Business Blog: Hoover’s Business Insight Zone

Today’s Company of the Day is Vonage. Here’s a copy of the original article; an update, a correction, and amplifications follow.

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Internet phone company Vonage got yet another bad piece of news this week when a federal court ordered it to pay nearly $70 million in damages to Sprint Nextel for infringing that company’s patents. Vonage said that it would appeal the verdict, and reasserted that its VoIP (voice over Internet Protocol) technology does not actually infringe on Sprint’s patents. The ruling comes in the wake of a March finding by another federal judge that Vonage’s technology infringes on patents held by Verizon — a ruling (also under appeal)* that would force Vonage to pay nearly $60 million in damages and, more importantly, bar it from its principal business of using that technology to deliver Internet phone service. Vonage has talked about devising technical workarounds that don’t use the contested technology, but so far hasn’t announced any breakthroughs on that front.**

The adverse court rulings have been just one facet of the company’s problems. In the eyes of many market watchers, Vonage’s May 2006 IPO constituted a clinic in what not to do when taking a company public. After debuting at a price of just over $13, Vonage shares went directly into a steep slide. By the end of 2006, the share price was under $7.00; by the middle of this week, the price had fallen below $1.00. Some customers swear by the clarity and reliability of Vonage’s service, and sales have grown rapidly, from $80 million in 2004 to $270 million in 2005 and more than $600 million in 2006. Unfortunately, losses have also piled up quickly, and the balance sheet will get even worse if the company must pay the damages awarded to its much larger competitors. Maybe Vonage can navigate all these problems and become a serious player in the phone market. If not, the dial tone for Vonage may go silent.

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* UPDATE: Yesterday an appeals court overturned one count and upheld two counts in the patent infringement ruling against Vonage in the Verizon case. More details available here:

Vonage loses appeal in Verizon patent case

** CORRECTION: In the story just cited, Vonage says that it has completed workarounds that allow it to operate without the Verizon-infringing technology. My mistake.

More context: This BusinessWeek item

Vonage’s Prospects Dim

raises an interesting question that I was just discussing with a Hoover’s colleague this morning: If Vonage can’t keep going on its own, might a company like Sprint want to buy it? For all its troubles, Vonage has nearly 2.5 million customers to go along with last year’s revenue figure of $600 million. If the legal haze clears adequately, one of the bigger telcos might want to buy Vonage out and fold its service offerings into their own.