TELECOM Digest OnLine - Sorted: A Stay of Execution Possible for Vonage

A Stay of Execution Possible for Vonage

Marguerite Reardon (
Tue, 03 Apr 2007 20:39:11 -0500

Vonage's lucky break?

By Marguerite Reardon

Internet telephony provider Vonage, which is facing a possible
shutdown of its service this week because of a patent dispute, may
have gotten a stay of execution.

According to a filing with the Securities and Exchange Commission, the
company has signed a deal with a wholesaler of voice over Internet
Protocol services called Voiceone, owned by a company called VoIP
Inc., that could provide it with a work-around for at least two of the
three patents owned by Verizon Communications. Voiceone also offers
wholesale voice over IP service to several large companies including
Broadwing Communications, iBasis and Google.

Details of the contract between Vonage and VoIP Inc. have not been
released. But according to a form that VoIP Inc. filed with the SEC on
March 30, the duration of the Vonage contract is two years. After that
time, the companies can continue their relationship on a
month-to-month basis.

Vonage did not return phone calls seeking comment on the deal with
VoIP Inc.

In March, a federal jury found that Vonage's IP telephony services
infringed on three patents owned by Verizon. Two of the patents deal
with how VoIP calls connect to the regular public switched telephone
network, and the third one is about making VoIP calls via Wi-Fi

While the jury found that Vonage did not willfully infringe on
Verizon's patents, it did award Verizon $58 million in damages. On
March 23, U.S. District Judge Claude Hilton said he would issue an
injunction barring Vonage from using the technology included in the
three patents. But he said he would not issue the injunction until
April 6, which is this Friday.

Since the judge announced he would issue an injunction, the IP
telephony service provider and its more than 2 million subscribers
have been living under a cloud of uncertainty. On the one hand, the
judge could issue a stay on the injunction that would last a couple of
weeks or until Vonage has had time to appeal the court's decision. On
the other hand, the judge could also require Vonage to stop service
immediately to ensure it is not infringing on the Verizon
patents. That would mean a catastrophe for Vonage and its customers,
who would be without phone service.

Vonage's recent deal with VoIP Inc. could help convince the judge to
give Vonage more time.

"I think it's very unlikely that Vonage's service will be cut off on
Friday," said Joel Rosenblatt, a patent and intellectual attorney in
private practice in Florida. "The judge will be fair. The court didn't
find Vonage willfully abusing the patents, and now that it is looking
for a work-around, it shows that Vonage is working in good faith to
find a solution."

But even though Vonage avoids a complete network shutdown this week,
the company's troubles have hardly evaporated. First, it's still
unclear whether the deal with VoIP Inc. will offer an arrangement that
does not infringe on the Verizon patents.

A spokesman for Verizon declined to comment on the implications of the
VoIP Inc. deal with regard to the case. But legal experts, such as
Rosenblatt, said it's likely that Verizon is already evaluating the
VoIP Inc. network and technology.

"I'm sure Verizon's legal team is already looking into their own
patents to see how they line up with VoIP Inc.'s network and
technology," he said. "And if they infringe, Verizon will be ready to
sue VoIP Inc. and Vonage for infringing on them."

'Crisis mode' for Vonage ...

The threat of a permanent injunction has already taken its toll on
Vonage. The company, which has yet to turn a profit, has steadily been
losing customers. And the recent uncertainty hasn't helped matters, as
customers try to figure out if they will have service next week or
even a few months from now.

"Vonage is in crisis mode," said Clayton Moran, a stock analyst with
the Stanford Group. "The uncertainty is impacting operations. We
expect many existing customers to cancel service. And it will also
make it more difficult for Vonage to attract new customers."

Moran said he has lowered his expectations for Vonage for 2007. While
he had earlier projected the company would end the year with more than
3 million subscribers, he's now predicting it will fall short of the 3
million mark. Previously he had forecast Vonage reaching profitability
by the end of the first quarter of 2008. Now the best-case scenario is
that Vonage could reach profitability in the second quarter of 2008,
he said. But even that is uncertain, he added.

Meanwhile, Vonage is facing stiff competition from cable operators
that are bundling voice services similar in price and functions to its
own service. Competition is also increasing from Internet companies
like Skype, Google and Yahoo that are offering IP telephony
services. While Moran doesn't believe that Vonage is in danger of
going out of business anytime soon, he said the continuing legal
troubles coupled with the increased competition could make it
difficult for the company to compete in the future.

"I don't see the company dissolving completely in the near term,"
Moran said. "But I can't rule it out for the future either."

Even with the VoIP Inc. deal, Moran said he is unconvinced that Vonage
will be able to get around the Verizon patents so easily.

"The agreement with VoIP Inc. is still unclear," he said. "But at this
point it doesn't change my view that a workaround will be challenging
for Vonage."

Copyright 2007 CNET Networks, Inc.

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