Vonage Clears Up Last Legal Cloud on Horizon

Tentative $39 million settlement with AT&T means that the VoIP pioneer can get on with business.

That makes it three down and none (that we know of) to go. Vonage's tentative settlement of AT&T's patent-infringement lawsuit takes care of its last oppressive legal problem, following similar settlements with Sprint Nextel and Verizon. Now, the company can get on with the business of providing cheap consumer broadband VoIP. The question is how good that business will be, especially since the settlements will set the VoIP pioneer back a significant sum.

The agreement in principle, which Vonage described in its Q3 financial-results announcement, would require it to pay AT&T $39 million over five years. That's a lot less than the $80 million it will pay Sprint and the $80 million to $120 million it will pay Verizon. While the combined payouts will amount to some $200 million or more, they eliminate some major uncertainties about Vonage's future. It's a big change from the dark days in March 2007 when the initial court loss to Verizon left it unclear whether the VoIP pioneer would be able to keep operating.

Uncertainty about Vonage's business model remains, however. TeleGeography analyst Paul Brodsky noted that it's still an independent VoIP company with a single value proposition — cheap voice service — competing against cable and telco giants with triple-play bundles of voice, broadband and TV.

Still, Vonage managed in Q3 to get a handle on some of its structural problems. For one thing, it cut the cost of acquiring each new customer to $206, its lowest level in more than two years. That's partly because, as promised, the company slashed marketing costs from $91 million to $62 million, or from 56 percent to 29 percent of its revenue, compared to Q2. Total new customer acquisitions rose 37 percent anyway, from 57,000 in Q2 to 78,000 in Q3. Even so, Brodsky noted, "that's a far cry from the days when it was increasing by a couple hundred thousand per quarter."

The increased confidence about Vonage's future is particularly important to investors, who bid up its stock significantly on the news, Brodsky observed. Vonage's value to customers, though, has less to do with money than with peace of mind. For them, simply knowing that the provider of something as crucial as telephone service has cleared up the biggest threats to its survival should be a great relief. "In the wake of the SunRocket debacle, I can only imagine there were a lot of Vonage customers sitting around wondering whether these guys would close tomorrow," said Brodsky. "I would speculate that this would make them feel a little better."

At the same time, Vonage now has a couple of hundred million dollars less to spend. Depending on how it might have used that money, the company's settlements may or may not affect users. For one thing, it could make it harder for the company to lower rates any more than it has already, if it ever considered doing so. Likewise, it could make it harder for Vonage to improve its technology or infrastructure.

On the other hand, perhaps Vonage would have simply blown through all that cash on marketing the way it did in the past. If so, not having it to spend will hurt investors, but existing customers could care less.