Complain about a product or service

Vonage CEO Exits as Company Struggles to Survive

Internet Start-Up Mired in Legal Challenges, Slow Growth, High Costs

By Truman Lewis
ConsumerAffairs.com

April 12, 2007

Vonage • Appeals Court Gives Vonage a Reprieve • Vonage CEO Exits as Company Struggles to Survive • Vonage Gets a Reprieve but its Future is Murky • Judge Orders Vonage to Stop Signing New Customers • Class Action Charges Vonage Deceived Consumers • Vonage Settles New Jersey Charges • FTC Drops Vonage 911 Inquiry But Continues Telemarketing Probe • Vonage Accused Of Violating Securities Laws • Vonage Customers Chafe Under Stock Purchase Plan • Vonage IPO Fails To Meet Expectations • Vonage 911 Caller Put On Hold While House Burns Down • Consumer Complaints

Embattled Internet telephone provider Vonage said its CEO, Michael Snyder, has stepped down. The company's founder and chairman, Jeffrey Citron, will serve as interim CEO while a replacement is found.

Vonage also said it will cut about 10% of its 1,800 employees and impose a hiring freeze as it tries to trim $30 million in operating costs during tghe second quarter.

Vonage is locked in a bitter struggle with Verizon, which claims the Internet start-up has infringed several of its patents. A federal district court jury in Virginia agreed and last week a federal judge ordered the company to stop signing new customers, a virtual death sentence.

But Vonage got at least a temporary reprive when a federal appeals court temporarily stayed the order.

Vonage is running low on cash and has promised its investors it would grow quickly to reach profitability. It's been losing customers nearly as fast as it signs new ones, so if the judge's no-new-customers order is reimposed, Vonage could see its existing base of 2.2 million customers erode quickly.

Vonage has about 2.4 million customers nationwide. It has said in its reports to investors that it spent $275 on marketing costs for every subscriber it adds, a figure Citron said is too high.

If the appeals court rules against Vonage, it would likely reimpose the ban on signing new customers laid down by U.S. District Judge Claude Hilton. In his ruling, Hilton said he considered the possibility that his order could result in bankruptcy for Vonage, but said he concluded that there is adequate competition in the telecommunications industry and that, whether or not Vonage survives, the public will have adequate access to telephone service.

Snyder, a former executive at Tyco International, was hired as CEO a few months before Vonage's initial public offering last May, partly to smooth over investor concerns about Citron, who got into hot water with securities regulators in the late 1990s when he was CEO of Datek Online, an online brokerage firm.

Citron, then 32, was fined $22.5 million for illegal trading and fraudulent bookkeeping. The Securities and Exchange Commission (SEC) said it was, at the time, one of the largest securities fraud settlements ever. Citron, who admitted no wrongdoing in the settlement, was permanently barred from the securities industry.

Vonage hasn't been kind to investors. Its shares are down more than 80% since its IPO, as cable systems ramp up their telephone service packages and Verizon keeps the company tied down in court. Vonage also faces a suit from Sprint Nextel Corp. that has not yet come to trial.

Vonage executives insist they will survive the legal challenge and claim to be developing a "work-around" solution that will let them continue to operate without infringing Verizon's patents.

Customers Restless

Although it advertises extensively and attracts a steady stream of new customers, Vonage has had a hard time hanging onto customers. Many complain about the audio quality of their phone calls, while others are never able to master the hook-up process, which requires installing a router between their Internet connection and their telephone. Billing disputes are also a common theme in the more than 400 Vonage complaints filed with ConsumerAffairs.com.

"I had dropped calls, couldn't call or receive calls, etc. So, I decided to go back to my land line," said Ashby of Forest Hill, Md.

"Vonage promised service that could not be delivered, stalled for several months and have billed me for service not delivered," said Peter of Big Bear Lake, Calif. "I have called for a resolution on this matter many times, they simply shuttle the calls from one nincompoop to another until the customer gives up."

Vonage also faces a consumer class action filed in U.S. District Court in California which charges that it misled consumers about the quality and reliability of its service and engaged in false advertising and deceptive business practices.

Verizon Suit

Verizon sued Vonage in June, claiming that Vonage had illegally used key technologies owned by Verizon to connect Internet calls to regular telephone networks and claimed it had lost hundreds of thousands of customers to Vonage as a result of the infringement.

Like many companies that try to capitalize on new technology, Vonage has attracted numerous competitors, including the huge telephone and cable companies it had hoped to displace. Much of the growth Vonage had hoped for has instead gone to the cable companies, which have aggressively rolled out telephone service packages bundled with high-speed Internet and video services.

Between them, Cablevision and Time Warner have signed more than 3 million customers, business that Vonage had been counting on to meet its projections.

Vonage has also run afoul of the regulatory thicket that is the telecom market. It has been required by regulators to add many of the very fees and surcharges already collected by its old-line competitors. That has taken away much of the low-cost advantage Vonage had been counting on.

Since it sells itself as a replacement for traditional telephone service, Vonage also found itself required to beef up its 911 service, a major unanticipated expense.

Defenders

Not everyone is critical of Vonage. The president of CompTel, a telecommunications trade association, says Verizon is using its market dominance to stamp out competition.

"We're seeing a still-dominant monopoly aggressively using its monopoly revenue to pursue and drive out of the market competitors," Earl Comstock told The Washington Post. "This isn't about protecting their patents. It's about crushing their competitors."

Comstock predicted Verizon will use the same tactic to go after other competitors.

Report Your Experience
If you've had a bad experience -- or a good one -- with a consumer product or service, we'd like to hear about it. All complaints are reviewed by class action attorneys and are considered for publication on our site. Knowledge is power! Help spread the word. File your consumer report now.