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Vonage Gets a Reprieve but its Future is Murky

Verizon Wins Patent Infringement Case, a Potentially Fatal Blow

By Truman Lewis
ConsumerAffairs.com

April 7, 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

Internet telephone pioneer Vonage got at least a temporary reprive from an almost certain death sentence when a federal appeals court temporarily stayed a federal judge's order that Vonage stop signing new customers until it stops infringing on patents held by Verizon.

U.S. District Judge Claude Hilton ruled Friday morning that Vonage stop signing new customers after a jury found that it had infringed on several patents held by telecom giant Verizon. Hilton said he considered the possibility that his order could result in bankruptcy for Vonage, which has seen its stock price plummet in recent months.

But Hilton 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.

Vonage is running low on cash and has promised its investors it will 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.

It's also possible existing customers will begin deserting Vonage more quickly, fearing that it could go out of business and leave them without service.

Customers Restless

Vonage says it is working to find ways around the patented processes so that it can get back in the race. But even if it solves the technical and legal hurdles, Vonage faces a growing chorus of consumer complaints that may be nearly as effective as a court order in stemming future sales.

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.

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