Vonage Settles With Sprint

Patrick Barnard
Group Managing Editor, TMCnet

Vonage Settles With Sprint

In case you haven’t heard the news, Vonage has settled its patent suit with Sprint, and will pay the telco about $80 million in a cash settlement. As per the agreement, Vonage will pay $35 million for past use, $40 million for a license going forward, and $5 million in prepayment "for services." In addition the two companies announced that they are about to enter into an unspecified business relationship.

A federal jury ruled last month that Vonage had infringed patents belonging to Sprint and ordered the company to pay $69.5 million in damages, plus future royalties. Vonage said it would appeal, but instead ended up settling.

Meanwhile, Vonage is still hoping for a favorable verdict in the patent infringement case brought against it by Verizon last year. Last month a U.S. appeals court upheld a verdict that Vonage had infringed on patents held by Verizon. Vonage has been ordered to pay more than $58 million in damages plus a 5.5% royalty on future revenue.

But Vonage has reportedly developed a workaround that does not violate the Verizon patents, which cover the way VoIP calls are routed over the PSTN. Although there is speculation that the court might overturn (i.e. reduce) the ruling for $58 million in damages, plus royalty fees, there remains the matter of a third patent which still needs to be re-reviewed. It remains to be seen whether the damages will be reduced.

If Vonage is forced to pay Verizon the full $58 million, plus royalties, it will, in conjunction with the other settlement, no doubt have a major impact on the company’s financial health. Some have even speculated that it might put the company out of business, or at least lead to it being auctioned off.

My take is that Vonage and the other "pure play" VoIP providers were doomed from the start – and I think it’s entirely possible that they won’t be around much longer. That’s because the real attraction to VoIP and other IP services for consumers is the bundling: More consumers get their VoIP service through their cable provider than any other method, and that’s because of the convenience of bundling your phone service with your Internet service and television service. It’s hard to imagine, at this point, that many consumers are going to buck the trend and go the other way and start buying stand-alone VoIP. It’s simply not convenient and not the way of the future. Perhaps Vonage and Skype will continue to subsist as stand alone providers, (or maybe they'll team up with other companies and start offering other services such as IPTV?) but my prediction is that their subscriber bases will start shrinking sometime over the next few years unless they start getting super innovative. And it's tough to find money for innovation when you're getting sued all the time.

Once we reach the point where all phone service is IP-based, you can be sure the dominant telcos will do all they can to stomp out the "little guys" … and my bet is that they’re going to win.

Leave a comment