Innovative Vonage Blocked by Powerful Rival

The innovative Internet phone company Vonage is on the verge of collapse after copyright infringement lawsuits from traditional phone giant Verizon. Some see Verizon's legal action as a simple power play.

RENEE MONTAGNE, host:

There have been some lousy weeks for Vonage.

The company provides cheap Internet-based phone service and was once seen as having tremendous promise. But lately, the news has been bad. Its stock price has fallen by more than 80 percent. A court recently ruled that Vonage has violated several patents owned by Verizon. And this week, the company publicly announced it could go out of business and declare bankruptcy.

NPR's Adam Davidson reports.

ADAM DAVIDSON: Companies must hate the 10k forum. All year long, they tell their customers and investors how great they are. But once a year, by law, every publicly traded firm has to file that 10k, which lists in detail all of their problems.

But even by the grim standards of the 10k, Vonage's firing this week was particularly upsetting. The company confessed it might lose, quote, "a substantial number of existing customers." It listed all sorts of other problems, like bad credit, a damaged brand image, loss of liquid assets, and said there is a chance that soon, Vonage could be bankrupt or liquidated.

Most of this bad news stems from a lawsuit Vonage is fighting against Verizon. Clayton Moran is an analyst with the Stanford Group.

Mr. CLAYTON MORAN (Senior Stock Analyst, Stanford Group Company): If they flat out lose this case, it's hard to see Vonage surviving.

DAVIDSON: With all the bad news, it's worth remembering Vonage's initial promise. You buy a little box, hook it up to the Internet and you can make phone calls for very little money. Calls in the U.S. are free, international calls are shockingly cheap. There are also a bunch of cool features you can't get on regular landline phones.

Vonage convinced almost 2.5 million people to ditch their landline phones and sign up for what is called Voice Over IP. Eben Moglen, founder of the Software Freedom Law Center.

Mr. EBEN MOGLEN (Founder, Software Freedom Law Center): The traditional telecommunications all oligopolists in the United States, the party's made out of the break up of AT&T, have business models which are deeply threatened by Voice Over IP technology.

DAVIDSON: Both Verizon and Vonage declined to comment on the story. But Moglen says Verizon has been preparing to take on the threat of Voice Over IP for 10 years. In 1997, long before Vonage existed, Verizon took out patents on some key technology, Moglen says, specifically so it could fend off any company that came along later. Moglen says Verizon is now using those patents to destroy its newest rival because Verizon is terrified of the competition.

MR. MORAN: I think terrified is a little bit of a strong word.

DAVIDSON: Clayton Moran has a very different view. He says this case isn't that big a deal for Verizon.

MR. MORAN: Verizon is a $100 billion-plus phone company. It's certainly safe to say that Vonage wasn't threatening Verizon in any meaningful way.

DAVIDSON: Next week, a federal court will decide whether Vonage can continue signing up new customers as it waits for an appeal. If the court says no, the company could collapse immediately. If Vonage wins that hearing, it will be allowed to struggle on until the appeal, which is expected in 2009.

Adam Davidson, NPR News.

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