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Recent events at Vonage Holdings Corp. – including the resignation of its CEO Michael Synder – has once more cast the spotlight on the "patent pressures" faced by key players in the telecommunications industry.
Synder's resignation came in the wake of two other significant events at Vonage:
• A court ruling last month ordering Vonage to pay $58 million in damages to New York-based Verizon Communications Inc., following a lawsuit launched by the rival claiming Vonage committed patent infringements;
• An announcement of restructuring and budget cuts at Vonage, including slashing 10 per cent of the company's workforce and $110 million in "unnecessary" marketing expenses.
There was some speculation in the industry that the two events were related.
"The budget cuts probably do have something to do with last month's court ruling," says Mark Tauschek, senior research analyst with Info-Tech Research Group in London, Ont. However he adds the cutbacks were inevitable given the company was already losing money.
"In the grand scheme of things, $58 million as compared to what they spend on marketing is not what you'd consider a big deal for them."
Tauschek says Vonage would have to launch the restructuring initiative "whether $58 million was hanging over their head or not." Besides, he notes that the company had earmarked funds to pay for a possible court order.
The Info-Tech analyst believes the court ruling against Vonage is representative of a trend we're likely to witness in the telecom industry, given the way patents are currently structured.
Under the current patent regime, Tauschek says, it's very difficult for any telecommunications company to respond to the pressures of getting products and services to market without potentially infringing on someone's technology.
"The message is you'd better be very careful about infringing on others' intellectual property. And you'd better do your due diligence before you go to market."
Although due diligence is one contributing factor, it's possible players in the telecommunication space are being a little protective, given market pressures, says Sally Cohen, analyst with Cambridge-MA-based Forrester Research Inc.
"It's such a highly-competitive market at this point, that everyone is territorial about their existing subscriber base, especially with all the recent consolidations."
Competitiveness aside, Tauschek believes the patents Vonage has been found to have infringed are quite broad and could potentially cover a wide swath of technology in this area. "Any VoIP provider that transfers traffic between the public switched telephone network and an Internet Protocol network infringes on those patents."
If the injunction is upheld, says Tauschek, Vonage will likely go under.
The analyst surmises that if Verizon does win, the company will launch lawsuits against other large providers in this space.
And what happens then?
Cohen says other players in this market are giving the case ample attention and anxiously awaiting its outcome, given it may also affect them down the road. "I do think there are other providers who are likely watching their backs right now."
According to Tauschek, things will have to change to encourage other companies considering the telecommunications space. "It will have to come to the point where you realize this sort of idea is probably not patentable."
Vonage has since been granted a temporary stay on an injunction that would prevent it from using technology that infringes on the patents in question. It has also received a temporary stay from being prohibited to sign up new customers.
An Appeals court will decide on Apr. 24 whether to uphold this injunction or not.
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