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Patent woes are just one of Vonage’s challenges

Times Staff Writer

Executives at Vonage Holdings Corp. are so upbeat in public talks these days it’s hard to believe the Internet phone company faces a court order that may cut off its lifeblood: new customers.

Vonage executives have said they expect to announce next month new technology aimed at getting around Verizon Communications Inc.'s patents, which a judge ruled that Vonage was infringing on.

But in court and regulatory filings this week, Vonage said it was months away from a work-around. And if an appeals court does not lift the injunction that would prevent the money-losing company from servicing new customers, Vonage said it might suffer “irreparable damage” leading to layoffs, a customer exodus and even “bankruptcy or liquidation of the company.”

The company already has announced a $140-million cost-cutting measure that was expected to lead to layoffs of up to 10% of its 1,800 workers.

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Vonage shares slid 6% on Wednesday to a $3.11, near a record low and a fraction of the $17 investors paid in the company’s initial public offering almost a year ago.

Even if Vonage wins a stay of the injunctions and goes on to defeat Verizon on appeal, it may gain little more than extra time. Analysts said Vonage was likely to be a historical footnote: a pioneering company that changed an industry but couldn’t stick around long enough to enjoy it.

“It seems like everything is working against them,” said Robert V. Green, a telecommunications industry strategist with Briefing.com.

The patent dispute is the most urgent of Vonage’s troubles, but not necessarily the biggest. The Holmdel, N.J., company faces major competitive and operational obstacles.

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Cable TV companies controlled 65% of the market for Internet-based phone calling at the end of December -- compared with 23% for Vonage -- and were growing faster than Vonage. Analysts said Vonage’s $420 million in cash may not last long enough for the company to turn profitable.

“It doesn’t get any easier for Vonage,” said analyst Clayton F. Moran at Stanford Group.

Jeffrey A. Citron, Vonage’s co-founder, chairman and interim chief executive, won’t hear any of it.

“This is not a dire picture,” he insisted in a recent interview. “Vonage established a great plan and has a phenomenal business.”

The Internet phone company has advertised heavily to build a national brand and educate consumers about alternative phone service that was based on a technology called voice over Internet protocol.

“We will compete on a national basis,” Citron said. “We don’t have to be No. 1 in every market for us to be a very big operator.”

Those are comforting words for Vonage’s 2.4-million customers. Many are die-hard fans who would rather put up with quirks in the new technology and spotty customer service than pay higher prices to major phone and cable companies.

San Dimas plumbing contractor Matthew Alder has coped with Vonage’s early problems of poor voice quality, dropped calls and outages in order to avoid Verizon and Time Warner Cable Inc., the main communications companies in his area.

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Alder likes Vonage’s calling features that he can control from his computer, a function that many Internet-based phone providers package for free with low-priced service. He can pick his own area code, direct calls to a series of numbers, have voice messages sent to his e-mail and even take his phone and telephone adapter with him on trips.

But when Vonage’s website, which Alder relies on to change call forwarding numbers for his four business and two home phone lines, went down for nearly an entire day early this month, he began browsing the Internet to find a new phone company. His 24-hour business, he said, was his primary concern.

“I’m concerned that the long court battle would degrade what poor service they already have,” Alder said.

Vonage needs to keep adding customers to reach its goal of turning profitable by early next year. It had 2.2 million customers at the end of December, a 75% increase from a year earlier.

But that growth fell behind the 112% growth in the Internet calling industry as cable firms entered with force, said analyst Stephan Beckert at research firm TeleGeography Inc.

Cable and phone companies also bundle phone, Internet and pay TV or wireless services -- packages Vonage can’t match.

Meantime, the company is forging ahead with new calling features it plans to roll out this quarter. One is expected to turn voice messages into e-mail text that customers can read on computers or cellphones.

Through such partnerships as one with EarthLink Inc., Vonage offers high-speed Internet connections -- a must-have for customers -- and phone service over EarthLink’s wireless broadband systems in cities such as Anaheim.

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Vonage’s Citron hopes the added features and partnerships will help reduce the number of customers who drop service, and allow Vonage to better compete with the cable and the phone goliaths.

“As a stand-alone company, it certainly is challenged,” said Albert Lin, an analyst at American Technology Research Inc. “It would need to double or triple its subscriber base if it expects to make money. But it’s very attractive to a buyer.”

The company may have to make some decisions quickly to shore up support, said Rich Tehrani, president of Technology Marketing Corp., an industry consulting and publishing firm. “Everyone wants to know whether they should cancel their Vonage service,” he said.

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james.granelli@latimes.com


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