Shares of Vonage Holdings Corp. plunged Friday in the wake of a patent-infringement ruling against the company that some analysts called a grim outcome for the voice over Internet Protocol (VoIP) service provider.
Vonage stock fell $0.69 to $4.17 on the New York Stock Exchange, losing more than 14 percent of its value, after a jury decided on Thursday that the company infringed three Verizon Communications Inc. patents on commercial VoIP services technology. Vonage was ordered to pay $58 million in damages and a 5.5 percent royalty rate on future sales. Verizon also is seeking a permanent injunction to keep Vonage from using the technologies. Vonage plans to appeal.
The ruling comes after a string of setbacks for the scrappy service provider, which has yet to make a profit. Vonage was founded in 2001 and has built up its customer base to more than 2.2 million through heavy investments in marketing. Along the way, it has become the most visible independent provider of VoIP, which puts voice calls on data lines for lower cost and some extra features. The Holmdel, New Jersey, company has claimed Verizon sued in order to eliminate a competitor to the traditional circuit-switched phone service that is its bread and butter.
Although the judgment is not very big compared to some, it could be devastating to Vonage if it stands, analysts said.
"It's a drop in the bucket, but they need every cent they can get," said Will Stofega, a VoIP analyst at IDC. The company is already dealing with shareholder lawsuits over its disappointing initial public offering last year, along with meeting regulatory requirements such as E911 emergency service and the Communications Assistance for Law Enforcement Act, he said.
The $58 million sum is about as much as the company is losing every quarter, Ovum Ltd. analyst Jan Dawson pointed out in a research note on Friday. Vonage lost $65 million in the fourth quarter of 2006.
"As this case gets more coverage, potential customers will be worried about signing up for new service with Vonage, and existing customers may churn in larger numbers than usual. Both of these effects would be disastrous for Vonage," Dawson wrote.
Verizon might also go after other VoIP providers for infringing the patents, Stofega said. Big providers such as the cable operators could absorb royalties, but smaller independent players would be even more vulnerable than Vonage. Already, regulatory requirements and "a race to the bottom" on pricing are threatening the stand-alone VoIP service business, he said. In a few years, many more people will be using the technology, but VoIP companies as such may become a thing of the past.
Jeff Pulver, a longtime VoIP booster who co-founded Vonage before leaving the company, was more optimistic in an entry on The Jeff Pulver Blog, in which he called the ruling "end of the seventh inning," a reference to baseball, which has nine innings.
"This isn't the end of the battle," Pulver wrote. "I hope and trust this decision does not curb innovation and progress in VoIP and other Internet communications products, services and applications."
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