VoIP Industry Measures The Impact Of Verizon's Patent Victory Over Vonage

In the wake of Verizon Communication's jury victory over Vonage, the booming VoIP industry collectively wondered on Friday whether Verizon's patents portfolio could now be selectively used to stymie the deployment of IP telephoning.

Investment banking analyst Rebecca Arbogast of Stifel Nicolaus said she doubts the jury decision would have much impact on other VoIP firms. An eight-person jury ruled Thursday that Vonage had infringed on three Verizon patents and awarded the New York-based telephone conglomerate $58 million.

More drastic, however, is Verizon's request for an injunction against Vonage that will be discussed March 23 in Federal Judge Claude Hilton's Virginia courtroom. Vonage has sought to assure its 2.2 million users that its service will continue uninterrupted, but an injunction and the jury's ruling that the Vonage should pay future royalties of 5.5% on certain Verizon intellectual property could cripple the VoIP provider in the future.

"I don't see the verdict as a good dynamic for the (VoIP) industry," said Ken Osowski, VP of marketing and product management at Pactolus Communications Software. "IP is the future because of its compelling cost points."

Osowski, whose company designs next-generation IP solutions for telecommunications carriers and service providers, indicated he will withhold final comment until after he has read the jury decision. He noted that the economics of telecommunications has changed for the better because of the spread of VoIP.Vonage went into the trial in a difficult position because Judge Hilton had determined that Verizon's claims were so broad that they covered much of Vonage's business. Vonage is now faced with a difficult task of creating a workaround or a possible settlement with Verizon, which analyst Arbogast suggested in a note Friday -- something investors might agree to.

The case also focused on the issue of standards -- open versus proprietary. However, it's not clear yet whether the case will have an impact on VoIP standards. Osowski said he believes the telecommunications industry will eventually move toward the IETF Session Initiation Protocol standard. Many providers are still holding out on SIP, notably Skype, which uses its own technology standard.

Earlier this week, Skype announced that its VoIP software had been downloaded more than 500 million times. The company, which is a subsidiary of eBay, didn't immediately reply to a question as to whether it expects the Verizon jury victory to affect its service.

Of the patents reviewed by the jury, the key one appeared to involve connecting IP calls to traditional landlines. Other patents concerned Wi-Fi/VoIP calls and call-forwarding. Vonage maintained it didn't infringe any of the patents and it indicated it will continue that argument in an appeal of the jury ruling.

John Thorne, Verizon senior VP and deputy general counsel, hailed the jury decision, saying, "Verizon's innovations are central to its strategy..."Vonage said it has enough financial resources to assure that its service will continue uninterrupted. The company has yet to turn a profit and its stock has plunged from $17 at the time of its initial public offering last summer to under $5 Friday in the wake of the jury decision.

Vonage is still facing additional patents litigation brought forward by Sprint Nextel and Klausner Technologies. Vonage upholds that it hasn't infringed on those patents, either.