VoIP service company Vonage last week suffered another setback in its patent litigation with Verizon Communications when a judge entered a permanent injunction against Vonage using disputed call-handling technology.  Vonage said it had a work-around for the Verizon technology but still faces a $58 million fine and possible other damages.

In my opinion as an observer of high technology companies for 30 years, Vonage is toast.

If they had a work-around that was easy to implement and had adequate performance, why did the company wait until now to announce it? 

Vonage is scrambling, facing a potential liquidity crisis with convertible shareholders and may well be forced into bankruptcy.  OR it may be forced into the arms of its opponent, Verizon, which might well covet Vonage's 2.2 million customers, one of whom is me.

We've been here before, the last time being when Verizon took on DSL provider NorthPoint Communications back in 2000 and 2001.  NorthPoint is long gone, you'll note. And yes, I was a NorthPoint customer, too.

The biggest issue in the story is this: The days are probably numbered for almost all VoIP providers that overlay their services atop broadband ISPs.  Net neutrality be damned, the local MSOs are preparing to give priority to their packets over others in the event of "network congestion." 

On the cable TV side, for example, both Comcast and Time-Warner Cable (probably other MSO's as well), are already changing their IP packets to priority bit '1' (default is '0') in their networks (from the Cable Modem Termination System back to the edge of their network).  They aren't setting their routers to treat the priority bit '1' to do anything YET, but, when or if they want to give their own packets preference in cases of congestion on their own networks, it'll be a flip of a switch.....

Now let's look at this in the context of Net Neutrality.  For the cable companies, at least, it probably doesn't matter.  That's because while cable Internet service and cable VoIP service both use the CMTS, it is easy for the cable company to configure its VoIP product as completely separate from its Internet product.  IF YOUR CABLE OPERATOR WILL SELL YOU VOIP SERVICE WITHOUT INTERNET SERVICE, THEN NET NEUTRALITY DOES NOT APPLY.  If excess Internet traffic causes problems for the VoIP services of these cable companies, they can prioritize their own VoIP packets with impunity because VoIP isn't defined as an Internet service.   And for that very reason, packet prioritization can -- and will -- occur even if the broadband ISP has signed an agreement promising net neutrality.

The next level of this ploy is to validate the un-Internetiness of the VoIP system through public service interconnects like 911.  "Should calling the police get priority treatment?" will be the question and most courts won't say "no."

Even if network congestion requires priority packet handling a small percentage of the time, it will be enough to nuke Vonage and its direct competitors, though the potential impact on Skype is less clear. 

The only question I am left with is where to transfer my Vonage numbers?