Thursday, March 8, 2007

Verizon Gets Its Way With Vonage - Another Boston Tea Party Coming?

Well, news travels fast. I've had a bunch of people email and IM me about the Verizon/Vonage case. Looks like things have gone Verizon's way, although I think it could have been a lot worse.

Details are limited so far, and a few bloggers have posted already, pretty much all referencing the same source from the Washington Post.

I don't have anything better to add yet, so at least you can read this for now. I'm sure there will be loads more analysis to come later today and tomorrow.

All I can say is that I thought Vonage might have caught a break in this one. I'm just thinking that the AT&T/Bell South merger went through with relatively few concessions, and that the sentiment today would favor a ruling going in favor of the competition. I guess not. So, we have another case of the incumbents getting their way, and obviously, this case can hurt Vonage a lot more than Verizon.

So far, though, it looks like the pain is manageable - $58 million settlement, and a 5.5% royalty on future sales. Vonage certainly has the cash on hand, but gee, this is another hit on their margins - 10% in fact, and that's quite a bit. Why 10%? Well, their gross margins are around 55%-60%, so 5.5% is 10% of that. Call it the Verizon tax if you like, but it worries me. Is this royalty in perpetuity, or does it have a limited life?

If it's the former, I see parallels to the Boston Tea Party here. Verizon gets its way by giving Vonage enough rope to live, and to continue profiting from VoIP while Vonage and their shareholders struggle to hang on. Plus, they may even make money some day from VoiceWing, their own VoIP offering - but that's another story.

If I'm Vonage, that's not a tax I'd want to live with the rest of my days, especially if they can somehow find light at the end of the tunnel. If that day comes, maybe they'll stage a Boston Tea Party of their own to protest this onerous and unfair tax.

Of course, it's debatable whether the "tax" is fair. Verizon seems to think so, but does the punishment fit the crime? And can Vonage somehow come up with a workaround to stop using the patents in question, and hence free themselves of this royalty scheme? And in the context of my Boston Tea Party theme, the word "royalty" is rather appropos here.

And then there's the bigger question of the rest of the industry. If they can go after Vonage for this, can they not go after the other VoBB operators like SunRocket? It's not clear to me if Vonage is the only one Verizon thinks they can apply this position to. In that scenario, they would really be a threat to the competitive landscape, which is an even bigger concern.

Finally, I can't help but wonder about the bigger picture. The cablecos are causing Verizon far more pain than Vonage, and they're a much bigger threat. That's where I'd be spending my time and money. And if Verizon really has all these great VoIP patents, why are they the smallest player in the market among Tier 1 carriers?

Many questions here - more to come for sure...

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1 comment:

ipcom said...

Posted by: David McIntosh

There is one other question/debate which you did not touch on, which is even more fundamental to this issue, and that is the patentability of "algorithms" as technology, i.e. the patentability of software. The patent infringment case against Rim was another example of "justice" according to the letter of patent law which was completely and utterly unjust. And is this perhaps not another case? Given any of the modern "technology" problems of internet communication today, a good technology group will come up with a good solution, and a separate technology group at another company is just as likely to solve the problem the same way, if it is a sensible solution. It is very different from coming up with an "invention", which is more often than not a unique, creative act. In technology, just because I am the first one to come up with what may arguably be the only sensible solution, should I really be allowed to patent it and prevent all others from solving the same problem without paying me a royalty? This is the situation we currently have, and it is incredibly stifling to economic growth. Those who argue it is "the law" and never question whether it is just, are those who cannot think outside of the strictures imposed on them by the establishment.