Vonage decision on hold - PBX Info :: Your Free PBX, PABX and Telephone Information Resource

**rixride** · 04-06-2007, 11:11 PM

Vonage decision on hold
Phone firm gets stay from judge

By Jon Van
Tribune staff reporter
Published April 6, 2007, 9:07 PM CDT

Vonage Holdings Corp. on Friday won a temporary stay of a federal judge's ruling that it can continue operating but cannot recruit new customers during its patent dispute with Verizon Communications Inc.

The U.S. Court of Appeals for the Federal Circuit in Washington issued a stay of the customer ban ordered earlier in the day by U.S. District Judge Claude Hilton in Alexandria, Va.

Verizon spokesman David Fish said the stay by the appeals court was "no surprise." Verizon must respond by Friday to the appeals court, which will decide whether to make its stay permanent. The Federal Circuit court has jurisdiction over patent appeals.

Vonage has 2.2 million customers and has bet its future on increasing its customer base, but analysts said the money-losing Internet phone service pioneer must find alternative technology or pull a legal rabbit out of a hat in its appeal of the ban.

Rather than a patent dispute, the Vonage-Verizon saga has become a David-Goliath struggle, and one that Goliath is winning.

"In an ordinary patent suit, the point is compensation," said Richard Koch, co-founder of RNK Communications Inc., a Dedham, Mass., competitive local phone service company. "This is no ordinary patent case. It's not about money for Verizon; it's a warning shot fired loud and clear."

Last month, Verizon won a jury verdict that found Vonage violated three of its patents concerning voice over Internet protocol, or VoIP, technology. The jury ordered Vonage to pay $58 million in damages, plus future royalties of 5.5 percent on revenue related to the infringed patents.

Not satisfied, Verizon went back to Hilton and asked him to bar Vonage's future use of the infringed technology. Hilton first indicated he would do that, but Friday he imposed a ban on new customers instead.

"It's the difference of cutting off oxygen as opposed to the bullet to the head," said Vonage's attorney, Roger Warin.

"What this shows is that Vonage has gotten big enough to be a threat," said Rich Tehrani, editor in chief of Technology Marketing Corp., which publishes Internet Telephony. "That's what Verizon is showing us. This is one way to compete, through patent litigation.

"The hidden challenge to Verizon is that by crippling Vonage, they may strengthen the cable companies, which are doing more damage to the phone companies with VoIP than Vonage is. What Verizon might be doing is cutting off its nose to spite its face."

Steve Titch, a telecom analyst with the Chicago-based Heartland Institute, a free-market think tank, said Hilton "evidently feels strongly that Vonage infringed. They have to pay a royalty and cannot market to new customers. That's a very strong penalty. I cannot recall anything like this before."

Another industry analyst, Jeff Kagan, said the judge's order raises the question, "Will this be the beginning of the end for Vonage?"

Since the judge indicated two weeks ago he would sign an order hampering Vonage's ability to do business, the company's executives have tried to calm the firm's customers and investors. They stressed their confidence that legal appeals will reverse findings that any patents have been violated.

Daniel Berninger, an analyst with Tier 1, said that there are no fundamental patents on VoIP and the claims at issue in Verizon's case are broad and vague. He said Vonage faced a similar situation a few years ago when the Federal Communications Commission ordered VoIP carriers to stop recruiting customers until they fixed problems with their 911 emergency calling service.

"Vonage kept adding new customers and never stopped marketing," said Berninger. "They felt the FCC overstepped its authority with that order."

In this situation, Berninger said, Vonage might have a technical work-around ready to implement to avoid Verizon's patents. Or it might have a new legal wrinkle ready to spring on the appeals court, he said.

"Vonage doesn't want to tip their hand to Verizon," he said. "But Vonage has $500 million on its balance sheet, which is enough to finance the legal fight and stay in business."

Bloomberg News contributed to this report.

**rixride** · 04-11-2007, 10:07 PM

I didn't realize Verizon claimed to create voice over ip....

On Mar 9, 11:27 am, "Ramon F Herrera" <r...@conexus.net> wrote:
> On Mar 9, 10:56 am, "Ramon F Herrera" <r...@conexus.net> wrote:
>
> > On Feb 20, 10:02 am, "Ramon F Herrera" <r...@conexus.net> wrote:
>
> > >http://www.usatoday.com/money/indust...7-02-19-vonage...
>
> > > Verizon claims to be the sole owner of VoIP.
>
> > > -Ramon
>
> > It seems like Darth Vader's troops are winning...
>
> >http://www.usatoday.com/money/indust...3-08-vonage-ve...
>
> > -Ramon
>
> http://news.bbc.co.uk/2/hi/business/6433525.stm
>
> The Verizon lawsuit is about the gateway which converts circuit
> switched calls to packet switched (VoIP) and viceversa. I use that
> technology at work on a daily basis, with Cisco devices. If I purchase
> one of those boxes from Cisco (like Vonage did), it means that Verizon
> can sue me!? Why don't they sue Cisco instead?
>
> -Ramon

The URLs got truncated. Here they are again:

http://www.usatoday.com/money/indust...7-02-19-vonage
http://www.usatoday.com/money/indust...n-patent_N.htm
http://news.bbc.co.uk/2/hi/business/6433525.stm

**rixride** · 04-12-2007, 10:40 AM

HOLMDEL, N.J., April 12 /PRNewswire-FirstCall/ -- Vonage Holdings Corp. , a leading provider of broadband telephone services, today announced that Michael Snyder stepped down from his position as Chief Executive Officer and resigned from the Company's Board of Directors effective April 11, 2007. The Company also announced that Jeffrey A. Citron, the Company's Chairman, has been appointed as the Company's interim Chief Executive Officer and is expected to serve on a short-term basis. In addition, the Company will immediately commence a search for Mr. Snyder's replacement.
Mr. Citron, Vonage Chairman and interim CEO said, "Mike has made valuable contributions to the growth of our business and we will miss him. We thank him and wish him well in his future endeavors."

The Company also announced its preliminary estimation of its operating and financial results for the quarter ended March 31, 2007:

-- Total Revenue (in millions): $195
-- Gross Subscriber Line Additions: 332,000
-- Net Subscriber Line Additions: 166,000
-- Average Monthly Customer Churn: 2.4%
-- Marketing Cost per Gross Subscriber Line Addition: $275

The Company has not finalized its financial statements for the quarter ended March 31, 2007.
Additionally, Vonage announced cost cutting measures focused on reducing the Company's loss from operations. Mr. Citron said, "In order to strengthen Vonage's financial position, we are taking a number of measures to reduce our costs and operating expenses. We remain focused on improving our competitive position in the marketplace."

Vonage announced plans to reduce its marketing expense by approximately $110 million. As a result, the Company expects marketing expenditures of roughly $310 million for 2007.

The Company also announced plans to reduce its G&A by $30 million through the remainder of 2007 through consolidation of operations and workforce reduction.

The Company expects its cost cutting measures to enhance shareholder value and improve its competitiveness in the marketplace.

Conference Call and Webcast
Management will host an investor conference call on Thursday, April 12, 2007 at 8:00 AM ET to discuss this information and other recent developments. To participate, please dial (800) 289-0533 approximately ten minutes prior to the call. International callers should dial (913) 981-5525.

The webcast will be broadcast live through Vonage's Investor Relations website at http://ir.vonage.com/. Windows Media Player or RealPlayer is required to listen to this webcast. A replay will be available shortly after the live webcast and will be available for two weeks.

**rixride** · 04-12-2007, 02:43 PM

Vonage Holdings Corp.’s stock hit its lowest point ever this week and CEO Michael Snyder resigned as the company dealt with the fallout from losing a VoIP patent dispute to Verizon Communications Inc.

At press time, Vonage was likely to pay millions more in bond money than originally expected and it faced the prospect of being barred from signing new subscribers. On April 9, the company’s shares plummeted to a 52-week low of $2.88. Two days later, Snyder stepped down in a move founder Jeffrey Citron would only say was “in the best interest of the company.”

Most of the troubles stemmed from the patent suit Vonage lost, a case that holds implications beyond determining Vonage’s future. On the positive side, it is focusing more attention on VoIP and highlighting that the technology has come of age. On the skeptical side, it has caused the industry to question Verizon’s timing in pursuing its largest competitor. And on the practical side, the suit looks to unleash a torrent of copycat patent infringement accusations.

In March, a jury found Vonage guilty of infringing – although not willfully – on three Verizon patents. The patents cover connecting VoIP calls to the PSTN; Vonage contests Verizon’s assertion that the three patents are specific and valid – the patents protect processes. Nonetheless, Vonage was ordered to pay Verizon $58 million plus 5.5 percent royalty fees on all of its future revenue. District Judge Claude Hilton then barred Vonage from using the Verizon technology and adding new customers. However, an appeals court overturned that decision and will hear arguments on April 24. If the judge accepts the case, the appeals process could take at least one year.

In the meantime, Hilton ordered Vonage to fork over $66 million in bond money to cover lost profits to Verizon. Vonage likely will have to pay another $189 million, which would pay Verizon back for “future lost revenue” while Vonage uses the patents during the appeals process. Hilton was scheduled to make that decision on April 12.

That’s a lot of money for a company that has yet to turn a profit. In its latest earnings report – from the third quarter of 2006 – Vonage was $62.2 million in the hole. In spite of that, its board in mid-March approved millions in raises, bonuses and stock option grants for its executives, including Citron and now-former CEO Snyder. Then, earlier this month, Vonage told the Securities and Exchange Commission it won’t be able to file its annual report for 2006 until it knows how much it owes Verizon. However, Vonage does expect to release updated quarterly earnings in May.

If one theme resonates among VoIP experts, it is that the Vonage-Verizon case – while very bad for Vonage – is good for IP telephony adoption. In the long term, says Dave Lemelin, a senior analyst for In-Stat, the dispute “can benefit overall take rates because it’s making VoIP more visible.” In fact, 1.6 million more households started using VoIP in the past six months thanks in part to Vonage and cable VoIP, the firm says.

Still, Vonage and its rivals stand to lose subscribers to cable operators. They are “the biggest threat for Vonage,” Lemelin says. Much of that is because cable VoIP has not been embroiled in patent disputes, says Scott Sleek, director of Pike & Fischer’s broadband advisory services unit. “These lawsuits will prompt more and more consumers to migrate to cable digital phone services,” he says.

If Vonage loses its appeal, “it’s the end of a company that’s certainly done a lot to increase the profile of the voice-over-IP market, and that would be tragic,” says Lynda Starr, a senior analyst for Frost & Sullivan.

Some media have taken those thoughts a step further, reporting that a doomed Vonage would translate into a doomed VoIP industry. One article, for instance, says venture capitalists will stop funding VoIP companies. But analysts and investors approached by New Telephony say that was a drastic interpretation and overreaction.

For its part, Vonage continues putting a positive spin on its situation. The company could not give New Telephony an interview by press time, but in a prepared statement, said it will continue providing service and adding subscribers. It even accused Verizon of simply using the court room to do what “Verizon could not succeed in doing in the marketplace – which is to put Vonage out of business.”

While Verizon has insisted it’s just protecting its intellectual property, some people question the timing. They speculate that the company didn’t pursue litigation earlier because competition wasn’t intense enough. Verizon probably waited until “the market created a target worth going after because patent litigation is pretty expensive,” says Ed Pennington, a patent lawyer and partner at Bingham McCutchen LLP in Washington, D.C.

To be sure, the timing of Verizon’s lawsuit – filed last June – strikes onlookers as interesting. Vonage was founded in 2001 and started providing service the following year. Verizon secured its patent in 2000, but did not roll out its VoIP product, VoiceWing, until 2004. That offering – whose success Pike & Fischer calls “tepid” – has gained little traction in the marketplace.

Regardless, “Verizon is ready to play,” Starr says. “I think the next step is to watch and see what Verizon does in this space. I think that they’re going to step up and they’re just clearing the way.”

Indeed, the case illustrates just how far a company like Verizon is willing to go, says Pennington. To that end, he is advising other VoIP providers to doublecheck their technologies before Verizon comes after them, too.

And Verizon’s not the only company on the warpath. “We’re seeing new lawsuits popping up every day involving various patents,” Pennington says.

For example, on March 14, Web Telephony LLC filed a patent infringement suit against Verizon, AT&T, EarthLink Inc., SunRocket Corp. and Vonage. Web Telephony, based in Illinois, holds and licenses patents governing Web control of telephony services. The company claims the defendants are infringing on two of its patents, issued in 2002 and 2004, respectively.

“All of this is coming together like the perfect storm,” Pennington says. “The VoIP industry is catching on. At first it was a novelty and now it’s mainstream.”

Bingham McCutchen LLP www.bingham.com
Frost & Sullivan www.frost.com
In-Stat www.in-stat.com
Pike & Fischer www.pf.com
Verizon Communications Inc. www.verizon.com
Vonage Holdings Corp. www.vonage.com

***MSYoung*** · 04-12-2007, 03:36 PM

It appears that the only winners will be the cable companies.

yunghkim · 05-24-2007, 03:05 PM

Verizon isn't the only telecom company trying to stop Vonage or Skype, I guess it makes them nervous knowing that customers might transition to VoIP and lose voice revenues to cheaper data revenues.

Yung Kim

**rixride** · 05-24-2007, 05:00 PM

Your right, but they are the only ones suing at this point. I really hope they don't win...

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