Vonage fighting for its life

In its ongoing fight with Verizon, Vonage won a temporary reprieve last week from the appeals court. But Vonage has a long road to travel before it’s out of the woods.

With its back against the wall, Vonage is now trying to enlist its 2+ million customers to lobby on its behalf. Below is the e-mail a friend received encouraging her to join a “grassroots campaign.” (Not clear how big Vonage would have to be for this to be an “astroturf campaign.”)

From: Vonage Customer Care <VonageCustomerCare@services.vonage.com>
To: (name deleted)
Sent: Friday, April 27, 2007 4:20:58 AM
Subject: Important News from Vonage

This message contains graphics. If you do not see the graphics, click here to view.

Dear Vonage Customer:

Vonage invites you to be among the first to join a new grassroots campaign aimed at preserving your right to choose your phone service. We’re launching a national movement – Free to Compete – because we believe marketplace competition is good, and we want consumers to have a choice. To learn the facts and find out how you can help preserve competition and your right to choose your phone service, please visit FreeToCompete.com.

Since the day we opened our doors, our mission has been to provide consumers with an alternative to the services offered by entrenched landline phone providers. In our five short years, we've gone head-to-head with many of these industry giants, and amassed 2.4 million customer lines with our innovative technology, cool features and value pricing.

You may have heard that Verizon® is suing us over patents they say we violated. Verizon has pursued litigation against Vonage in an effort to achieve in court what it cannot achieve in the marketplace. The suit could result in limiting competition and consumers' freedom to choose a communications provider, which could ultimately drive up the cost of phone service. Vonage will continue fighting this attempt to limit your choice, while ensuring that you continue to receive the reliable, quality service you've come to expect.

As our customers, you are the most passionate and effective spokespeople we have. Let your voice be heard by visiting FreeToCompete.com. where you can:

1. Send an email to Verizon telling them you support Vonage as they defend your right to a better phone service
2. Sign our Petition
3. Learn the facts of the case
4. Spread the word

We hope you'll join us in taking up this important challenge by visiting FreeToCompete.com. Together, let's move the battle for free competition and choice in the phone industry out of the courts and back into the marketplace!

And thank you for choosing Vonage.

Regards,

Jeffrey Citron
Chairman, Interim CEO and Chief Strategist


VONAGE - 23 Main Street - Holmdel, NJ 07733
Served by PM Digital - 5 Hanover Sq - New York, NY 10004

Technorati Tags: patent infringement, Verizon, VoIP, Vonage

V is for very little

In light of its patent problems with Verizon, Vonage will be late filing its 2006 annual report. Certainly the damages potentially due to Verizon are material to its statements.

What will it do about its patent problems? Ars Technica (and later CNET and other outlets) carried this breathless story:

Vonage has signed an agreement with a VoIP network services provider to carry calls placed by Vonage customers, giving the troubled VoIP provider an out on two of the three Verizon patents it was found to have infringed. According to a Form 8-K filing with the Securities and Exchange Commission, Vonage and VoIP, Inc. have inked a two-year contract under which VoIP, Inc.—likely under its VOICEONE brand—will provide network services for Vonage customers.

While there is a deal with VOIP Inc., Vonage denies that patents are the motivation:

After the story ran, Ars was contacted by a Vonage spokesperson that claimed that the agreement with VoIP, Inc. has "nothing to do with the patent situation." She described the deal as another termination deal similar to those Vonage has signed with other carriers, reiterating that the agreement was unrelated to the Verizon agreement. However, an unnamed source at VoIP, Inc. suggested to TelecomWeb that Vonage would indeed be using its network to carry its calls, while refusing to speculate about the patent dustup.

Here is the SEC filing by VOIP Inc.:

Effective March 28, 2007, the Company’s wholly owned subsidiary Voice One, Inc. entered into an agreement with Vonage Network Inc. (the “Vonage Agreement”) whereby Voice One will provide certain network services to Vonage for their domestic customer base. The Vonage Agreement is for a term of two (2) years and is month to month thereafter. Under the Vonage Agreement, the Company will receive revenues based upon the amount network services provided.

So is Vonage denying they have a patent problem? Denying they have a patent solution? Denying this is their patent solution?

With only minor digging, it’s pretty clear here that a small company (VOIP Inc.) is trying to get publicity off of the Vonage name and its highly visible problems. The 8-K wasn’t filed by Vonage (either with the SEC or its IR website) because the deal with VOIP is not material to its business. Instead, VOIP Inc. has a habit of filing 8-Ks to give the impression of impeding good news. The VOIP Inc. 2006 10-K shows that they are badly losing money — revenues of $14.7 million, cost of sales of $14.7 million, and operating expenses of $31 million.

Vonage’s last quarterly statement indicates that they are also losing lots of money, but are a $500+ million/year company — nearly 40x as big as VOIP Inc. Or at least they were, until they started losing customers over the patent uncertainty. Perhaps now they’re only 30x as big.

Technorati Tags: patent infringement, VoIP, Vonage

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

Lots of IP news today

Three news items I saw today related to past, present or future IP litigation in the IT industry:

1. By now, everyone’s heard about how Viacom wants $1 billion from Google for copyright infringement. Apparently they don’t buy the GooTube business model either. Donna Bogatin, who claims to have predicted this before the YouTube acquisition, seems sanguine there will be a labor-efficient technical fix (i.e. digital watermarks). I’m not so sure.
2. After losing a patent lawsuit to Verizon, Vonage must be looking for a win somewhere. But here’s one award Vonage doesn’t want: worst one-year performance for a 2006 IPO (down 75%). Somehow, saying shareholders could have lost 96% doesn’t lessen the pain.
3. The looming Nokia-Qualcomm showdown over Nokia’s expiring CDMA license, which was a major topic at the Qualcomm shareholders’ meeting.

I spent the day at the Qualcomm meeting, so I haven’t kept up on the news, but thought I’d mention all three. I expect to have more to say on the Qualcomm-Nokia case when I can offer more specific observations.

Technorati Tags: Google, intellectual property, Nokia, Qualcomm, 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