Telecom Industry: Vonage Is On A Slippery Slope
By Ann Sosnowski
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In this article:
Vonage has gained media attention again, but not for its annoying advertising campaign.
Vonage’s fight with Verizon will end badly, even though Vonage was granted a temporary stay and allowed to sign up new subscribers.
Vonage’s new CEO doesn’t seem as optimistic about a workaround plan as the one that stepped down last week.
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Telecom Industry: Vonage Is On A Slippery Slope
I’ve never really jumped on the phone-over Internet bandwagon. I just never really saw a use for it, considering cellular phone plans are a lot less expensive than they’ve been. Of course, I don’t call cross-country on a regular basis, and I mostly text message friends about dinner parties or get-togethers.
Maybe I just don’t find a use for it.
Of course, if there was any doubt, Vonage Holding Corp.’s (VG:NYSE) annoying television commercials (Woo hoo, woo hoo hoo!) would have just put a stake into any inclination I had toward considering its Voice-over-Internet technology.
Now, the company with the annoying advertising is in a whole mess of trouble. A miracle is necessary to help pick them out of this one.
If you’re not familiar with the court case that’s going on between Verizon Communications (VZ:NYSE) and Vonage over patent infringement, you can learn more on this week’s Taipan Financial News’ Stock Busters segment.
Currently, Vonage has over 2.2 million subscribers to its phone-over Internet service. This allows subscribers to make and receive phone calls wherever a broadband Internet connection exists. National retailers like Wal-Mart and Best Buy sell subscriptions to Vonage’s telephone service.
Telecom Industry: Vonage Steps on Verizon’s Patents
But probably not for long. A little more than a week ago, Vonage was found guilty of infringing on Internet phone patents that Verizon had rights to. These patents owned by Verizon link Internet-based phone calls to traditional phone networks, and also allow the retrieval of voicemail.
Verizon, one of the top telephone companies in the business, has had these patents for a while, but it doesn’t heavily market the services, or even retain a lot of subscribers. Verizon was awarded $58 million in its case against Vonage, that has allowed Vonage customers to make cheaper phone calls on its service to services like Verizon.
Now Vonage was originally barred from signing up any new subscribers. The injunction was supposed to take place on Thursday, but last Monday, the Court of Appeals issued a stay that allows Vonage to sign up new customers… for now.
My question is, who is going to sign up for Vonage now after all of this media attention? There’s no promise that Vonage is going to stay in business.
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On top of paying $58 million to Verizon, Vonage is also paying an additional $66 million to post bond for securing Vonage’s damages judgment.
Vonage is ensuring all current subscribers that, for now, they will have uninterrupted phone service. Of course, Vonage will be paying 5.5% royalty revenues to Verizon during the stay.
Telecom Industry: Purge Vonage From Your Portfolio
Personally, I wouldn’t put any risky bets on Vonage. The company’s stock has lost 80% of its share value in the last year, trading for around $3.30 per share. It’s another case, just like Sirius. I consider it a doomed stock.
Even if the company can pull itself out and initiate a “workaround plan” to stay off of Verizon’s territory, the company has lost face in this whole telecom argument by now, declaring doubt as to whether a workaround plan is even feasible.
Not to mention that its fundamentals will probably get worse: currently it has a –47.10% profit margin, a –46.62% operating margin and a –182% return on equity.
Verizon believes that Vonage should just stop advertising altogether. Of course, at this point, it’s in the courts’ hands.
And it doesn’t bode well that Vonage’s CEO Michael Snyder resigned immediately following the media frenzy over this trial, replaced by interim CEO Jeffrey Citron.
The mixed messages from Vonage regarding whether or not it can work around Verizon’s patent no doubt came from two conflicting opinions from a former and an interim CEO.
Unlike many other cases, this is a foolish investment. Purge Vonage from your portfolio if you’re still holding, and tell all your friends the same.
This company is over.
Ann
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Ann Sosnowski is a small and mid-cap stock analyst for Taipan Financial News. She is the editor of Diligent Investor, a monthly newsletter that balances conservative and moderately risky investments that pertain to current market trends. She is also the editor of Diligent Investor Micro-Cap Hot Sheet, a monthly newsletter that finds the hottest penny and micro-cap stocks on the market.
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Related Resources
Telecom Industry: Vonage’s Home Page
Telecom Industry: Verizon’s Home Page
Telecom Industry: Vonage Message Mixed on Technology Patch (courtesy of BusinessWeek)