Friday, March 16, 2007

Vonage Verizon Value

by Doug Pollack

Last week a federal jury said that Vonage owes Verizon $58MM in damages and a royalty on future revenues for infringing on 3 Verizon patents that have to do with internet calling. Verizon had asked for $197MM in damages and is requesting a 5.5% monthly royalty of future revenues.

Vonage has countered that the Verizon patents aren't valid anyway, and that in any case, they don't infringe on the patents. It appears that Verizon has chosen to target Vonage because at least partially because as was reported in the Wall Street Journal recently that Verizon has lost hundreds of thousands of customers to Vonage over the last couple years.

There are several interesting aspects of this situation. One is why Verizon targeted Vonage rather than possibly a company such as Skype (now owned by E-Bay) which was one of the first movers in providing voice over IP (VOIP) internet calling services to the masses. While Skype is more well known for computer-to-computer calling, which it provides for free, it also provides for computer to standard telephone line calling, which was stated as an area of infringement in the Verizon-Vonage case. But Skype has a different business model from Vonage in that it charges an annual fee of $29.99 per year for calling any phone line in the US or Canada.

Another interesting aspect of this is the choice of a 5.5% royalty rate. This would represent around $33MM a year in royalty payments based on Vonage's last year's $607MM in revenues. It would be helpful to see the financial justification that led to the request for 5.5%. Especially because so much of the value of Vonage has been based on their effective marketing and brand building, as opposed to any unique distinction of their flavor of VOIP technology. It seems like the Verizon patents have only taken on value because they (Verizon) failed to capitalize on the use of a technology that they are claiming to have invented. But in that case, still, why 5.5%?

There is of course the "rule of thumb" for patent licenses which suggests a market rate of between 3% and 10%. And 5.5% is right in there. But is there any quantifiable economic analysis that ties the value of the contribution made to the overall offering by Vonage that the Verizon patents make that would result in $33MM or so a year?