Vonage beat Skype to market but struggled to match the global reach enjoyed by its VoIP rival
Voice over Internet Protocol (or VoIP) is a relatively recent technology having emerged in the mid 1990s, just as the mainstream take-up of the Internet began in earnest.
A number of companies became closely associated with VoIP, principally Skype. But to many people Vonage was also an earlier pioneer of the technology, yet it wasn’t the first.
Indeed, VoIP services actually started with a company called VocalTec in 1995 after it pioneered the first widely available Internet phone (simply called InternetPhone). It allowed one Internet user to call another, and it connected to the speakers and a microphone of a PC, providing both PCs were running the same software.
What It Does
It should be remembered that Internet speeds back in the late 1990s and early 2000s were often painfully slow, and connections were tedious because of musical dial-up modems. There was no such thing as “always on” internet back then.
Vonage launched its VoIP offering into this reality in 2001 under the name of Min-X.com (it changed its name to Vonage in December 2000).
The firm was initially based in Melville, New York and was founded by CEO Jeffrey Citron, but in January 2001 Vonage moved to Edison, New Jersey. It then relocated its HQ again in 2005 to Holmdel, New Jersey (its current home).
Vonage claimed it had “revolutionised the telecommunications industry as it began its life offering a residential VoIP subscription service in the United States (from $2.99 per month), and then Canada in 2004. A UK launch followed in 2005.
It is also worth noting that Vonage offered 911 service on a VoIP platform for the first time in 2003. But for that to work, subscribers had to activate the 911 calling feature by registering their full address with the company.
Vonage Vs Skype
So how did differ from Skype which arrived two years later in 2003?
Well both are VoIP phone service providers that work on many types of home phones, computer systems, and mobile devices.
But there are differences between the two. Skype for example utilises a peer-to-peer network with encryption to manage calls, while Vonage uses Session Initiation Protocol (SIP) without encryption to make phone calls.
Both firms offer free app-to-app calls, free app-to-app texting, can work on Wi-Fi and 3G/4G, and can make video calls.
And Vonage is still available on home phones (landlines); PC or Mac; iOS (iPhone, iPad, and iPod Touch), and Android mobile devices.
It has also branched out from its residential roots into the business side. It counts 84,000 businesses as its customers.
Loads Of Money
In the early 2000s Vonage emerged as one of the first mainstream VoIP providers.
The company managed to raise huge amounts of funding ($12m in 2002, $15m in 2003, $145m in 2004, and $200m in 2005), before it went public in 2006, a move which raised $531m for the company.
Vonage’s ability to attract venture capital investment therefore allowed it to raise a ton of cash over the years.
However when it filed its initial public offering (IPO) in 2006, founder Jeffrey Citron had to be replaced by Michael F. Snyder as Vonage’s new CEO.
This was because Citron was a defendant in a civil enforcement action for securities fraud by the United States Securities and Exchange Commission (SEC) in 2003.
Citron had to pay approximately $22.5m of a $70m settlement to be paid by all the defendants. When the SEC finalised the settlement, it ruled that Citron was “barred from association with any broker or dealer,” and therefore he had to take a step back from running Vonage when it went public.
Citron remains chairman of the firm he founded.
Whilst the IPO did raise over half a billion dollars for Vonage, on the first day of trading its share price closed lower than its initial share price offering, and disgruntled customers filed a lawsuit that was eventually settled in 2009.
And Vonage was not popular with established telecom firms, who resented the VoIP provider being able to use their infrastructure for its services.
Vonage was sued in 2006 by Verizon, who alleged that Vonage had infringed on five of Verizon’s patents related to its VoIP service.
In March 2007 a jury found that Vonage guilty of infringing three patents held by Verizon, and not guilty of infringing two other patents. Vonage was ordered to pay $58m plus royalties to Verizon.
Vonage of course appealed but in November 2007 it agreed to pay $120m in damages to Verizon.
Other lawsuits filed by other American telecom firms were also ongoing at the same time, and Vonage was ordered to pay $80m to Sprint Nextel, and $39m to AT&T. Another lawsuit with Nortel resulted in no monetary damages.
Vonage was also the subject of a customer service lawsuit in 2009 by a number of US states over complaints about the marketing of Vonage services. Vonage agreed to pay the seven investigating states $3 million for costs, issue refunds to complainants dating back to January 2004, and change several business practices in regard to advertising and customer retention.
Unlike some of the other companies covered in the ‘Tales in Tech History’ series, Vonage is still very much a thriving business, especially in its North American heartland.
It could be argued that it was the first mainstream VoIP provider, but the younger Skype managed to achieve a larger global reach. This could be down to a number of factors, like Skype being able to exploit the arrival of more reliable and faster Internet connections when it launched.
Indeed, some feel that the world’s data networks were simply not up to scratch for Vonage to achieve critical mass when it first arrived in 2001.
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