No New Customers for Vonage

A federal judge has ordered Internet Phone provider Vonage not to accept any new customers while it continues to infringe on Verizon Communications patents covering some aspects of Internet phone calls. It's a temporary setback for the leading voice over Internet Protocol (VoIP) company and its some 2.2 million subscribers. U.S. District Judge Claude Hilton said it was the only fair option that would minimize harm to both companies for now.

In case you didn't know, a federal jury on March 8 found that Vonage had infringed three Verizon patents. The New Jersey-based Internet phone provider was ordered to pay $58 million in damages. Vonage is expected to appeal the decision, which Hilton plans to make effective this next Thursday. A federal appeals court could then decide to save the VoIP provider from having to deny new customers by granting a full stay of the injunction.

Verizon general counsel John Thorne said the judge was able to "craft a middle path that allows Vonage to continue serving its existing customers while protecting Verizon's patents from increased infringement during the appeal process," adding that he fully expects the decision to be affirmed on appeal.

Roger Warin, Vonage's attorney, protested Judge Hilton's no-new-customers order. Arguing the decision was just as threatening to Vonage as a full injunction, he said "it would be the difference of cutting off oxygen as opposed to a bullet to the head." He also told Hilton that "in effect, what you are doing is slowly strangling Vonage because it cannot preserve that customer base" indefinitely. He noted that Vonage's customer turnover rate is 2.5 percent per month.

Being hamstrung in this way could be particularly devastating for Vonage, as it faces stiff competition from other VoIP companies like Packet8 (my own provider) as well as cable operators, which are also targeting residential phone users with their own VoIP services. Then there are the Internet companies, such as Skype, Google, and Yahoo, that are also offering VoIP services that allow people to make calls to traditional phones as well as cell phones.

Even before the jury found that Vonage was infringing on Verizon's patents, the company was struggling to add new customers. In the fourth quarter of last year, Vonage added 166,000 new subscribers. That was down from 204,591 subscribers in the third quarter and 256,000 in the second quarter of 2006. This drop in new subscriber growth occurred despite the fact that the company spent $365 million on marketing in 2006, a 50 percent increase from the previous year.

Who knows, we might have seen the last ad featuring someone in a beat-up old orange van throwing a Vonage cardboard box and hitting someone in the head.