Vonage 2008 Annual Report Download - page 23

including adverse events a
ff
ecting our business, to impose
a
h
oldback of our advanced payments purchased using a Visa
/
M
aster
C
ard, American Express, Barcla
y
s or Discover credit card,
as applicable, or demand additional reserves or other securit
y
.I
f
circumstances were to occur that would allow any of these pro
-
cessors to
i
n
i
t
i
ate a
h
o
ldb
ac
k
or cons
id
era
bl
y
i
ncrease reserves,
t
he ne
g
ative impact on our liquidity likely would be si
g
ni
f
icant. I
n
addition, our Visa
/
Master
C
ard credit card processing agreemen
t
m
ay be terminated by the credit card processor at its discretion i
f
we are deemed to be
f
inancially insecure. As a si
g
ni
f
icant portion
of payments to us are made through Visa and MasterCard credit
cards, if the credit card processor does not assist in transitionin
g
our business to another credit card processor, the ne
g
ativ
e
impact on our liquidity likely would be signi
f
icant.
The success o
f
our business relies on customers’ con-
t
i
nue
d
an
d
un
i
mpe
d
e
d
access to
b
roa
db
an
d
serv
i
ce.
P
ro
-
viders of broadband services ma
y
be able to block our
services or char
g
e their customers more for also usin
g
our
services, which could adversely a
ff
ect our revenue and
growt
h.
O
ur customers must have broadband access to the Interne
t
i
n order to use our service. Some providers of broadband acces
s
m
ay take measures that affect their customers’ ability to use our
s
ervice, such as de
g
radin
g
the quality of the data packets w
e
t
ransmit over their lines, giving those packets low priority, givin
g
ot
h
er pac
k
ets
hi
g
h
er pr
i
or
i
ty t
h
an ours,
bl
oc
ki
ng our pac
k
et
s
entirely or attemptin
g
to char
g
e their customers more for also
u
sing our services
.
I
t is not clear whether suppliers o
f
broadband Internet acces
s
h
ave a
l
ega
l
o
bli
gat
i
on to a
ll
ow t
h
e
i
r customers to access an
d
use
our service without interference. As a result of recent decisions b
y
t
he U.S. Supreme Court and the FCC, providers of broadband
s
ervices are subject to relatively light regulation by the F
CC
.
C
onsequently, federal and state re
g
ulators mi
g
ht not prohibi
t
b
roadband providers
f
rom limitin
g
their customers’ access t
o
VoIP or otherwise discriminating against VoIP providers. In Augus
t
2008, however, the F
CC
found that it had the authority to order
a
m
ajor cable operator to cease usin
g
network mana
g
ement practi-
ces that interfered with its broadband service users’ ability to us
e
certain types of applications. The cable operator has sou
g
ht judi-
cial review of the FCC’s decision. Interference with our service or
h
igher charges
f
or also using our service could cause us to los
e
ex
i
st
i
n
g
customers,
i
mpa
i
r our a
bili
ty to attract new customer
s
and harm our revenue and
g
rowth. These problems could also
arise in international markets
.
Because much o
f
our potential success and value lies i
n
our use o
f
internally developed systems and so
f
tware, i
f
we fail to protect them, it could ne
g
atively affect us
.
O
ur ability to compete effectively is dependent in lar
g
e part
u
pon the maintenance and protection o
f
s
y
stems and so
f
tware
t
hat we have developed internally based on open standards.
Whil
ewe
h
ave t
h
ree
i
nterna
ll
y
d
eve
l
ope
di
ssue
d
patents, severa
l
p
endin
g
patent applications and acquired three patents
f
rom Di
g
i
-
t
al Packet Licensing, Inc., we cannot patent much o
f
the technol
-
o
g
yt
h
at
i
s
i
mportant to our
b
us
i
ness.
T
o
d
ate, we
h
ave re
li
e
d
on
copyri
g
ht, trademark and trade secret laws, as well as con-
f
identiality procedures and licensing arrangements, to establish
an
d
protect our r
igh
ts to t
hi
s tec
h
no
l
o
g
y.
W
e typ
i
ca
ll
y enter
i
nt
o
c
on
f
identiality or license a
g
reements with our employees, con-
s
ultants
,
customers and vendors in an e
ff
ort to control access t
o
a
nd distribution of technolo
g
y, software, documentation and othe
r
i
n
f
ormation. Despite these precautions, it ma
y
be possible
f
or a
third party to copy or otherwise obtain and use this technology
w
ithout authorization. Policin
g
unauthorized use of this technol-
og
yisdi
ff
icult. The steps we take may not prevent misappropria-
tion o
f
the technology we rely on. In addition, e
ff
ective protectio
n
may
b
e unava
il
a
bl
eor
li
m
i
te
di
n some
j
ur
i
s
di
ct
i
ons outs
id
et
he
U
nited States, Canada and the United Kin
g
dom. Liti
g
ation may b
e
necessary in the
f
uture to en
f
orce or protect our rights or t
o
d
etermine the validity and scope of the ri
g
hts of others. That liti-
g
at
i
on cou
ld
cause us to
i
ncur su
b
stant
i
a
l
costs an
ddi
vert
resources away
f
rom our daily business, which in turn coul
d
materially adversely affect our business.
R
egulation o
f
VoIP services is developing and there
f
or
e
u
ncertain, and
f
uture legislative, regulatory or judicial
a
ctions could adversely a
ff
ect our business and expose us
t
o liabilit
y.
O
ur business has developed in an environment lar
g
ely free
from government regulation. However, the United States and
o
t
h
er countr
i
es
h
ave
b
e
g
un to assert re
g
u
l
atory aut
h
or
i
ty ove
r
V
oIP and are continuin
g
to evaluate how VoIP will be re
g
ulated in
the
f
uture. Both the application o
f
existing rules to us and ou
r
c
ompetitors and the effects of future re
g
ulatory developments are
u
n
ce
rt
a
in
.
F
uture
l
eg
i
s
l
at
i
ve,
j
u
di
c
i
a
l
or ot
h
er regu
l
atory act
i
ons cou
ld
have a ne
g
ative effect on our business. If we become subject t
o
the rules and re
g
ulations applicable to telecommunications pro-
v
iders in individual states, we may incur significant litigation and
c
omp
li
ance costs, an
d
we may
h
ave to restructure our serv
i
c
e
off
erin
g
s, exit certain markets or raise the price o
f
our services,
a
ny o
f
which could cause our services to be less attractive to
c
ustomers. In addition, future re
g
ulatory developments coul
d
i
ncrease our cost o
f
doin
g
business and limit our
g
rowth
.
O
ur international operations are also subject to regulator
y
r
i
s
k
s,
i
nc
l
u
di
n
g
t
h
er
i
s
k
t
h
at re
g
u
l
at
i
ons
i
n some
j
ur
i
s
di
ct
i
ons w
ill
p
rohibit us
f
rom providing our services cost-e
ff
ectively or at all
,
w
hich could limit our growth.
C
urrently, there are several coun-
tries where re
g
ulations prohibit us from offerin
g
service. In addi-
tion, because customers can use our services almost an
y
where
t
h
at a
b
roa
db
an
dI
nternet connect
i
on
i
s ava
il
a
bl
e,
i
nc
l
u
di
ng coun-
tries where providin
g
VoIP services is ille
g
al, the
g
overnments of
those countries ma
y
attempt to assert jurisdiction over us, which
c
ould expose us to significant liability and regulation
.
W
e identi
f
ied a material weakness in our internal control
o
ver
f
inancial reporting which was remediated as o
f
D
ecember 31, 2007 and ma
y
identif
y
additional material
w
eaknesses in the future that ma
y
cause us to fail to mee
t
o
ur report
i
ng o
bli
gat
i
ons or resu
l
t
i
n mater
i
a
l
m
i
sstate-
m
ents o
f
our
f
inancial statements.
O
ur management is responsible for establishing and maintain-
i
n
g
adequate internal control over financial reportin
g
. Interna
l
c
ontrol over
f
inancial reportin
g
is a process desi
g
ned to provid
e
reasonable assurance regarding the reliability o
ff
inancial report-
i
n
g
and the preparation of financial statements in accordance wit
h
a
ccountin
g
principles
g
enerally accepted in the United States. A
material weakness is a de
f
iciency, or a combination o
f
de
f
icien-
c
ies, in internal control over financial reportin
g
, such that there i
s
15