Internet telephone service provider Vonage (NYSE: VG ) is up against the ropes in its patent dispute with rival Verizon Communications (NYSE: VZ ) . An order banning Vonage from enrolling new customers has been stayed, for now, but regardless of how the current legal matters pan out, investors would be wise to steer far clear of this sector.
A U.S. District Court judge ruled late last week that the company could not sign up new customers on its network, as punishment for using technology that violates three patents owned by Verizon. A jury had earlier ruled that Vonage owed Verizon $58 million for unlawfully using the technology, as well as future royalties for as long as Vonage used the patents.
Much to the company's relief, however, Vonage persuaded the U.S. Court of Appeals to immediately stay the order until it could appeal, so the new-customer ban has not yet gone into effect. But the judgment also required that Vonage post a $66 million bond to cover damages awarded to Verizon.
Of course, Vonage was quick to describe the initial ruling as nearly as bad as a complete injunction against providing service to all existing customers -- Verizon's original request. According to Vonage, an inability to attract new customers will decimate the company, albeit more slowly than completely cutting off service. Vonage needs to be able to sign up new customers to replace the roughly 50,000 that cancel service, or churn, every month.
Actually, a new-customer ban may do Vonage and its hapless investors a big favor. Vonage would save about $100 million in marketing aimed at attracting new customers every quarter, and be forced to focus instead on improving service to its current base of approximately 2.2 million.
In reality, though, little is likely to help stem the flow of customers away from Vonage at this point. Most customers switch to Internet telephone service because of the cost savings it provides, and the ease of switching service providers means that customers have little loyalty. Until Vonage or other providers such as Comcast (Nasdaq: CMCSA ) and Cablevision (NYSE: CVC ) offer significant differentiating services, Internet telephony will be tough business.
No matter how Vonage fares in the courts, investors would be wise to avoid this sector. Pure-play Internet telephony providers have no clear path to profitability in a cutthroat competitive environment against incumbents like Verizon, AT&T (NYSE: T ) and Qwest (NYSE: Q ) . It may be a great value for consumers of the service, but it's a lousy basis for investment.
Dial up related Foolishness:
Fool contributor Dave Mock would like to have stays issued on several of his monthly bills, even if they are only temporary. He owns no shares of companies mentioned here. Dave is the author of
The Qualcomm Equation. The Fool has a disclosure policy.
RSS Headlines
Fool UK