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Verizon vs. Vonage Comments Page
[March 15, 2007]

Verizon vs. Vonage Comments Page

Group Editorial Director
 
On March 8, 2007 a federal jury found that Vonage Holdings Corp. infringed on three key patents owned by Verizon (News - Alert) Communications Inc. (the original suit claimed infringement on seven patents). The eight-member jury found that Vonage must pay Verizon $58 million in past damages. The jury also declared that Vonage must pay a 5.5 percent royalty rate on any sales going forward.

TMCnet reached out to a number of the industry’s thought leaders to get their comments on what the outcome of the lawsuit means to the VoIP industry.

The goal of this Comments Page is to act as a repository for what our industry’s leading voices are thinking and saying on this critical topic. Today we post some initial thoughts. If you wish to add your voice to this ever-evolving document please feel free to send e-mail to TMCnet Editorial Director Greg Galitzine and he will see to it that your thoughts are added to this page.

Or, feel free to leave your comments using the “Add to the Discussion” feature further down the page.

TMCnet prides itself as being the most widely-visited Web site dedicated to IP communications and related technologies. With over 1 million unique visitors each month, TMCnet is the logical place to debate and discuss issues of critical importance such as the fallout from the Verizon/Vonage court battle.

What follows are comments from some of the industry’s top leaders:

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In a statement following the ruling, John Thorne, Verizon senior vice president and deputy general counsel had this to say:

“A jury today found that Vonage Holdings Corp. has infringed three United States patents awarded to Verizon covering methods of offering commercial-quality VoIP services, including wireless access to VoIP.

“Patents encourage and protect innovations that benefit consumers, create jobs and keep the economy growing. Verizon’s innovations are central to its strategy of building the best communications networks in the world.

“We are proud of our inventors and pleased the jury stood up for the legal protections they deserve.”

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On March 8, following the jury ruling, Vonage issued the following statement:

We are delighted that the jury rejected Verizon’s meritless claim that we infringed their two billing patents. Of the seven patents Verizon originally sued on, they prevailed on only three and we expect that verdict to be reversed on appeal. The jury’s damage award represents a 70% reduction from Verizon’s $197MM claim. The jury also unanimously rejected Verizon’s claim that Vonage willfully infringed its patents.

In addition, we don’t believe there is any basis to support Verizon’s request for an injunction and we will have the opportunity to present our position to the trial court shortly. If the trial court does impose an injunction, we will seek an immediate stay from the Federal Court of Appeals. Vonage’s customers should see no change to any aspect of their phone service.

The following day, March 9, in an effort to reassure their customers, Vonage released the following statement. Vonage expressed the utmost confidence in the following:

--Vonage is not going out of business.
--There will be no loss of service to our customers.
--Our customers will experience no change in their phone service.

In the unlikely event the monetary award ($58 million) and royalties are ultimately upheld/paid, they will not jeopardize Vonage’s financial position as we focus on achieving profitability. Vonage is equipped to handle these costs, while still running our business as we always have.

“We are confident in Vonage’s future health, growth prospects and longevity,” said Jeffrey A. Citron, Vonage’s chairman and chief strategist.

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Russell Shaw is a well known author and blogger in the VoIP industry. He currently writes the Regulations, Statutes & Standards Blog for TMCnet:

What does the decision mean to the VoIP industry? I think that if the decision is followed by an injunction limiting Vonage services, the injunction will probably be stayed pending appeal. What this does is surround Vonage with a shroud of uncertainty that the big triple-play competitors will subtlely use to push their own packages. “You know, do you really want to sign up for Vonage if we’re not sure how long they are going to be around?”

I think you will also see a ramp up of “stability” marketing messages from other pure plays such as 8x8 (News - Alert) and SunRocket. These pure plays (which may be snapped up eventually) are going to try to distance themselves from Vonage even more than they are doing now.

Regarding the effect of the ruling on Innovation, companies with research operations will need to watch their backs even more than ever now. Their lawyers will be more closely involved in the R&D process, product development cycle as well.

As for the state of patent litigation? Let’s tear the pages out of the statutes and rebuild patent law for the 21st century. We might start by raising the bar on overly general guidelines about what constitutes infringement.

Lastly, regarding the question of how ‘the little guy’ might survive in the ongoing battle against the larger incumbents, I think at this point we’re looking at a combination of offering a la carte VoIP packages to the segment of the market that still wants that, plus double and triple plays with affiliates. Hypothetically, this could mean a Vonage (and/or a competitor) hooking up with a non-competitor for cell (say, Cricket Wireless) and as we are already seeing, EarthLink Muni WiFi. Advantage: both of the potential partners - EarthLink and Cricket - are fighting against the same broadband monopolists as the pure play VoIPs are. Can you say, “The enemy of my enemy is my friend?”

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Matthew Schulman is a Regulatory Consultant with REGNUM GROUP, INC.
 
The Verizon vs. Vonage patent case has far greater implications than the $58 million (plus 5.5% future royalty) amount awarded to Verizon. Verizon’s claim was based on the seven patents that they control, and Vonage claims to have acquired three patents to protect their own interests. If the major players control the technology and charge royalties for past and future traffic, the entire VoIP industry may be adversely affected, forcing many providers out of the market. VoIP and SIP technologies have progressed quickly because of an unfettered arena, free from governmental, IP (Intellectual Property) and protectionist burdens. As VoIP has become more mainstream, its value has increased exponentially and the desire to control it seems to be causing a feeding frenzy amongst the major players.
 
Where would the telecommunications industry be today if these high rates were charged for TDM, ATM, or other intrinsic technologies? The VoIP industry may need to examine the benefits of laissez-faire policies and seek protection from the entities that it initially wanted to avoid. This is a developing situation that will have tremendous impact on the entire telecommunications industry.

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John Cimko is a regular contributor to Internet Telephony magazine. He served for 15 years at the FCC (News - Alert) and currently practices law at Greenberg Traurig LLP in Washington, D.C:

The recent court decision that Vonage has infringed Verizon patents, if it is upheld on appeal, could have negative implications for the VoIP industry. For one thing, Vonage itself - a company which has been a leading VoIP innovator and pioneer - will have to cope with the $58 million damages price tag and the 5.5 percent royalty on future sales. Potentially even worse is the fact that Verizon is trying to get a permanent injunction that would bar Vonage from using the patented technologies. This “triple play” - the court-imposed damages, the royalty fees, and the potential injunction - will make it tougher for Vonage to compete against Verizon and other large players who would like to capture larger shares of the VoIP market. In addition, the court decision could prompt Verizon to bring infringement actions against other independent VoIP providers. If these small, independent providers are targets for such infringement claims, and become subject to damages and other liabilities like those imposed by the court on Vonage, these developments could further undermine the strength of competition in the VoIP market.

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According to Jon Arnold in his recent blog, “Verizon Gets Its Way With Vonage – Another Boston Tea Party Coming?” things are going Verizon’s way:

All I can say is that I thought Vonage might have caught a break in this one. I’m just thinking that the AT&T (News - Alert)/Bell South merger went through with relatively few concessions, and that the sentiment today would favor a ruling going in favor of the competition. I guess not. So, we have another case of the incumbents getting their way, and obviously, this case can hurt Vonage a lot more than Verizon.

So far, though, it looks like the pain is manageable - $58 million settlement, and a 5.5% royalty on future sales. Vonage certainly has the cash on hand, but gee, this is another hit on their margins - 10% in fact, and that’s quite a bit. Why 10%? Well, their gross margins are around 55%–60%, so 5.5% is 10% of that. Call it the Verizon tax if you like, but it worries me. Is this royalty in perpetuity, or does it have a limited life?

If it’s the former, I see parallels to the Boston Tea Party here. Verizon gets its way by giving Vonage enough rope to live, and to continue profiting from VoIP while Vonage and their shareholders struggle to hang on. Plus, they may even make money some day from VoiceWing (News - Alert), their own VoIP offering - but that’s another story.

If I’m Vonage, that’s not a tax I’d want to live with the rest of my days, especially if they can somehow find light at the end of the tunnel. If that day comes, maybe they’ll stage a Boston Tea Party of their own to protest this onerous and unfair tax.

Of course, it’s debatable whether the “tax” is fair. Verizon seems to think so, but does the punishment fit the crime? And can Vonage somehow come up with a workaround to stop using the patents in question, and hence free themselves of this royalty scheme? And in the context of my Boston Tea Party theme, the word “royalty” is rather apropos here.

And then there’s the bigger question of the rest of the industry. If they can go after Vonage for this, can they not go after the other VoBB operators like SunRocket? It’s not clear to me if Vonage is the only one Verizon thinks they can apply this position to. In that scenario, they would really be a threat to the competitive landscape, which is an even bigger concern.

Finally, I can’t help but wonder about the bigger picture. The cablecos are causing Verizon far more pain than Vonage, and they’re a much bigger threat. That’s where I’d be spending my time and money. And if Verizon really has all these great VoIP patents, why are they the smallest player in the market among Tier 1 carriers?

Many questions here - more to come for sure...

[Ed. Note] Indeed, in a follow-on post, Jon adds the following insight:

Anyhow, I’m glad [Business Week] picked up the acquisition idea, as it looks very plausible to me. Just keep sucking margin away from Vonage with the tax, and use that money (all profit too) to help fund the buyout. How hard will that be? VZ picks up 2+ million subscribers, they take out the only VoBB threat that matters, and they’re ready to take on AT&T and the cablecos.

After all, the VoiceWing offering is going nowhere, and believe it or not, Vonage is still the #1 residential VoIP offering in terms of subscribers last I looked. Together, the cablecos passed them a long time ago, but no individual MSO has more subs than Vonage. So, VZ could effectively become #1 with this deal. What’s not to like if you’re VZ?

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Huw Rees, vice president of marketing and sales for 8x8 had this to say:

Unfortunately, the U.S. jury ruling in favor of Verizon’s patent infringement claims ultimately affects consumers, as large telcos continue to seek out ways to thwart the availability of lower priced, competitive VoIP phone services. That being said, 8x8 is confident in the defense of its own proprietary technology which has been awarded 66 U.S. patents and remains at the core of our Packet8 residential and business Internet phone service.


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And Greg Welch, CEO, GlobalTouch Telecom, offered these comments:

There is no question that the recent Verizon success in its litigation against Vonage will have an impact on the VoIP industry. Does it create a more complex and challenging environment? Most certainly. Does it mean the end or even a slow-down of the growth in VoIP services? We think not.

Nimble entrepreneurial companies will have the skill and insight to navigate around this latest obstacle. Business planning and financing will become more complicated. Resources will need to be allocated to pay attention to patent issues and aggressively consider their implications as part of Standard Operating Procedure. Has Sarbannes-Oxley put a stop to fast-moving publicly traded companies? Of course not, but the new realities cannot be avoided. Audits, reports and accountability are a cost of doing business. So too will be the costs in a post Verizon/Vonage legal and patent environment.

The Internet and VoIP are organic. They grow and evolve. The pending decision does nothing to change this.


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