Vonage Gets Another Black Eye

Posted by: Olga Kharif on September 25, 2007

For Vonage, things have gone from bad to worse. On Sept. 25, a jury found that Vonage infringed on Sprint Nextel’s patents. It asked Vonage to pay $69.5 million in damages and a 5% royalty rate for future use of the patented technology. Sprint may also seek an injunction against Vonage; Vonage say it will appeal.

So, what does this mean for Vonage? Basically, Vonage will need to find its way to break even faster now, as its cash has taken a major hit, and it can’t afford to lose money for much longer.

Here’re some back-of-the-envelope calculations. Vonage will have to pay some $69.5 billion in damages to Sprint. In addition, since spring, it’s placed into escrow or issued a bond for some $90 million related to a patent-infringement case it lost to Verizon (a decision on an appeal is expected any day now). That adds up to $159.5 million. Plus, Vonage is obviously paying lots of legal fees. And Vonage is still losing money: It lost $34 million in the second quarter alone.

So, let’s look at Vonage’s cash. At the end of the second quarter, the company’s cash and equivalents totaled $344 million, which included $66 million of restricted cash used as collateral for the Verizon bond. If we subtract from that the various royalty payments and jury awards/restructed cash, Vonage has about $184.5 million in cash and equivalents to work with.

Assuming Vonage continues to lose money at the current rate of $34 million per quarter, the company can last for a little over five more quarters.

This is a very rough estimate, of course: Vonage’s expenses will rise as it starts making royalty payments to Sprint. The outcome of the Verizon case can tip the scales one way or another. Thanks to recent staff cuts, overall expenses may fall. But one thing is clear: Vonage will have less financial flexibility now, after the Sprint loss.

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Reader Comments

og oggilby

September 26, 2007 07:13 AM

Look guys phone companies have always operated by ripping off it's customers. Until Vonage came on the scene and for once since the telephone was invented we got a fair shake and it is THAT reason why Vonage has been under attack. These same companies are crying over dormant patent issues the same one they are using to bankrupt a company that offers the consumers a fair price for their phone service.

Robert

September 26, 2007 07:21 AM

You have a typo. "$69.5 billion"

hi

September 26, 2007 08:02 AM

There is a speeling error in the artical...its not 69 billion (3rd para) instead 69 million

AnonEditor

September 26, 2007 08:48 AM

I could be mistaken, but I believe you mean "$69.5 million" in paragraph 3.

Crito

September 26, 2007 08:51 AM

Typo:

Here're some back-of-the-envelope calculations. Vonage will have to pay some $69.5 billion in damages to Sprint.

BILLION!?!??!? :O

MaryAnn Jewitt

September 26, 2007 09:23 AM

I signed up for vonnage service 3 weeks ago. What a horrible experience I am having. The first thing they did was cut me off from my internet service. Then they tell me I cannot get vonnage without internet service. After waiting 5 days for new internet service I happily await to be hooked up to vonnage. It took 3 hours,(one of which was of hair pulling) but finally I had a telephone and I do mean A telephone. Now I have 6 telephones in my house but only one will work, it has to be next to the vonnage box. Calling the vonnage tech support another 2 hours (only 45 min. of hairpulling this time) they then tell me "oh we can't do anything about that, and we don't have a service rep in your area" Now being a cancer patient and not haveing to much hair left to pull I'm going back to ATT as of the 28th of Sept. (the earliest they could hook me up, they are so busy, probably from hooking up all the people switching from vonnage.) I feel that there is a need for low cost phone service but vonnage sure isn't it........

David Longjohn Stanton

September 26, 2007 11:54 AM

Million, Billion. What's an order of magnitude anyway?

Brandon

September 27, 2007 09:04 AM

An order of magnitude can mean the difference between a company collapsing or merely treading water amongst the sharks of the business world. Here is a video that may sum up the powers of ten for you.

URL:
http://tinyurl.com/3x8nwv

Don Bankhead jr

September 27, 2007 01:46 PM

I've had vonage for going on three years and my only complaint was when I moved here to AL from TX, they didn't have a local area code number. But I must comment on the post from MaryAnn. Vonage only works through your internet, VOICE OVER INTERNET PROTOCOL (VOIP). So I don't understand how they cut you off? That would be your internet provider. Also that's not true that your phone has to be close to the vonage box. Your cable modem or router has to be close to the vonage box because the have to be physically connected to one another. Once you run the phone cord from the vonage box or modem to your phone outlet you should have service at all your phone outlets thur your home unless they are defective. I rather pay $24.99 anytime over $60+ dollars amonth from either your cable company or phone company and you don't get all the features vonage provides. Thats my two cents.

Chirag

September 28, 2007 12:45 PM

I am also a fan of vonage. It has been very stable with me. I have all our company running on vonage if we go to other provider then it means a huge cost. Also we dont get all the features.

Lets hope vonage survives this blow from sprint.

Jay

October 1, 2007 08:39 AM

I have been using Vonage for over 3-4 years now, and am a very happy customer. I make a lot of international calls back home to India and until Vonage came, all big companies such as Verizon, Sprint etc used to rip me off with unnecessary taxes, fees and high rates, they even charged me over a $1 per minute for calls to Canada and the reason being Canada was not in my calling plan.

Vonage came with a sigh of relief with lower rates, and unlimited calls within US for reasonable fees etc. The big companies are losing money and obviously want Vonage to go down. The big companies can and should compete fairly intead of these lawsuits to make money. It's a open market economy and you survive if you provide better products. I am not going back to the big companies as they are a rip off!!!

I will continue to support Vonage!!!

Pete

October 4, 2007 11:06 AM

I agree the phone companies have been ripping off their customers for too long. And finally Vonage gives consumers a fair deal and great features. And that's why Vonage is under attack, by the fat cats trying to bankrupt them. I don't know the patent issues, but if they are legit, I hope Vonage can settle them and keep going. I too will continue to support Vonage, and take advantage of their good service and support.

Jake

October 4, 2007 10:29 PM

One might think that VoIP for consumers is down for the count – with the Sunrocket meltdown and now this legal mess with Vonage leaves one pining for a provider who has been around and won’t get knocked out the box. I asked my IT geek friend what they liked and they told me about Net2Phone. Unlike almost all the other guys – this company has been at this for about 10 years and they are well funded (big IDT owns them). He also said that now because of all the uncertainty – they are running a special try/ buy offer. Try them for 3 months free and then it is just $19.95/ month – plus you get to keep your phone number. It’s better than paying the big telco’s lots of $$$ every month.

Also—I have a lot of family overseas and have been blown away by the options for international calling – not only really cheap international rates – but you can get a local phone number in a huge number of countries. Most of my family is based in Brazil – they dial a local call to my Brazil number from Net2Phone and it gets to me here.

jason

October 6, 2007 02:49 AM

I live overseas and depend heavily on vonnage to speak daily, at length, to my elderly parents. I don't know what I would do without it. I hate SKYPE. Any suggestions?

Robert

June 25, 2008 11:05 PM

Hi just want to know if somebody know about vonage surcharge regulatory recovery fees, taxes not charge 911 emergency call
do not charge taxes all different item
want a good stories please reply to this e-mail.

Chris

October 9, 2008 03:06 AM

I live overseas and depend heavily on vonnage. I am able to speak to my elderly mother on a daily basis as though I were around the corner. I would be lost without it; so would my mother! I agree that vonnage is under attack because they are offering a fairly priced competitive service.

Charles Martin

October 16, 2008 01:06 AM

Vonnage will never get my business again. My wife signed up for service in November of 2007. She died on January 12, 2008. I have been working in Kuwait supporting the troops in Iraq and indirectly Afghanistan. I realized I have been paying on my credit card since her death for service that is not being used. I called them asking to cancel the service, answered all of their security questions only to be slapped in the face by them asking me to Fax her Death Certificate. I am in Kuwait with no access to a fax machine so I have to bother my in-laws to ask them to fax the death certificate because this lkousy company will not believ me my wife is dead. We have to live her death over again because they do not believe me my wife is dead. This heartless company does not deserve any more business from anyone. So if you are using vonnage I only hope that you do not lose a loved one and have to relive that tragedy. SHAME ON YOU VONNAGE. I will still be here supporting the people that are keeping you and your loved ones safe in your bed as you destoy other people's lives.

Charles Martin

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BusinessWeek writers Peter Burrows, Cliff Edwards, Olga Kharif, Aaron Ricadela, Douglas MacMillan, and Spencer Ante dig behind the headlines to analyze what’s really happening throughout the world of technology. One of the first mainstream media tech blogs, 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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