income of between $15 and $25 per month. "It's not a bad formula from a direct-marketing perspective," said Forrester's Nail. "But you are counting on loyalty."
Such a high CPA isn't sustainable forever. By comparison, Netflix spends around $38 to acquire each customer and then earns $17 off each of them per month. DirecTV spends hundreds of dollars per acquisition, but gets more monthly revenue from each customer it gains.
Industry watchers believe cellular phone VOIP will be the next killer app, and think Vonage should find partners in the mobile space pronto. When SBC completes its acquisition of AT&T, for example, it likely will aggressively market its VOIP offering, CallVantage. And Verizon's VOIP offering VoiceWing costs just $19.95 per month.
Or, perhaps the category will not reach the heights many anticipate. After all, people do stupid things (like clinging to familiar ways when better ones exist).
Just ask those who may have caught a Vonage billboard that resurrected one of the more foolhardy missteps in recent presidential history: "Oval office. Humidor. Intern ... Paying too much for phone service is just as stupid."
Photograph by Peter Murphy