Investors Warm to Web Calling

The rally that's propelling Vonage and 8X8 and luring venture capital to private Web-calling providers is likely to continue

Robyn Beck/AFP/Getty Images

By Olga Kharif

For many consumers, the appeal of low-cost Web-based calling has long been clear. But many investors have kept their distance from companies specializing in Internet telephony out of concern the industry would struggle to make money.

Until recently. The most high-profile indication of newfound love for Web calling came Sept. 1, when investors led by venture fund Silver Lake said they would pay eBay (EBAY) $1.9 billion for most of PC-to-PC calling giant Skype.

The demand doesn't end with Skype. In the past seven months, venture capitalists poured tens of millions of dollars into mobile Web-calling provider Fring, Internet-calling software maker Twilio, and service provider Ooma, which had multiple funding offers in June, when many startups couldn't get a dime.

Vonage on a Tear

Public markets have warmed to Web calling, as well. Shares of Vonage (VG) have rallied almost fourfold, to 1.62, since early August. The stock of rival 8X8 (EGHT) has risen 26.4%, to 91¢, since Aug. 1, and the company is getting "a lot of interest" from potential acquirers, says 8X8 CEO Bryan Martin.

The companies that have stuck it out this long overcame the technological glitches that plagued Voice over Internet Protocol (VoIP) communications early on, and have made the cost reductions and strategy adjustments needed to spur growth. "This is not a 1999 or 2000 dot-com deal, where you buy a company with no revenue," says Mark Wiseman, senior vice-president for private equity investments for the Canada Pension Plan Investment Board, which invested in Skype along with Silver Lake. "You are buying a real company, with real revenue…and real earnings."

In the second quarter, Skype's sales rose 25%, to $170 million, while its registered subscriber base increased 42%, to more than 480 million. In the same quarter, Vonage posted its first net profit, of $2.3 million. "We are generating positive cash flow, we reported record earnings," says Vonage CEO Marc Lefar, a former chief marketing officer at AT&T (T) who joined Vonage in July 2008. "People are starting to realize there's a good business model here. It's absolutely a business that can be very profitable."

Business Exchange

Track and share business topics across the Web.