Vonage Gets a New Life
By Dave Mock
October 9, 2007
Only a few weeks after losing its patent infringement case to Sprint Nextel (NYSE: S), Internet telephony provider Vonage (NYSE: VG) came back to life again as the two companies settled the spat for a flat license fee of $75 million plus an additional $5 million prepayment for services from Sprint Nextel. The payment to Sprint Nextel covers not only the patents at the center of the lawsuit, but a portfolio of more than 100 patents the company holds related to voice transmission over data networks.
The settlement cleared away all the likely appeals that would have drawn out the original verdict, and also freed Vonage from the 5% future royalty the jury had awarded Sprint Nextel. The elimination of the royalty that would have taxed Vonage's revenue electrified its stock, which ended the day up a whopping 123%, a level higher even than prior to the original court judgment.
The settlement makes it more likely that Vonage will be around for a while longer to push ahead with its plan to cut expenses and achieve profitability. The company made a dramatic shift in direction earlier this year by booting the CEO and slashing its marketing budget.
But while Vonage has had its attention elsewhere, cable companies such as Comcast (Nasdaq: CMCSA) and Time Warner Cable (NYSE: TWC) have been pushing deeper into digital phone services, offering more competition to Vonage. Major telcos such as Verizon (NYSE: VZ) and AT&T (NYSE: T) have also been busily building out broadband networks to support the quadruple-play of voice, video, broadband, and wireless services. With bundled packages now offered in more markets, consumers will have more options aimed at keeping them from jumping to Vonage's service.
So while the market breathed a huge sigh of relief at Vonage's newfound viability, this cat has bounced a number of times already and doesn't have many of its nine lives left. The impact of Verizon's and several other lawsuits still hang over the company, and recent metrics show that the company's business plan is ineffective. Regardless of the events, Vonage is still a speculator's toy -- not an investment in the future of telephony services.
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