This Might be Good for Vonage

In a decision issued April 30, the U.S. Supreme Court reinvigorated the "obviousness test" used to determine whether a patent should be issued. Ruling in the case of KSR v. Teleflex, the Court found that the US Court of Appeals for the Federal Circuit, which handles patent appeals, had not been using a stringent-enough standard to determine whether a patent was infringing.

At issue in KSR v. Teleflex is a gas pedal manufactured by KSR. The pedal has an electronic sensor that automatically adjusts its height to the height of the driver. Teleflex claimed that KSR's products infringed on a patent it held. KSR said that Teleflex's patent combining a sensor and a gas pedal was one that failed the obviousness test, and as such, should not have been granted.

Since 1952, legislation has mandated that an invention can not be patented if a "person having ordinary skill in the art" would consider it obvious. Many observers think Verizon's patents are overly broad. Basic mechanisms for connecting calls between the public switched telephone network and IP networks might be a similar sort of thing.

KSR argued that the US Patent and Trademark Office should have denied Teleflex's patent, as it only combines components performing functions they were previously known to do.

The Supreme Court ruled that the Federal Circuit had failed to apply the obviousness test. "The results of ordinary innovation are not the subject of exclusive rights under the patent laws," Justice Anthony Kennedy wrote for the Court. "Were it otherwise, patents might stifle rather than promote the progress of useful arts."

The Supreme Court also said that the Federal Circuit's conception of a patent's obviousness was too narrow. "The Circuit first erred in holding that courts and patent examiners should look only to the problem the patentee was trying to solve," according to Justice Kennedy's opinion. "Second, the appeals court erred in assuming that a person of ordinary skill in the art attempting to solve a problem will be led only to those prior art elements designed to solve the same problem."

So Teleflex's patent has been invalidated and more importantly, the Federal Circuit will now have to pay closer attention to a patent's obviousness. That may be good news for Vonage.

EarthLink Not So Sure About Muni Wi-Fi

EarthLink says it is studying the financial performance of its municipal wireless Internet networks in four cities--Philadelphia, New Orleans and California's Anaheim and Milpitas--before deciding how to move forward with similar Wi-Fi networks elsewhere.

While more cities are expressing interest in striking deals with the company, EarthLink is "not yet able to establish that comfort level" that the investments are really profitable, says Kevin Dotts, EarthLink's chief financial officer.

That's sort of the whole problem with Wi-Fi. It is a fabulously useful local access tool. It just never is quite so clear that it is a business, or a good business. Indoors is one story. Outdoors is quite another. As useful as Wi-Fi is indoors, muni Wi-Fi suffers in that respect. Sure, handhelds capable of doing something useful with outdoor Wi-Fi are getting to be more common. But they aren't yet real common. And I don't know about you, but I never use my notebook outdoors. My mobiles don't have Wi-Fi access. And I'm not really interested in downloading music to my iPods using Wi-Fi. Other people might want to do these things. The issue is whether there are enough of them.

It's Hard to Do Any Better Than This

Verizon added more than a million new wireless customers in the first quarter, outpacing at&t. And its churn remains astonishingly low. Millions of households move every year, and the propensity to move is much much higher for younger mobile users, who might arguably represent the highest churn demographic. A household churn rate of just one percent a month (people moving) would still generate 900,000 switchers in a quarter. Of course, mobile providers have one advantage wireline providers do not. When somebody moves out of state, the mobile account doesn't necessarily have to change. The landline voice, broadband access and video account might well have to. So wireline services always face an uphill battle to get churn down to just one percent a month.

It's All About ARPU and Churn

How bundling is good, or whether bundling is good for customers might be debated. There isn't much question about whether it is good for service providers. "When you look at consumer customers from a bundled standpoint, customers that are stand-alone voice customers have ARPUs in the low $40 range," says at&t CFO Rick Lindner. "As they begin to bundle and as we move them upwards to a full-quad bundle where they have got voice, data, video and wireless from us, all of a sudden that customer moves to a $250, $260 kind of monthly customer"

"At the same time, the churn rates are cut by two thirds when you move from that stand-alone voice customer to a full-quad bundled customer," he says.

At the end of the day, this is about supplier push more than end user demand. It isn't the "bundle" users want, it's the monetary savings. Innovations will occur, neverthless. So in the end, bundles will lead to something besides higher ARPU for providers.

Specter Haunting Cable Companies?

“It’s all clicking, our business is on fire,” says Comcast CEO Brian Roberts. Maybe so. But we sometimes forget that the cable industry is in the same position as the telephone industry. Namely: its core business is under fire and will not drive growth in the future. So each industry is racing to create new business models where legacy revenue is half or less of total revenue in a few years.

About half of Comcast's subscribers will also use its phone and broadband services by 2010, Roberts says. Roberts believes that within two to three years, half of the company’s customer units will not be cable TV, but instead will come from Internet access, telephony and other services. At that point, he says, “half of Comcast is no longer just a TV company.”

With the caveat that a stock price isn't a complete proxy for the anticipated fortunes of a company or industry sector, U.S. cable operator prices have sagged of late. In Comcast's case, it is a bit hard to know why. Comcast added 75,000 basic cable subscribers in the quarter, 644,000 digital subscribers, 563,000 cable modem customers and 571,000 VoIP customers.

With 2.5 million VoIP subscribers, the company may now be bigger in Internet telephony than Vonage, which had 2.2 million customers as of the end of December.

The company repeated previous guidance that 2007 cable revenue growth will be at least 12 percent, with cable operating cash flow growth of at at least 14 percent.

To be sure, free cash flow is down. Comcast generated $442 million, versus $807 million a year ago.

So maybe investors are spooked by higher capital spending trends. Or maybe it is something else. Maybe the threat of over-the-top video finally is starting to register as another threat to the legacy cable business. Sometimes we all forget that cable is an incumbent. It has a legacy business that has gone into reverse after decades of sheer growth. And it also faces competitors able to innovate at Google speed. And might we add, Apple speed.

Viral Adoption for Enterprise

The integration of the Iotum Talk-Now presence app with Jajah for calling on BlackBerrys illustrates a new approach software distributors can take to penetrate enterprise accounts. You know the old way: direct sales teams target "C" title executives. Key decision makers then are identified and the account is "worked."

There's another model. Harken back to the days when computing was centralized, lived in a "glass house" and terminals were dumb. If you wanted to sell a personal computer or a local area network to connect them, what would you do? You weren't going to get the glass house shut down, so the top down, rip out the mainframe, forklift route wasn't promising.

Instead, you targeted individuals. Lead users. Power users. You flew under the radar. You kept the upfront cost low. You didn't require a change of enterprise computing architecture. And then you let interest spread virally.

Lead users, work groups and then departments. That was the adoption approach. One person brings the application into their environment, and invites their circle of business colleagues to participate, setting off a wave of adoption within a specific business or social network.

And that is what Iotum and Jajah hope will happen.

Commoditizing SMS?

Given that short message service is a high margin product delivering between a third and half of most mobile operators’ profits, STL Partners wonders what threat third party providers might represent. Alternative services allow users to connect to a third party gateway over the Internet (using GPRS, 3G, or Wi-Fi) and send text messages affordably.

Service provider execs who remain optimistic about keeping the business say users are too lazy or indifferent to the cost of SMS to switch. A general shift towards IM features will moderate costs and provide a richer alternative. There will be spam and privacy issues. And service providers will just drop prices if they have to.

Executives seeing a larger threat suggested that messaging will be embedded in third party applications, notably social networking services, and that operators will lose control of the context from which messages are initiated — as well as the revenue.

The STL graphic shows the percentage of business lost to third party providers in five years.