Vonage reaches tentative settlement with AT&T

Vonage is working to settle yet another patent dispute, this time for a comparatively low $39 million.

In its third-quarter earnings report released today, the company announced it had reached an agreement in principle to settle its patent litigation with AT&T. While the specifics have yet to be finalized, the company said that the general terms being discussed are for Vonage to pay AT&T $39 million over a five-year period in return for AT&T agreeing to dismiss its lawsuit. Vonage also said that if negotiations between the two companies break down, it would be prepared to “vigorously defend itself” in the patent litigation.

Patent lawsuit settlements are expected to take a heavy financial toll on Vonage’s future earnings. In addition to the $39 million it is offering AT&T, Vonage also recently reached settlements with Sprint Nextel for $80 million and with Verizon in a settlement that could be worth as much as $120 million. The company reported net losses of $160.5 million in the third quarter for this year, more than twice the $65.8 million loss it reported for the third quarter in 2006. Overall, the company has lost $266.6 million so far this year, and it has incurred net losses of more than $500 million in the past three years.

Stan Schatt, vice president and research director for networking at ABI Research, says Vonage’s future in the wake of these litigation settlements looks very bleak.

“They’re really like the little Dutch boy trying to stick his fingers in the dike,” Schatt says. “We don’t see how they can make money, and we don’t see how they’re viable in the long run.”

Schatt notes that Vonage’s problems could go beyond its hefty patent settlements as well. With technologies such as fixed-mobile convergence and femtocells gaining ground, Vonage could soon find its customers looking at alternatives for providing VoIP services, he says.

Vonage’s announcement that it has reached an agreement in principle with AT&T comes less than a month after AT&T filed its patent infringement suit. Unlike the Sprint Nextel and Verizon suits, which accused Vonage of violating multiple patents related to IP telephony services and enhanced name translation servers, this suit pertains to a single patent related to systems that let users make VoIP calls using standard telephone devices.