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11/1/2007
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Competitors Turn Vonage into a Piata

Singing a familiar Warren Zevon tune: Im down on my luck  Send lawyers, guns, and money, Vonage had a tumultuous October, settling patent disputes with Verizon and Sprint for approximately $200 million, but now finding that AT&Ts hand is reaching into its pockets.

Singing a familiar Warren Zevon tune: Im down on my luck  Send lawyers, guns, and money, Vonage had a tumultuous October, settling patent disputes with Verizon and Sprint for approximately $200 million, but now finding that AT&Ts hand is reaching into its pockets.Vonages legal problems began in October 2005 when Sprint sued the company for infringing on six patents. After the court ruled in Sprints favor at the end of August 2007, settlement talks between the two companies intensified, and they reached a compromise , which cost Vonage $80 million. Ouch.

The fledgling Voice over IP provider has been involved in a similar dispute with Verizon since June 2006, and it eventually boiled down to infringements on two patents. In March 2007, the court ruled in favor of Verizon, but Vonage appealed, a step needed to keep the company afloat while it developed a workaround. Rather than let its fate be entirely determined by the appeals process, Vonage reached a settlement that outlined two possible final payments, which are expected to be determined shortly. If Vonage wins the appeal on either patent, or if the injunction on Vonage using the technology is vacated (both of which are considered unlikely), Vonage will pay Verizon $80 million. If Vonage does not win its appeal on the two remaining patents, it will pay a full $120 million, $2.5 million of which will go to unspecified charities. Nice to see that it is not only the lawyers benefiting from the legal wrangling.

Company executives were starting to breathe a little easier when AT&& joined the legal feeding fray in the middle of October. Vonage has told investors that it is trying to settle this case (no sense going 0-3 in court, I guess) but stopped short of guaranteeing that the case will not go to trial.

When it went public in May 2006, the VoIP service provider was a high flying service provider that had emerged victorious in an excruciatingly competitive battle among start up suppliers. The companys customer base had raced past the 1 million mark, and the big question was how much larger would the company become. Since then, the patent disputes have scared away potential and existing customers, drained Vonage's cash reserves, raised its cost of providing phone service, and put the company in a precarious financial position. Whether or not the company will survive is an open question.

If it does fall by the wayside, that would be a loss for small and medium businesses. Vonage was one in a dwindling number of stand alone companies offering low priced voice services; its Small Business Premium Unlimited Plan delivered robust features at an attractive price, about $50 a month. One less competitor in the marketplace means less competition in a market segment that has already seen significant consolidation. It also signifies a monumental win for corporate lawyers; does anyone else ever really benefit from that?

Have you used or examined Vonages services? What do you think of them? How do you feel about lawsuits like the ones filed by Sprint, Verizon, and AT&T?

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