Can You Hear Me Now?

Jeffrey Citron made his name as the boy wonder of computerized day-trading, then ran afoul of federal regulators. Today, as CEO of Edison-based Vonage, he wants to revolutionize the telephone industry. Can he be trusted with your dial tone?

At first glance, Vonage Holdings’s headquarters gives little hint that it’s home to a leading player in a new technology that’s reshaping the telecommunications industry. Headquartered in a nondescript office park in Edison, across the street from an Entenmann’s outlet, the work space is cluttered, even a bit ratty.

The tight quarters add a certain sense of energy, as employees go about their business on a crowded second floor devoted to product development, administration, and marketing. Some of the techies walk around with open laptops cradled under their arms, occasionally stopping for impromptu meetings in the middle of a corridor. The brainstorming helps fuel the burgeoning technology of Voice over Internet Protocol, known by the not-too-catchy acronym VoIP. Simply put, VoIP is phone service delivered over high-speed broadband networks. A consumer plugs a phone into a small adapter box connected to a DSL or cable modem and—voila!—a dial tone. The adapter converts voice signals into small digital information packets composed of zeros and ones, which are converted back into sound waves at the other end. Transmitting across fat broadband pipes that deliver assorted voice, video, and data services enables VoIP providers to avoid certain switching and regulatory fees that traditional phone companies must pay to use dedicated copper lines.

VoIP has been a fringe technology since the 1990s. But now it’s on the verge of going mainstream, in part because of the leadership of Vonage (pronounced VON-ij) in residential VoIP service. Perhaps you’ve seen the company’s advertisements in recent months, from its ubiquitous Internet presence to its humorous “people do stupid things” television spots with the “woo hoo hoo” music. The hook is simple: Pay a low, flat monthly rate for lots of calling minutes any time of day, anywhere in the United States, Puerto Rico, and Canada. Vonage’s cheapest plan provides 500 minutes for $14.99 per month.

By 2006 Vonage expects to have more than one million customers, about a 150 percent increase from the end of 2004. Later this year the company will also have more elbow room when it moves into a refurbished 360,000-square-foot building in Holmdel with a gym, a child-care center, and a bank.

If this story were a movie, central casting might place a company like Vonage somewhere in Silicon Valley. But given New Jersey’s rich history of telecom innovation, it’s entirely appropriate that the company is based here. In nineteenth-century Menlo Park (present-day Edison), Thomas Edison improved upon Alexander Graham Bell’s original invention, boosting the telephone’s long-distance capacity. In the twentieth century, AT&T’s famous Bell Labs unit in Murray Hill gave us the transistor, which is credited with ushering in the information age, and the cellular technology behind wireless phones and the voice-compression technology needed for VoIP.

In the 21st century, Vonage wants nothing less than to upend the telephone industry. Or, in the words of company CEO Jeffrey Citron, “We aim to replace the existing communications platform.”

Tall in stature, with a youngish face, Citron, now 35, brought to the new company a history of success in a high-tech business. He also brought some baggage.

Citron grew up on Staten Island, skipped college, and took a job in the mailroom of a New York brokerage firm. He eventually became a trader and, while still in his twenties, played a significant role in two ventures that helped change the face of Wall Street. First, in 1992, when he was all of 22 years old, he co-founded the Island ECN, an automated electronic stock-trading system that lowers trading costs by connecting buyers and sellers without a middle man. The Island ECN was later sold to Instinet Group, a company that now handles one-quarter of all Nasdaq trades.

In 1996 Citron helped launch and became CEO of Datek Online Holdings, one of the pioneers of online stock trading. With the stock market booming, Citron and his wife, Suzanne, who’s also from Staten Island, bought the Brielle home of troubled financier Robert Brennan. They bulldozed the property, which fronts the Manasquan River, and built a $3 million mansion (he also bought Brennan’s jet). “I guess we’re not newbies anymore,” Citron jokes. “What’s that word they use in Jersey? We’re not bennies anymore.”

But Citron’s reputation took a hit in 1999 when he resigned from Datek amid a Securities and Exchange Commission investigation into stock fraud by Datek employees. He sold his stake in the company for a figure reported by the New York Times to be $225 million. The SEC filed formal charges in January 2003, accusing Citron and six others of manipulating for their own benefit an automated trading system designed for individual investors, making tens of millions in profits. Seven Datek employees paid $70 million in fines. Citron, without admitting or denying wrongdoing, agreed to pay $22.5 million, one of the highest individual fines ever imposed by the SEC. He was banned for life from the securities industry.

After leaving Datek, Citron took a year to travel with his wife around the United States and Europe. In 2000, the founders of Min-X, a Long Island–based company, recruited Citron to invest in their business, an electronic exchange for trading phone minutes. Citron signed on but quickly realized they could make more money selling cheap phone service directly to consumers via the Internet. The company adopted the VoIP model and renamed itself Vonage; Citron became CEO.

Flush with cash, Citron provided most of the company’s initial seed money. At least one published report put the amount at more than $30 million, a figure that Citron does not dispute. “The first goal was to get a dial tone,” he says. Eventually they made the system work, and Vonage launched its service in April 2002. Since then, Citron says, Vonage has raised $408 million from private investors.

By the end of last year, Vonage was the market leader with a 35 percent share of the 1.2 million VoIP subscribers, according to an industry report by broadbandtrends.com. The report said that Vonage’s premium residential service—$25 per month for unlimited calling in the United States, Puerto Rico, and Canada—mirrors the average rate for local service in major markets. Long-distance with Vonage is dirt cheap—3¢ per minute to Paris, 4¢ to Rome and Sydney.

The Yankee Group, a research and consulting firm in Boston, forecasts that VoIP will reach 28.5 million users in the United States by 2010. But competition is heating up, with the largest telecom players—Comcast, Time Warner, and Cablevision Systems, along with the Baby Bell phone companies—having either joined the fray or planning to later this year.

As cable and phone companies flex their muscles, the Yankee Group expects that by year’s end the collective market share of smaller VoIP providers such as Vonage—66 percent at the close of 2003—will plunge dramatically. Phone service, including VoIP, is becoming a commodity, if not a loss-leader, for large cable companies that lure customers with the promise of bundled voice, video, and data service in one tidy bill. “I can tell you that none of the VoIP packages out there are making a lot of money,” says Yaron Raps, a longtime industry veteran who heads the VoIP practice at BusinessEdge Solutions, a consulting firm in East Brunswick. “The guy who wins is the guy with the deepest pockets.”

Vonage says its customer base makes money, but the company is still in the red because it’s plowing revenue into expansion. But a price war isn’t Vonage’s only challenge. Texas and Connecticut are suing the company for failing to clearly disclose the limitations of its 911 emergency access. It’s a critical issue for the entire VoIP industry: In May the Federal Communications Commission required that all VoIP providers offer complete 911 services by December. Vonage says it’s spending $10 million to start its 911 system.

Conventional analyst wisdom holds that Vonage needs to be creative to compete against telecom’s big boys. “The average household market will be a battle between the cable and phone companies,” says Yankee Group analyst Kate Griffin. “Vonage needs to key into tech-savvy users with perhaps more advanced needs.”

Citron brushes off these concerns. He says that competition from large telecoms raises VoIP’s profile and expands the market for everyone. He claims that Vonage products and services—including a Wi-Fi (that’s “wireless fidelity”) phone, to be released later this year, that will make VoIP available on wireless networks—provide a compelling value for individuals and small businesses. “If you listen to the analysts, we shouldn’t be here today,” Citron says. “There will be five or six players dominating 80 percent of the business, and Vonage is positioned to be one of those.”

Given Citron’s track record, it’s much too early to hang up on Vonage.

Jeff Schlegel is a regular contributor.

Article from September, 2005 Issue 

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