An AT&T (T) Suit, The Death Of Vonage (VG)

AT&T (T) became the third big telecom company to file a patent suit against Vonage (VG). It follows actions by Sprint (S) and Verizon (VG). Those suits have been settled at a price of over $100 million and royalty deals that are going to cut the gross margins at the VoIP company.

Vonage will probably have $250 million on the books at the end of the third quarter, but it had an operating loss of $33 million in Q2. With the new royalty formulas, it is easy to see that making money will be even harder.

The AT&T suit is likely to cost a great deal in legal fees. If Vonage loses the suit or settles, there will probably be another lump sum payment, and, perhaps, more future royalties. According to The New York Times: The single patent in question, filed in 1996, appears to broadly describe the idea of routing telephone calls over data networks like the Internet.

It is time to shut Vonage down. One of the large cable companies might well buy the customers.With another several quarters of losses almost inevitable, the reasons or keeping the company open have gone away. With shares at just above $1, common shareholders might just get some money back in a liquidation.

Vonage may have been early to the market, but its stepped on too many intellectual property toes.

Douglas A. McIntyre