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Vonage officials say they'll persevere

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Vonage officials last week were staring at yet another possible body blow from the U.S. District Court in Washington but remained stoic and determined to continue courting customers and building their business.

The company got only a partial stay against a permanent injunction issued by a federal court judge two weeks ago that would prevent Vonage from violating three Verizon patents in providing its VoIP service. The judge allowed Vonage to continue using its existing technology to serve current customers but refused to let Vonage sign up new customers on that platform. Vonage lawyer Roger Warin told the Associated Press the verdict was “the difference of cutting off oxygen as opposed to a bullet in the head.”

Vonage is developing work-arounds to avoid the patent issues, officials said, and is continuing to develop new features and functionalities it believes will attract and retain VoIP customers.

“The key for us is to keep doing what we are doing, acquiring more customers and get beyond the market we are in to new markets,” said Lou Holder, executive vice president of Vonage. “When we add more profits to the offering, [customer acquisition] gets cheaper, and it helps you keep churn down by making the service stickier.”

For the immediate future, Vonage is exploring portability and mobility-which are two separate markets, Holder said. On the mobility side, Vonage is looking at a “bring your own sim card” offering that would allow its customers to use dual-mode phones that use Wi-Fi networks in the home or in the business and cellular networks to connect the two, he said.

“Being a [mobile virtual network operator] and reselling cellular-that is not where our vision is,” he said. “We would consider a partnership with a cellular company where we would white-label the service.”

Vonage is also looking at the convergence of voice, video and mobility, Holder said. “We expect to investigate and build that this year,” he said.

The company is also adding more features that appeal to small businesses and is continuing to expand what it offers consumers, Holder said.

“The key for us is to offer more products and make the service more compelling,” he said. “We have to keep innovating, and the good news is that's what we are doing. You will see new features that help people manage contacts better and communicate online better, as well as software-based community tools to manage family communications.”

Holder said he doesn't think consumers care about the legal or patent issues, as long as their service works.

Patrick Monaghan, an analyst for Yankee Group, believes Vonage will take care to protect its customers in the event the injunction Verizon received in the patent case is enforced. But he sees other challenges for the VoIP industry pioneer.

“Vonage's name is plastered in the press, and for anyone using the service, they have to start to worry like BlackBerry owners did when RIM was being sued,” he said. “It won't hurt the service but will probably hurt their reputation, which could possibly could result in churn but more likely hurt new business. It's too early to tell whether they have enough customer loyalty to survive if the judge comes back and says he will enforce the injunction.”

More important, Monaghan added, Vonage will continue to feel the effects of cable's success in bundling VoIP-which it calls digital phone-and will likely be hurt more as AT&T and Verizon sell more triple- and quad-play bundles.

“They have an uphill battle, with the impending lawsuits and due to the competition that is getting tighter and tighter,” he said.

VONAGE'S TIMELINE OF TROUBLE
2001: Company founded by Jeffrey Citron with $12 million in funding.
March 2002: Vonage formally launches VoIP service.
September 2005: Vonage exceeds 1 million lines.
March 2006: Vonage passes 1.5 million lines.
May 2006: Vonage issues stock IPO at $17.25-it quickly loses 30% of its value.
June 2006: Vonage sued for mismanaging IPO by customers who invested.
December 2006: Vonage exceeds 2 million lines.
February: Vonage reports net loss of $286 million on revenues of $607 million.
March 2007: Verizon wins a patent infringement suit against Vonage, and a federal judge issues an injunction prohibiting Vonage from using patented technology, which Vonage appeals.
March 2007: Vonage stock bottoms out at $2.98 before rebounding to $3.67.

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