Temporary help for ailing Vonage

Times Staff Writer

A federal appeals court Friday gave Vonage Holdings Corp. a reprieve from a ruling issued hours earlier that a company lawyer said was “cutting off oxygen” to the Internet telephone provider.

Early in the day, U.S. District Judge Claude M. Hilton in Alexandria, Va., issued a partial stay in his injunction against Vonage for violating three patents held by Verizon Communications Inc.

Hilton allowed Vonage to continue serving its 2.2 million customers while the company appeals, but said it couldn’t bring on new ones until it stopped using Verizon’s patented technology.


One of those patents is essential: The technology connects Internet phone customers to the public phone network.

But several hours later, Vonage won an emergency stay from the U.S. Federal Circuit Court of Appeals, which gave Verizon until next Friday to respond.

Many analysts saw the courtroom maneuvering as little more than a distraction that failed to lessen their main concern about Vonage: whether it can ever thrive, especially with cable TV companies cornering the market for alternative phone service.

“Even without the patent dispute, they have significant problems ahead of them as a business,” said Blair Levin, an analyst at brokerage Stifel, Nicolaus & Co.

Holmdel, N.J.-based Vonage sees continued growth as key to its financial health. Its lawyer, Roger E. Warin, suggested to Hilton on Friday that the company would have been as bad off with the partial stay as without it.

“It’s the difference of cutting off oxygen as opposed to the bullet in the head,” Warin said.

Some industry experts, although pessimistic about Vonage’s future, weren’t ready to bury the company.

“It’s not as bad as the worst-case scenario -- no stay at all, which would have closed them down -- but it’s still dire,” said Clayton Moran, an analyst at Stanford Group.

Money-losing Vonage has been spending huge amounts on advertising and marketing to attract new customers, a strategy aimed at helping it reach its goal of becoming profitable by early next year.

“It’s imperative they continue to grow for them to be viable in the long term,” said Rich Tehrani, head of Technology Marketing Corp., which publishes the trade magazine Telephony.

Vonage already is losing 55,000 customers a month but has used its heavy marketing to attract more new customers than it lost.

Regardless of how the appeal goes, industry analysts expect nervous customers to leave the company in even greater numbers. Moran believes that Vonage’s churn rate, the percentage of customers leaving the company, could nearly double.

Hilton’s order “renders Vonage a mature company with a capped opportunity,” he said.

The court order stems from a March 8 jury verdict that assessed Vonage $58 million in damages, plus monthly royalties of 5.5%, for violating the Verizon patents. The jury found, though, that the company had not acted willfully, a factor believed to warrant some leniency.

The company went public last May at $17 a share. But the price began plummeting almost immediately as cable firms began aggressively marketing phone plans last year.

Vonage stock reached its nadir March 23, falling to $2.98 a share before climbing slightly. Shares dropped 25 cents Thursday to $3.37. The markets were closed for Good Friday.