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Wal-Mart is going to start selling nine Skype-certified hardware devices (and by extension the Skype service) in all 1800 (or roughly half) of its stores. The deal also includes Skype pre-paid cards. Wal-Mart is the first retailer in the U.S. to offer Skype’s pre-paid cards that will be sold in $20 denominations.

The move is an effort by Skype to boost its U.S. revenues. Skype, which had about $79 million in first quarter revenues relies heavily on the overseas markets. The Wal-Mart deal is one of the many efforts by the company to goose up its revenues and meet the targets that will help Skype cofounders get the $1.5 billion that is tied in earn outs.

Skype’s mainstream retail push is coming at a time when the service is showing signs of maturity. In first quarter of 2007, there “was the marginal 1% increase in the Skype-to-Skype usage to around 7.7 billion minutes.”

Despite all the growth in minutes and users, eBay’s $4.2 billion buy is on a treadmill - it has to keep adding more users in order to what amounts to squeezing blood from a stone.

The downside of this mainstream push by Skype is that it comes with the baggage of expectations. It will be viewed as a low-cost telephony service, and mainstream users will expect 911 services, which if not available can cause legal headaches. Regardless, this move can put pressure on Vonage, and further siphon away long distance minutes from the big phone companies.

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With a reprieve from the courts, what’s Vonage’s first public step in its patent battle against Verizon? Hire more lawyers? Partner with other patent holders? Nah — instead, Vonage went and bought some newspaper ads, and built a net-neutrality style “grassroots” website designed to enlist public support for its fight against the big telco. Just imagine, an army of thousands of Vonage customers, circling the court while chanting “woo-hoo, woo-woo-hoo!” That should do the trick.

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The Valley likes to stuff money into the next telecommunication technology that will tear down the traditional phone company monopolies. And ya’ll know we love to write about them. But the public markets haven’t been too keen on some of the more high-risk, high-spending telcom services. They want simple stuff - stuff they can understand, like cellular phone services.

That might explain why MetroPCS, a flat rate cellular carrier was able to raise over a billion dollars from the stock market this week. Forbes says the reason why MetroPCS did well is it’s making money and doesn’t take too radical an approach to the phone world. True enough. An indicator that MetroPCS will likely stay strong is that cell phone operator Leap Wireless, another flat rate wireless provider, has seen its shares jump by over 50% over the last 6 months.

In comparison, the more exotic telecom services offerings - VoIP provider Vonage and WiMAX operator Clearwire - are swirling down the toilet. This year is touted as the return of the tech IPO, but for telco startups, the public markets are still shying away from anything too far outside the standard.

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Michael Synder, chief executive officer of Vonage, came, saw and scurried away. Vonage chief executive resigned this morning, in what seems to be an un-ending string of bad news for the Holmdel, NJ-based VOIP service provider. Snyder was the CEO of Vonage for less than a year. He has also resigned from the board of directors.

Vonage Founder and Chairman Jeffrey Citron is going to take over as the interim CEO. Citron, cannot be CEO of a publicly traded CEO as part of a settlement with the Securities & Exchange Commission. The company is looking for a new CEO - not an easy task given the uncertainty around the company.

Vonage has been in crisis mode since it lost its patent case to Verizon, and a US Court asked them to stop marketing their service to new customers. They stay open for business after getting a temporary stay and are appealing the court’s decision that essentially will put them out of business.

The company is also undertaking a restructuring that is going to save $140 million in costs, of which $110 million will come from the marketing budget. No worries people – you will still see those annoying ads, for the company expects to have a marketing budget of $310 million. The company is cutting its work force by 10 percent.

The expense cuts are a move to appease the Wall Street, and also indicate the fight with Verizon and increased competition with cable companies is beginning to impact the company – and not in a good way. Vonage expects revenues of $195 million in the first quarter 2007, with net subscriber additions of 166,000 (21% year-over-year decline) and marketing cost per gross subscriber addition of $275. The company had 332,000 gross subscriber additions. That’s just WEAK!

Some believe that Snyder is the fall guy here, but I think it might be an exit of convenience. Vonage needs the street fighting skills of Citron in the battle for survival. Snyder may have wanted to get out of dodge. Stay tuned as story develops.

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Verizon’s lawsuit against Vonage is the VoIP version of showdown at Ok Corral!

The weary entrepreneurs have gone from fighting the regulatory morass to fighting the patent morass. The ability of Verizon et al to play the dimensions of uncertainty associated with patents makes one nostalgic for the ability of Verizon et al to play the dimensions of uncertainty associated with the regulatory pronouncements of the FCC. Anyone not attracting a patent lawsuit should feel a bit embarrassed. All the companies with some claim to success will get their turn before Verizon exhausts its legal budget.

Lost among the legal theories, predictions of Vonage’s demise, and the wishful claims Vonage’s troubles are unique is the fact that the future of the VoIP industry depends on challenging vague, generic, overly broad patents. The hope for low cost communications, cool applications, and connected devices has been lost in a patent system gone wild, where companies file patents, just as telemarketer dial for dollars.

The birth of the VoIP industry happens to coincide with the greenlight on “method patents” aka software patents. The framing of Verizon’s patents as “technology innovations” reflects a press release version of reality. Verizon’s patents address methods of communication between network elements.

They would have been unpatentable as little more than mathematical algorithms until lawsuits overruled the patent office’s distaste for method patents in 1999. Efforts to establish the quality of method patents represents a particular challenge, because applying companies pursue an application fatigue strategy. Companies make a long list of broad claims and await rejection. They use information in the rejection to refine the claims and repeat the process.

Method patents remain in dispute and Congress appears ready to pursue reform, but the VoIP industry seems unlikely to survive long enough to benefit from a cure. The need for a better means of vetting software patents motivated IBM, Microsoft, GE and others to assembled a public peer review process in conjunction with the patent office, but other priorities and a slow start mean the project does not offer a near term solution for the VoIP industry.

Participants in the VoIP industry will need to quit cowering in the corner and initiate their own efforts to move the patent process back toward meritocracy. The three surviving patents Verizon claims Vonage infringes represent a good place to start. They look like the prototypical “garbage patent” clogging the system.

Five years of graduate engineering education, five years at Bell Labs, and five years working on VoIP startups should equip me to appreciate the innovation content of Verizon patents. In fact, as the Project Director for Vocaltec Communications, I was the senior technical person responsible for implementing Verizon’s first VoIP pilot in 1997. Reading and re-reading the patents leaves me at a loss as to their innovation content.

Extensive scrutiny of patent claims represents the only way forward. The Internet that sparked several million articles associated with Wikipedia can cope with due diligence on 2200 VoIP patents. AT&T successfully prosecuted 600 patent infringement cases between 1876 and the expiration of the telephone patent in 1891. This time around there is no patent on the basic innovation underlying VoIP.

Verizon can’t make the Internet go away with a patent lawsuit. Vonage’s poor showing in court does not prove patents on implementation issues and features will ultimately sink the VoIP industry. Verizon’s success reflect genius in applying for and defending patents, not genius in innovations protected by patents.

I don’t begrudge Verizon’s right to pursue all legal means to preserve the status quo, but three generic and ambiguous patents seem a thin reed for a $90 billion company. If patent disputes ultimately undermine the VoIP industry, it will owe to the self-inflicted wounds of inertia, not patents. The industry need not sit idle for the next 15 years waiting for patents to expire. Take a look and judge for yourself.

Click here for our previous Vonage-Verizon patent dispute coverage.

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Updated: Yesterday, I wrote about the Vonage-VoIP Inc., deal that seemed to be perfect for Vonage to get out from under Verizon’s thumb of death. A few publications and some Wall Street firms had pointed out that VoIP Inc., had some patents and cited a 8-K filing. Instead of checking the facts, I went along with what others were saying.

Unfortunately, that doesn’t seem to be the case. A few vigilant readers wrote in and prompted us to further investigate the claims in the previous Vonage-VoIP Inc. report. A Vonage spokeswoman in an email said:

The VoIP Inc. 8-K filing has caused much confusion in the marketplace. Vonage’s deal with the company is a termination deal, and is completely unrelated to the development of workarounds. Basically, VoIP Inc. is no different from any of the carrier partners Vonage utilizes to get inbound calls from the PSTN to customers, or vice versa, IP calls to the PSTN. Again, this deal is completely unrelated to the pending litigation between Vonage and Verizon.

So for this less-than-mediocre reporting, I would like to offer my apologies to the readers and hopefully learn from this episode.

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The looming VoIP patent mess not withstanding, In-Stat, a market research firm says that 9% of US households were using VoIP at the end of 2006, up by one percent at the end of September 2006. By In-Stat’s estimate, there were about 10.6 million households where at least one member was using some form of VoIP-service at the end of 2006.

If you add up 5 million-plus cable subscribers, 2 million Vonage subscribers and a few of the other independents, you are still left with a few million households that I guess are Skypers and a few hundred thousand Gizmo Project users.

Apparently 61% of residential VoIP users have switched from PSTN, which explains why Verizon & Co., want folks want to put the keibash on Vonage and its kind. It threatens PSTN’s core bread-and-butter business: voice. Or as guest columnist Daniel Berninger would say, the telco battle of mice and incumbents.

The In-Stat survey shows that lower international call prices are the primary reason for the VoIP adoption, especially amongst those of us who use Gizmo Project and Skype. You might remember my rant about poor PSTN quality - I checked my phone bill - holy shit… that 13 minute call cost me about $11, which is about the same amount I spend on Truphone calls to India.

Regardless, time to ask the community what kind of a VoIP users are you? Cable kind, or someone who uses soft clients or do have still doing the Vonage styled ATA-based VoIP calling?

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You know things are getting pretty grim when even we start having sympathetic thoughts for Vonage, the residential VoIP service provider that got KO-ed by Judge Hilton who gave the company two weeks to stop infringing on Verizon’s patents.

Today the company is getting hit by a class action suit that alleges that Vonage over promised and under-delivered on its VoIP service. On its legal troubles with Verizon, the company issued a press release, promising to soldier on, and fight Verizon in the courts.

“Friday’s events represented one small step in what is sure to be a long legal battle. The fact is we’ve been preparing for this verdict and the possibility of an injunction for months. Anyone who’s counting Vonage out is making a huge mistake.” Mike Snyder, Vonage’s chief executive officer.

These are three likely scenarios facing Vonage.

1. If Judge Hilton grants a stay, then Vonage can continue operating and will have to pay royalties on an ongoing basis.
2. If no stay is granted, then Vonage will seek a stay from the appeals court.
3. If Vonage fails to get a stay from either of the two courts, then it will have to develop a work around, which is not that far off in the future, and thus avoid any shut down of the service.

Whatever the outcome, Vonage’s financials are going to take a hit. Furthermore, the Vonage decision will basically tip the balance of VoIP power in favor of cable operators who are watching this legal drama with the same attention Lost gets from television junkies.

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The remarkably uniform pessimism regarding Vonage’s prospects, reflected in the share price, would lead you to believe that Vonage is on the death bed, gasping its last breath. The $58 million potential payout to Verizon has the gravediggers out in full force. The B-word is being thrown around. However, Vonage’s reported results and financials do not support a conclusion of imminent demise.

The supply and demand mechanism of the stock market reflects investor sentiment, not company performance. Vonage fan club meetings have become increasingly lonely affairs, as investors discount for the fact Verizon wants Vonage to die. That is ironic, because Vonage is less than 1 percent the size of Verizon.

Anyway, the loss of this patent case is not as desperate a situation as most think. In the most recent quarter, Vonage used only $28 million of its $500 million cash reserve; so paying Verizon $58 million (if the companies don’t settle for less) does not threaten bankruptcy.

Secondly, Vonage gets $16 per month of incremental margin from each subscriber addition, so an injunction requiring payment of 5% or $1 per month per line does not destroy the prospects for profitability.

In a quick-to-judge reaction, many have forgotten that the successful imposition of E911 requirements on VoIP companies in 2005 cost Vonage more than the worst-case scenario outcome of the patent dispute. And the application of Universal Service obligations in 2006 added another $1.25 per line to Vonage’s costs.

Somehow, Vonage has survived, and posted impressive growth over past five years, if not profits, mostly because it adopted the flat-rate-plan that is typical of Internet companies. With that move it has forced a radical change in the incumbent business model of charging per minute, thus forcing new pressures on incumbents’ revenue streams. To compete, incumbents have to deal with the flat-rate voice plans. And maybe that is why the Bells want to see Vonage die.

Here is a little historical perspective. The breakup of AT&T in 1984 did not eliminate monopoly control over local telephone service. The Telecom Act of 1996 removed restrictions on long distance and consolidation setting up Verizon and AT&T with $200 billion in revenue.

The Bells defeated the wannabe competitive local exchange carriers created by Telecom Act (and $500 billion of investment capital). They now own the long distance carriers they once dueled with – MCI and AT&T. CLECs are all but gone, though a handful are hanging around.

So what makes Jeffrey Citron hope for a different outcome? The Internet! MCI used microwave transmission to overcome barriers to entry associated with the wired networks. Vonage leverages the Internet to similar ends.

The pristine anti-competitive track record of Verizon et al suffered its first blemish with the defeat (for now) of efforts to unwind net neutrality. Vonage’s national reach makes it difficult for the regional Bells to apply a price squeeze (raise costs and reduce revenues) that worked so well against the CLECs and LD companies. The cost side of the strategy is working, but the relatively high price umbrella allows Vonage to pass through the cost of the E911 and USF to customers.

Vonage can take a similar approach with any patent royalties or just go with a generic line item called anti-competitive pass-through fee.

A low stock market valuation does not directly impact prospects until Vonage needs to raise additional capital. Funds obtained through the IPO leave Vonage flush through 2010. Status as Jim Cramer’s most hated stock does not help morale, but Citron needs the endorsement of customers more than investors. As long as they keep voting with their subscriptions, reports of Vonage’s demise are still an exaggeration.

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