How Vonage Woes Could Affect Online Advertising

The biggest online ad spender of 2006 may not have reason to advertise on the Web at all in the future. Vonage plunked down more than $185 million for online ads last year, and while its monthly expenditures have lessened in recent months, the VoIP service has certainly relied on Web ads to drive customer acquisitions. A recent patent ruling against Vonage could change that.

Vonage Holdings is one of a handful of ubiquitous direct response advertisers seeking customer leads through online ads, mainly purchased through ad networks. The company topped TNS Media Intelligence’s list of online ad spenders in 2006, towering over AT&T, Dell, Walt Disney and General Motors. According to Vonage’s 2005 SEC filing, the firm spent over $331 million on marketing across TV, Web, print and radio in ’05 and Q1 of 2006.

The company was found guilty by a U.S. District Court in Virginia of violating Verizon’s VoIP patents, and as a result, Vonage was barred from acquiring new customers. Friday the broadband phone firm was granted a temporary stay allowing it to continue to round up new customers.

Vonage’s monthly Web ad expenditures reached new heights in January 2006, surpassing the $31 million mark, according to TNS. Throughout the year, however, the company reduced spending, dropping steadily to $6.7 million in November 2006, then ratcheting up Web ad buys a bit to $10.6 million in December.

If Vonage decides to taper its ad spending further, David Smith, CEO of Mediasmith hopes the company’s media purchasing contracts incorporate standard terms and conditions that allow advertisers to opt out of commitments with a two-week notice.

A drop off by the big ad spender could affect Web sites and ad networks running Vonage ads, Smith added. “It’s always difficult when somebody opts out of the commitment for the sellers to have to resell it,” Smith continued.

Most of Vonage’s online dollars have been used to drive customer acquisitions through direct response advertising, so if the firm is unable to sign new subscribers, there’s a good chance it will reduce ad spending even more. Without Vonage vying for top search results spots, a reduction in their SEM spending also may lower prices for VoIP and related keywords.

“We may see some advertisers getting a lot more volume than they had in the past,” said JupiterResearch Analyst Emily Riley, noting ad inventory might be freed up if Vonage drops out of the online ad market. She believes the networks Vonage buys online ads from, which have included AOL’s and ValueClick, won’t have too much trouble adjusting for a potential Vonage exodus.

Vonage was running ads through ValueClick’s network until about five months ago, said the firm’s VP of Corporate Strategy John Ardis. “Many players in the space have already experienced the Vonage departure,” he told ClickZ News, citing the advertiser’s reduction in ad spending throughout 2006. “If a company is spending millions of dollars, you notice it, but I don’t think [the departure] was devastating by any means,” he said. “There are plenty of advertisers vying for these impressions.”

Mediasmith’s Smith isn’t sure networks will bounce back so readily. When credit card and cellphone firms lowered online expenditures, it happened gradually, company-by-company, said Smith. “This is the first situation where there’s potentially a massive cancellation,” he said. “If it does happen, it’s unprecedented.”

Vonage also announced late last month it would discontinue running its affiliate program through ValueClick’s Commission Junction network. Ardis said the loss of Vonage will not have a “material impact” since Commission Junction works with about 1,600 advertiser clients. If Vonage loses its right to acquire new customers, he added, it might disrupt the expectations of the company Vonage plans to move to for its affiliate program.

Although Vonage’s future hangs in the balance, the company has been given a window of opportunity through the temporary stay. That could mean a surge in online ad spending by the firm. Vonage would not comment for this story.

“It’s not a bad idea for them to be building up more consumers while they still can,” said Riley. “It does seem like they would turn to the Web in a last ditch effort.”

Because of its huge ad expenditures, Vonage’s strategy has been seen by some as wasteful. Vonage came under fire in July when spyware watchdog Ben Edelman released a report claiming the company’s ads were served up through alleged spyware during the months of March, June and July 2006. According to TNS, Vonage spent over $48 million on online advertising in the months Edelman reported spyware-served ads.

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