Vonage shares dive on patents ruling

Vonage, the leading voice over internet protocol company, was dealt a blow on Friday when a judge ruled that it should be barred from using key Verizon patents, sending its already battered share price reeling further.

It said the decision would not affect service for its customers, but investors remained unconvinced as its shares plunged 26 per cent, or $1.05, to $3.

The ruling by a court in Virginia is a fillip for traditional telecoms companies against their internet telephony rivals, and could prove to be a landmark case affecting the ability of other emerging VoIP providers, such as Packet8 and Sunrocket, to operate without licences.

The rulings are the latest troubles to hit Vonage, which has suffered a baptism of fire since it launched as a public company last year. It made one of the worst market debuts in New York in recent memory on its IPO last May as its shares dropped 13 per cent on their first day.

Verizon welcomed the decision, which bans Vonage from using VoIP technologies, including features such as call waiting and the conversion process from internet protocol to telephone, as well as certain Wi-Fi patents.

“We’re pleased the court has decided to issue a permanent injunction to protect Verizon’s patented innovations for offering commercial quality VoIP and Wi-Fi services,” said John Thorne, Verizon’s deputy general counsel.

Vonage will have two weeks to convince the court to stay the injunction, while it appeals the ruling delivered earlier this month that it had infringed Verizon’s VoIP patents, granting the telecoms giant $58m in damages plus monthly royalties.

“We remain confident that Vonage has not infringed on any of Verizon’s patents,” said Sharon O’Leary, Vonage’s chief legal officer. Analysts think it unlikely that Vonage will be forced to shut down service as a result of the rulings, arguing that it will be able to find a way around the patents, or sign a licensing agreement with Verizon.

Vonage, a pioneer in VoIP, has struggled to make money since its troublesome flotation. Although it has managed to add customers, they have proved expensive to attract, while it has experienced a very high churn rate. The ruling is likely to be a big distraction for Vonage from its aim of breaking even next year. Vonage’s sales doubled to more than $607.4m last year, whereas Verizon delivered sales of $88.1bn.

Verizon and other big telecoms companies will welcome the ruling in helping to reduce the threat of independent VoIP providers.

However, cable companies such as Time Warner and Comcast, and their VoIP offerings, packaged in with television and internet, pose a more serious worry than the small internet telephony providers to the telecoms giants.