Can Vonage Hang On?

Steady as she goes after Sprint patent settlement. But what about those "triple play" rivals?

By Erin Joyce | Posted Oct 9, 2007
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Vonage is putting on a brave face about the future now that one of its two patent litigation problems is in the rear-view mirror.

But one analyst sees more trouble brewing for the Voice over IP provider -- chiefly from the competition's "triple play" prices. Can the standalone Vonage stand it alone? So far, it's hanging tough.

In its latest patent settlement, Vonage is expected to pay Sprint $80 million -- including $35 million for past use of the telecommunication firm's licenses, $40 million for a fully paid future license, and $5 million in prepayment for services that Sprint will provide.

On the bright side, the agreement will enable Vonage to escape paying 5 percent of its future sales to Sprint, as had been stipulated in the original Sept. 25 federal jury ruling.

Following that that decision, which found the VoIP provider infringed six Sprint patents, investors punished the company and sent its stock price plummeting to less than a dollar per share the following day -- its lowest level since going public in May 2006.

Yet Vonage's shares, which rebounded slightly earlier this week, continued today to slip even after announcing the settlement -- with the stock falling 26 cents, or 10 percent, to $2.19. The Holmdel, N.J.-company may have cleared out its legal issues with Sprint, but investors evidently still recognize that it has yet another patent thicket to climb out of: a longstanding suit with Verizon.

Just days after the Sprint decision, a federal appeals court handed Vonage a good news/bad news decision, saying that damages awarded in March to Verizon for patent infringement had been too steep. At the same time, the appeals court upheld two out of the case's three infringement verdicts facing the VoIP company.

That means Vonage may be off the hook for a portion of the $58 million in damages originally awarded to Verizon, as well the 5.5 percent royalties on future revenues also awarded by the court. Vonage still has to pay the telecom giant for the two remaining infringement verdicts, however.

Vonage spokesman Charlie Sahner said the company hopes to work with Verizon on an amicable settlement, and is exploring all of its legal options in the meantime.

But Larry Hettick, a principal analyst for digital home technologies at Current Analysis, thinks Vonage has bigger problems to deal with beyond settling patent infringement issues.

"Can any standalone provider without an access loop survive, particularly for voice?" he told InternetNews.com. Rates for a VoIP provider like Vonage compare poorly to the bundled deals offered by cable providers and telcos like Verizon, he said. Many of those larger companies offer a cable TV, Internet access and VoIP "triple play" package for about $99 a month.

Piping in Vonage on top of Internet service can actually cost consumers more than a triple-play bundle, he said.

As a result, even the Sprint settlement won't solve many of Vonage's long-term problems, he added. Plus, the company has about $320 million in cash, but it's still not profitable. In June, the company ended its second fiscal quarter with a $33.6 million loss.

But as the No. 3 VoIP provider with 2.4 million customers, the company is doing something right, Vonage's Sahner argued, pointing especially to its efforts in customer service and adding new features. In addition, he said Vonage is lowering its customer acquisition costs as it manages its way toward profitability.

As for the triple-play bundles that cable providers such as Comcast and Time Warner offer, he said Vonage is happy to remain a standalone alternative for consumers.

"We don't mind being the underdog," he said. "We've been a disrupter since the day we started. We're keeping our eye on the ball, bringing out new features, strengthening our core and offering the best service in the world."

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