Friday, July 6, 2007

Will SunRocket VoIP Bite Moon Dust?

SunRocket VoIP advised their affiliates yesterday (July 5, 2007) that they were discontinuing their affiliate program managed through the LinkShare network. They also advised that they have not paid affiliate commissions since March and they did not know "if or when payment would be received." Is the end of SunRocket VoIP near?

An Affiliate only gets paid when they sell a product so Affiliate marketing is a very cheap way for a company to market products on-line since it is the lowest cost option. SunRocket has been offering sweet deals to affiliates and new customers, commissions of up to $100 per account for affiliates and up to 3 months of free service to new customers. It seems the deals may have been too sweet and SunRocket likely has a severe cash flow problem. A company would usually discontinue or reduce their high cost marketing channels first, not their low cost one, so the fact they cancelled their Affiliate marketing program is not a good sign. It seems that SunRocket needs a cash infusion or the next step may be bankruptcy.

What will happen to a customer's VoIP service if SunRocket goes bankrupt? It is hard to say at this point. Many SunRocket customers prepaid their SunRocket service for 1 year because they offered a special of $199 per year and 3 months of free service. So many customers may simply lose their VoIP service and the unused portion of their money.

Are there lessons to be learned here? Yes, at least a couple.

1. The VoIP market has been very competitive over the last couple of years and margins have been low. VoIP service provider's have spent a lot of money on advertising and promotions in order to build a large customer base in order to reach critical mass and reap large profits in the future. This strategy does not always work and it tends to favor the large well financed companies. There will continue to be a consolidation in the industry as weaker players continue to fail and larger, well financed companies continue to gain market share.

2. A consumer should be careful when they choose a VoIP Service provider. Maybe it is not a good idea to prepay for a long period of time in order to get dirt cheap service today This may actually be a sign of financial weakness because a company offers these deals in order to improve short term cash flow.

3. The same can be said for all prepaid services. It is a good idea to not pay them to far in advance unless you know the financial condition of the company.

Remember, even large well capatalized companies can fail. Remeber Enron? Could this happen to Vonage? Of course it could. One thing is certain, there will be more surprises in this industry in the future. There are simply too many players and the VoIP industry needs to consolidate.

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