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Will the downfall of Vonage hurt residential VoIP customers?

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Vonage, already struggling from a series of setbacks, has just taken another two huge body blows — one by the U.S. Court of Appeals on behalf of Verizon, and the other by Sprint Nextel. At first glance, it looks like the old-school phone companies are not only fighting back, but winning. But is that really the case, and if it is, what does that mean for other VoIP providers?

First, the news. The U.S. Court of Appeals upheld a previous decision to award an injunction against Vonage's use of technology based around two patents held by Verizon. A third patent was also involved, and in that case, the verdict is not yet final — it has been sent back to the original court for further clarification and a recalculation of awards and damages associated with the verdict. That last part, at least, is a little good news, since it suggests that the $58 million in damages plus 5.5 percent royalties on future sales that was originally awarded may be reduced. This came one day after a New York court reached a similar decision in a suit brought by Sprint Nextel, in which it awarded the company damages of $69.5 million and 5 percent royalties on future Vonage sales. This award is being appealed, and it may yet be set aside.

The result was a drop in stock price for Vonage to just more than $1, as well as a suspension of trading. Less than 18 months ago, Vonage went public with an initial share price of $17. That's a huge drop and a huge blow to the company. In addition, if both lawsuits end up where they stand right now, Vonage is going to be paying 10 percent of everything it makes to two of its biggest rivals, not exactly a recipe for success.
What Next?

Despite a giant customer base, a well-known brand and, yes, even some loyal customers, it is hard to imagine Vonage recovering from these blows. Instead, it is likely that its customers will drift away over the next two years. The big question: Where will they go? Probably in the short term, the most likely answer is to their local cable provider. One of the reasons for Vonage's early success was simply that cable companies weren't in the game. Now that they are and are offering VoIP service in combination with Internet and TV service (usually in the popular "triple-play" package, in which voice, Internet and TV service cost $100 per month), it is hard to see customers looking much beyond that easy, one-stop shopping.

And the other question that has to be troubling the other (smaller) residential VoIP companies is whether or not these telco and cable giants are going to come after them next.

But there are two other groups that could see some success. One is the more edgy VoIP players that offer basic free services while charging for extras. This group is led, of course, by Skype but include tens — even hundreds — of niche players. And Skype, despite some recent bad publicity, is clearly making inroads. It now has 20 million registered users in North America, up from 10 million a year ago. Since the company makes the concurrent numbers of users at any one time public, it is easy to see that it now has more than 9 million callers actively using Skype at any moment. And Skype, like other client-based VoIP services (Gizmo Project and several cell-phone VoIP enablers like Truphone spring to mind), is moving relatively fast in terms of adding functionality and features.
Wifi VoIP

The other group is far less obvious — it's the mobile-phone providers. As more and more people abandon landlines altogether, mobile-phone companies are also stepping in to IP-based services to expand their offerings and reduce their costs. The previously mentioned Truphone is an example, having just demonstrated true VoIP calling on the Apple iPhone.

All of these players are just itching to step in and grab chunks of the lucrative residential phone pie. In fact, they already have much of it. So what's left for VoIP?

The simple answer is business. Business VoIP is a whole other kettle of fish. That market is changing rapidly, and PBX (Private Brach eXchange) services in particular are letting small companies look like big companies while still operating at small-company prices.
The more complex answer is in interconnecting everything. VoIP isn't going away; in fact, VoIP is rapidly being put inside every form of voice calling — from traditional telco to mobile phone to business PBX to voice services — if it isn't already there. It isn't VoIP that's in danger from a Vonage collapse — it's the idea that just changing from traditional telephone circuits to VoIP is all that it takes to make a new phone company.