Dead Cat Bounce

On Friday, Vonage lost yet another court ruling in its ongoing fight with Verizon, in this case an injunction against operating its service with the infringing patents.

Larry Dignan of ZDNet does a good job of summarizing the issues facing Vonage, while Eddy Elfenbein of Seeking Alpha is ready to pull the plug.

The stock was up slightly today (but of course down 25% on Friday after the news). Perhaps it’s because, as one blogger notes, the injunction won’t be enforced for two weeks. I personally think it’s a dead cat bounce.

Dignan’s online poll asks who will get the business that Vonage loses. One option is to shift demand to other VoIP suppliers. I can’t see how this is a positive for the other VoIP startups, since clearly Verizon and the other Baby Bell are only interested in putting competitors out of business. It may be that the only viable competition comes from P2P services like Skype or A/V instant messaging clients that bypass the PSTN entirely.

Technorati Tags: Baby Bells, patent infringement, Verizon, VoIP, Vonage

V is for Victory

In Virginia, Verizon declared Victory over Vonage in VoIP patent fight. The jury said Vonage infringed three (of seven) patents contested and owes $58 million in back royalties.

There’s likely more bad news for VoIP startups down the road. Verizon (two former Baby Bells plus GTE) only owns a few of the patents around switched telephony; we should expect the rest of ol’ Ma Bell to be quickly behind: SBC (now “the new AT&T”) and the ever-litiguous Alcatel-Lucent. A non-Bell, Sprint has already sued Vonage.

The jury’s award of a 5.5% ongoing royalty for three patents seems pretty high. As best I can tell (the coverage isn’t very precise), the three patents cover connecting an Internet and PSTN phone call, call waiting and WiFi calls. The rate is more than charged by the much-villified Qualcomm for licensing its 1000+ patents — royalties going to the company that invented CDMA.

Of course, Verizon’s real concern is not earning a royalty, but putting Vonage out of business so it can get back the 600,000 customers that it lost to Vonage. The Baby Bells are trying to hassle or litigate all the VoIP startups out of business, much as Ma Bell used FCC proceedings in an (unsuccessful) attempt to keep out mobile phone competitors. This is just a replay of the story from mobile handsets, where Ericsson used patents to put Sendo out of business.

When it comes to patents in ICT (and consumer electronics), there seem to be three camps:

1. The have-nots (like open source hackers, VoIP companies, many Taiwanese or Chinese companies) who want to offer cheap stuff and not pay a penny in royalties.
2. The big boys (like Ericsson, Verizon) who are eager to use patents as a barrier to new firms but expect to avoid paying royalties themselves through use of cross-licenses.
3. The toll collectors (Fraunhofer-Thomson, Lucent, InterDigital) who want to make money off of IP rather than products.

Some firms are harder to classify: Microsoft and Qualcomm combine the 2nd and 3rd approaches, using their patents to sell component technologies; IBM’s strategic use of IP belongs in a class of its own.

I used to think that the brewing patent storm could be solved by incremental changes in patent policy — such as the tweaks to patent processes advocated by Adam Jaffe and Josh Lerner. But the onslaught of patents and patent lawsuits under the current system makes that increasingly unlikely.

The US Constitution calls for limited-term grants to “Inventors the exclusive Rights to their … Discoveries.” Patents are supposed to provide incentives for true innovation, so how do you fix the current system without throwing out the baby with the bathwater?

Technorati Tags: business models, intellectual property, Baby Bells, Verizon, VoIP, Vonage