Vonage Injunction: Now Wait a Minute (Weeks, That Is)

Posted by: Olga Kharif on March 23, 2007

Today, Vonage got slapped with an injunction in its patent-infringement legal battle with Verizon. A judge will decide whether to stay the injunction for 120 days or permanently, or to impose it immediately in two weeks.

As a result, Vonage’s stock is down 26%. Yes, things don’t look good. But I find the magnitude of the stock slump surprising, considering that everyone, all of the experts I’ve talked to, expected this injunction to fall.

I think that what’s happening is, investors are starting to question Vonage’s viability. It’s a valid concern. But there are several factors going in Vonage’s favor. For starters, as of December, the company had $500 million in cash and marketable securities. Considering that, last year, Vonage burned through $189 million in cash, that means that the company has enough dough to last for another two years, assuming the same rate of cash burn. Meanwhile, Vonage expects its cash burn to fall; it guided for operational profitability in as early as in the first quarter of 2008. If Vonage’s appeal fails, and the company is forced to pay Verizon $58 million in back royalty fees, that will make a dent in Vonage’s coffers, but the company will still have enough money left for two more years.

Vonage’s profitability could suffer, however, if the company is forced to pay Verizon royalty fees, which are pretty steep, going forward. But Vonage still claims it won’t have to pay those, that it will develop a work-around around Verizon’s technology.

Vonage may have a little bit of time left still to develop that work-around. First off, in two weeks’ time, the judge might yet grant a stay. Secondly, even if he doesn’t, Vonage can immediately file an appeal of the stay decision. Usually, when such an appeal is filed, courts grant the appealing party a 30-day temporary stay. So Vonage might have at least six weeks to work with here.

That said, that work-around may be hard to develop, as Verizon’s patents in this case have been defined very broadly, and they cover a lot of ground.

Reader Comments

RandomThoughts

March 25, 2007 3:28 PM

"I think that what's happening is, investors are starting to question Vonage's viability."

Starting to? Are you kidding me?

Vonage was a hurting duck before this lawsuit, now? Lets see, Vonage is going up against huge companies with huge bank accounts, they offer 1 product against their competitors 4 (voice, video, internet, wireless), their entire network is controlled by their competitors, their primary product is trending to zero, they face regulatory issues, legal issues and have never shown a profit.

They did have some kind of funny commercials though.

Nick

April 6, 2007 1:11 PM

The biggest loser here is not Vonage or their shareholders, but rather the millions of consumers and small businesses that choose Vonage as much for the superior menu of services that it provides as for their cost effectiveness.

It is not surprising that Verizon, with its war chest and army of lawyers was able to get such a favorable ruling. It is truly sad, however that once again, "the little guy" loses. Any politician, bureaucrat or judge that thinks otherwise is simply blind to the realities of "deregulation".

I'm sorry, but I just don't see how it serves the public interest to rule in favor of patents when they only exist to stifle innovation. Verizon either lacks the technology to use its patent, or realizes that internet telephony and the services that are easily delivered along with dial-tone are so far superior to what it can deliver, that they need the court to sustain their monopoly.

Its time for a public debate on the state of deregulation in the telecommunications and cable industry. In most markets, there is simply no viable competition for the landline carriers and entrenched cable providers. With rulings like this, we can expect Verizon and the like to continue to deliver less and charge more, stunting innovation and damaging small business and customers in the process.

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Bloomberg Businessweek writers Peter Burrows, Cliff Edwards, Olga Kharif, Aaron Ricadela, and Douglas MacMillan, dig behind the headlines to analyze what’s really happening throughout the world of technology. Tech Beat covers everything from tech bellwethers like Apple, Google, and Intel and emerging new leaders such as Facebook to new technologies, trends, and controversies.

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