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Vonage - You Should Thank And Cheer For Them

Verizonvsvonage It is one thing when someone like Jim Cramer jabs Vonage constantly for business reasons, that can actually be pretty humorous. What is not funny is the possibility of once again paying inflated prices to telephone companies due to Verizon’s attack on Vonage and subsequent winning of round one. Make no mistake, Vonage has had a key hand in changing 135 years of traditional ideas and usage patterns relating to what we call the telephone. These changes have had a dramatic impact on pricing and moving VoIP from techie to mainstream.

What I do not understand is the relative apathy and lack of true outrage among consumers in general with regards to the Verizon ruling. Sites like TechDirt (for which I have previously disagreed) have covered it well and point to the ludicrous nature of granting a permanent injunction when Verizon seems to have no other interest than stopping innovation and keeping inflated prices. The judge states the following (as noted at TechDirt):

A judge bought that line, saying an injunction was necessary because simply awarding damages "does not prevent continued erosion of the client base of the plaintiff."

That gets to the heart of it. Verizon and other traditional phone companies want to extinguish Vonage and all of VoIP so they do not have to compete nor lower prices. I will share my own contribution to their landline erosion and let you decide whether it is reasonable to artificially prop up a dying industry that is fighting change. To me, it would be in the same vein – albeit more extreme – as attempting to shut down online news sites in order to save the wilting newspaper business. As noted via GigaOM (Vonage: Rocky Road, not Road Kill):

In a quick-to-judge reaction, many have forgotten that the successful imposition of E911 requirements on VoIP companies in 2005 cost Vonage more than the worst-case scenario outcome of the patent dispute. And the application of Universal Service obligations in 2006 added another $1.25 per line to Vonage’s costs.

Somehow, Vonage has survived, and posted impressive growth over past five years, if not profits, mostly because it adopted the flat-rate-plan that is typical of Internet companies. With that move it has forced a radical change in the incumbent business model of charging per minute, thus forcing new pressures on incumbents’ revenue streams. To compete, incumbents have to deal with the flat-rate voice plans. And maybe that is why the Bells want to see Vonage die.

Here is a little historical perspective. The breakup of AT&T in 1984 did not eliminate monopoly control over local telephone service. The Telecom Act of 1996 removed restrictions on long distance and consolidation setting up Verizon and AT&T with $200 billion in revenue.

The telcos have been trying to drive up costs for Vonage for the past five years! Whether it be by attempting to have FCC taxes added as noted above or varying lawsuits such as the current Verizon salvo – the end game is the same: VoIP must die or also inflate in price. That is not something you should be happy about.

Let me share a personal note and disclose that I have Vonage service but this applies to VoIP in general (i.e. SunRocket, Packet8, and even cable companies), as Verizon and others will not stop there. I first started using Vonage a couple of years ago as a second-line used for conducting business. I did so, in part, because I was being charged $41 USD per month for a line with nothing more than a dial tone. That is correct – no caller-id, no voicemail, no long distance… nothing. I paid $41 a month to receive 5–10 phone calls and dial about the same. For a variety of reasons however, I had to have a “landline”. It was then that I decided to give Vonage a try by choosing their $14.99 plan. Not only did I get the dial tone, but I also received 500 anywhere in the US minutes and every possible feature offered by the one phone company in my area (and then some): Voicemail Plus, Caller ID with Name, Call Waiting, Call Return, Repeat Dialing, International Call Block, 311 Dialing, Call Forwarding, Call Transfer, Call Hunt, Area Code Selection, Vonage V-Forecast, 511 Traveler Information, Vonage Moves With You, V-Access, Ring Lists, Click-2-Call, Caller ID Block, 3-Way Calling, In-Network Calls and 811 Dialing. That is a lot of features! But most of all – it mostly worked. While not perfect, the value I receive for the cost is fair…  Paying $41 dollars to receive and dial a handfull of calls with no other features is not a value. As I stated though, I had no other choice but VoIP if I did not want to pay that much for traditional home phone service.

I and a lot of others have no other choice. Let me explain… Even though I live in one of the Twin Cities (the 16th–largest metropolitan area in the United States) rings, I have one telephone company to choose from. One. Moreover, it is not a large company like Qwest where I might have a shot at getting a decent package deal (of course this is mostly because there are other competing companies in those areas). No – this is a small local phone company that has a monopoly on my area and quite a large swaft that has now become part of the ever expanding Minneapolis-St. Paul area. Without Vonage and other VoIP providers to choose from, I have no other choice but pay the $41 per month minimum for a dial-tone and nothing more. To me, that is absurd and is nothing but but being piggish. (Sidenote: while the top DSL speeds in Qwest areas are 7 Mbps for $36.99 a month, my provider topped out at 1 Mbps when I chose another route… and charged the same as Qwest)

How does the Verizon ruling and injunction help the thousands of people in my area? What about the millions currently being served by Vonage? What about the millions more using other services that will be next on the telco hitlist? I am for patent protection, however not at the cost of innovation. As the Supreme Court pointed out in the eBay versus MercExchange case – injunctions are not always necessary.

Unanimous Opinion: The decision relies on the traditional “four-factor test” for determining whether to issue a permanent injunction:

A plaintiff must demonstrate: (1) that it has suffered an irreparable injury; (2) that remedies available at law, such as monetary damages, are inadequate to compensate for that injury; (3) that, considering the balance of hardships between the plaintiff and defendant, a remedy in equity is warranted; and (4) that the public interest would not be disserved by a permanent injunction. . . . These familiar principles apply with equal force to disputes arising under the Patent Act.

Note test numbers two (2) and four (4). Do you think the millions of Vonage customers will not be disserved if the Vonage service is permanently stopped? How about those that rely on the phone service for business and even E411?

Further, how are monetary damages not adequate in this case which amounts to 5.5% of future revenue? While Verizon wanted more, the victory did award them 5.5% of the Vonage fees… essentially making it that much tougher for Vonage to keep the prices low.

The bottom line is this, if you want to continue to pay inflated prices charged by traditional telephone companies, then cheer for Verizon. If you want choice and the opportunity to use new technology such as that offered Vonage, then cheer against Verizon. If Verizon ultimately wins this case – after appeals etc. – you could see a domino effect with Skype, cable companies and other VoIP providers next. One-by-one prices will be inflated or the companies will go out of business. Further, why stop at VoIP providers like Vonage – what about Skype and the ability to place or receive calls to/from landlines? Those would be in jeopardy. How about calling to/from software like instant messaging that is starting to grow? Say goodbye or hello to higher costs. If we are lucky, perhaps we can get things back to the good old days of paying by the minute for local calls and connection charges of multiple dollars.

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Benjamin Bach
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