Ruling May (Most Likely) Be End for Vonage

Posts: 41 · Full Forum Member Joined: Apr 07, 2006 Posts: 41

Article in on the Front Page of the Washington Post today (3/24/07)

A federal judge yesterday dealt a potentially fatal blow to Vonage Holdings, the Internet-phone service that offers one of the few alternatives to traditional carriers, by ordering it to stop using a technology that connects its network to the public telephone system.

U.S. District Judge Claude Hilton approved the request by Verizon Communications for a permanent injunction two weeks after a jury in Alexandria found that three of its patents had been infringed by Vonage, including one for the technology allowing the Internet company's 2.2 million customers to call regular phones.

Hilton said the ban would not take effect before he holds another hearing in two weeks on Vonage's request for reprieve through a stay. The company said customers will not be affected by the court's decision, although analysts are skeptical the company will be able to sustain service if the ruling is not overturned.

This is the latest setback in Vonage's troubled history, which has included some regulatory losses and a shareholder suit stemming from its public offering. Vonage, which has never generated a profit, helped popularize online calling as a cheaper alternative to traditional phone service, waging a flashy marketing campaign on prime-time television and over the Internet. But some industry analysts said its flat-rate service was already starting to lose its luster next to new offerings from phone and cable companies selling combined telephone, Internet and cable television services.

The impact of the court's decision on other providers of Internet phone services, known as voice-over-Internet protocol, or Voip, remains unclear, analysts said. This could depend on whether Verizon wants to shut down Vonage or sell its licenses for the technology.

Vonage, which was ordered by the jury to pay $58 million in damages, has vowed to appeal the verdict and seek a stay from the federal appeals court if Hilton does not grant one.

In his ruling, Hilton said that the financial award alone was not enough because it "does not prevent continued erosion of the client base and customer base" of Verizon.

Vonage's stock lost 26 percent of its value in the hours after the decision, closing yesterday at $3 a share, down $1.05. The company went public last year at $17 a share.

"We are confident Vonage customers will not experience service disruptions or other changes as a result of this litigation," Vonage chief executive Michael A. Snyder said in a statement. Company executives said shortly after the jury ruling that the company could continue doing business by designing a "work-around" technique for connecting Vonage's network, which operates over high-speed Internet connections, to the regular phone network.

Analysts said yesterday that Vonage's public optimism might be ill founded.

"The patent goes to the core aspect of their service. It's not a small bell or whistle they can turn off without disrupting the service," said Rebecca Arbogast, a vice president and analyst with Stifel Nicolaus. "If they don't get a stay, they need very quickly an adequate work-around and that's going to be a challenge for them."

Arbogast predicted that Vonage would find it difficult to design an alternative way of hooking its network to the public telephone system because of the way the judge had interpreted Verizon's patent, leaving the Internet challenger little legal room for maneuver. Vonage had unsuccessfully argued that the patent covered only a small portion of how that connection can be made.

"If Vonage tries to implement a work-around, it's entirely likely Verizon will come right back and say that work-around violates our intellectual property and they'll be right back in front of a judge," she said.

Sharon A. O'Leary, Vonage's executive vice president and chief legal officer, said the company's appeal would center on how broadly the judge defined the scope of Verizon's patents.

"We remain confident that Vonage has not infringed on any of Verizon's patents, a position we will continue to vigorously assert in federal appeals court," she said, adding that Vonage developed its service using publicly available, off-the-shelf technology.

In a brief statement, John Thorne, Verizon's deputy general counsel, welcomed Hilton's ruling. "We're pleased the court has decided to issue a permanent injunction to protect Verizon's patented innovation," he said.

The brunt of the court ruling, if upheld on appeal, would be felt by Vonage's domestic customers because U.S. patent law applies only within the United States. But overseas customers could also see some of their service affected if the ruling disrupts the company's ability to provide international calling.

If Vonage fails to win a stay or offer a practical work-around, the New Jersey company could still seek to settle with Verizon by agreeing to license the disputed technology. In its March 8 verdict, the jury ordered Vonage to pay 5.5 percent of its revenue as royalties for the technology. But Verizon, now in a stronger bargaining position because of yesterday's ruling, would likely demand a higher percentage.

John Rabena, a patent expert at the Washington law firm of Sughrue Mion, said Vonage might be interested in reaching a licensing agreement despite the cost. He added it's still uncertain whether Verizon would throw Vonage a lifeline by agreeing to license the patented technology.

He said it also remains unclear whether Verizon will use the court rulings to put other smaller Internet competitors out of business. "What it means for other Voip providers, they could be next," he said. "It depends on what Verizon is interested in."

Posts: 63 · Posted: Sat Mar 24, 2007 6:43 pm Post subject:

I'm stunned there are not more posts about this given the gravity of the situation. Came on here to see what's going on with this new news and there's only two posts with few replies.

So who is the next logical Voip providor if Vonage is shut down? Granted, we're talking about several weeks/months until this would happen, but I'd hate to come back from vacation to find my phone shut off!!!

Could this be one of the worst IPOs of all time?

Posts: 1327 · Vonage Forum **MVM** Joined: Nov 08, 2006 Posts: 1327

Here in Canada we have Primus, I will just switch over to them.

If Skype had SkypeIn here in canada I would even go that route before switching back to Bell Canada.

Posts: 153 · Vonage Forum Master Joined: Jan 11, 2007 Posts: 153

There is a lot of discussion in the Vonage Stock forum.

Note that if Verizon's patents are actually upheld as valid, ALL Voip interconnections from the Internet to the PSTN are in trouble. Verizon has patented the basic mechanisms in the main Voip protocols, as defined in the Internet Engineering Task Force's RFCs.

Posts: 73 · Posted: Sat Mar 24, 2007 8:11 pm Post subject:

I don't have a current link, but I read an article how the cable companies were coordinating interconnecting their own services, so they don't have to connect to the PSNT networks.

Posts: 2251 · Posted: Sat Mar 24, 2007 8:16 pm Post subject:

This topic is being discussed HERE