OK, I'll admit it. There's comfort in crowds when taking a bear stance on Vonage (NYSE:VG), especially here at the Fool. The VoIP telephony provider doesn't get much love around these parts for a number of good reasons.

But I'm not so foolish as to believe that my duel counterpart Tom Taulli is without bullish ammunition. There are reasons why the market still has Vonage priced around $3 per share and not $0.03 per share. And I know darn well that since Tom is as sharp as a tack when it comes to stocks, he'll find some reasons why the stock might be worthy of consideration, risks and all.

I'm still going to bring the pain, though, Tom. Let's start with a recap of the fundamental ugliness at Vonage and then go through why the negatives outweigh any positive motivation for risking it with shares of Vonage.

On with the bloodletting
The most obvious argument against Vonage is that of a shaky fundamental basis for a growing business. Vonage is offering a service that is easily duplicated from any of dozens of deep-pocketed incumbents across multiple telecom and media-services industries. Large telcos Verizon (NYSE:VZ) and AT&T (NYSE:T) offer cheap telephony alternatives. Cable companies Comcast (NASDAQ:CMCSA) and Time Warner Cable (NYSE:TWC) bundle similar digital telephony services with their video programming options. And eBay's (NASDAQ:EBAY) Skype is a compelling alternative that's free to download and can be, for many users, a much cheaper alternative to the Vonage product.

This intense competition shows through in Vonage's metrics. Subscriber growth is slowing, churn is rising, and the average revenue earned per line is essentially stagnant. Not a good recipe for growth.








Subscriber Base (in millions)














Average Revenue Per Line







To get a sense of just how bad this is, consider this: For every two new subscribers who signed up in Vonage's most recent quarter, one canceled service. To deal with the flight of customers, Vonage has been squeezing its base with tighter policies -- and penalties -- for leaving. That's certainly one way to earn customer loyalty.

Earlier this year, Vonage cut its equipment returns policy off at 30 days -- Vonage will not accept any returned equipment after a month. And subscribers will now pay a termination fee if they leave within two years, a retreat from the previous one-year plan.

A stagnant average revenue per user (ARPU) metric tells me that customers are not using Vonage service for much beyond the basics. In fact, compared to a year-ago quarter, Vonage saw a significantly larger increase in revenue from disconnect fees ($2.4 million) in its most recent quarter than fees from add-on features to its plans ($1.8 million). And the customer revenues are even being slightly propped up by regulatory fees introduced last year for E-911 cost recovery and the Universal Service Fund. Again, not a business that shows significant new revenue opportunities on the horizon.

But wait, there's more. Tack onto this bleak picture a stifling lawsuit from Verizon that has the company paying a 5.5% service revenue royalty, the shooing out of past CEO Michael Snyder, and more litigation in the wings from stockholders, customers, and companies such as Sprint Nextel (NYSE:S). Oh, yeah, and an interim CEO and founder who has a less than stellar track record.

Where's the disconnect?
So if the outlook for Vonage is so dim, what keeps the shares afloat at all? Well, I can think of a few reasons -- potential for a buyout being one. Some investors believe there's inherent value in a customer base of almost 2.4 million, value for which another company may pay a few hundred million dollars. But the most likely candidates to buy the company are some of the very companies from which Vonage is stealing customers. So will Verizon pony up a half billion dollars to buy back some its lost customers? Probably not. Easier to just let Vonage go bust and woo customers back then.

And while I'm sure Tom will find other reasons that investors would speculate on shares of Vonage, it's far from a legitimate turnaround play and in my mind amounts to little more than a crapshoot. The bottom line is this: With so many great companies out there with solid growth and reputable management teams, why would investors sink money into such a death trap, hoping for a lifeline?

I wouldn't, but for those who have excess money to burn ...

You're not done with the duel yet! Read the other arguments, sound off on CAPS, and vote for a winner!

Fool contributor Dave Mock likes watching the VoIP carnage unfold from the sidelines. He owns no shares of companies mentioned here. Dave is the author of The Qualcomm Equation. eBay is a Stock Advisor recommendation. The Fool has a disclosure policy.