Telecosm - Ike Elliott

Limelight's IPO Patent Disclosures

Andy Abramson, whose excellent VoIP Watch blog I read regularly, has raised some interesting questions triggered by my recent posts on the Level 3 patent suit against Limelight Networks.  Andy wondered whether Limelight fully disclosed the pending Level 3 patent infringment letter in their S-1 form, filed in March, 2007, ahead of their June IPO, and wonders if Limelight's investment bankers discovered the Level 3 letter in their pre-IPO due diligence.  Limelight raised $240M in that June IPO, and Level 3 alleges in their patent court documents that they sent their letter to Limelight in February.

I went back and read the Limelight S-1, and while I did not find a specific disclosure about the Level 3 letter, I did find this general disclosure on page 13:

<snip> We may need to defend our intellectual property and processes against patent or copyright infringement claims, which would cause us to incur substantial costs.

Companies, organizations or individuals, including our competitors, may hold or obtain patents or other proprietary rights that would prevent, limit or interfere with our ability to make, use or sell our services or develop new services, which could make it more difficult for us to operate our business. From time to time, we may receive inquiries from holders of patents inquiring whether we infringe their proprietary rights. Companies holding Internet-related patents or other intellectual property rights are increasingly bringing suits alleging infringement of such rights or otherwise asserting their rights and seeking licenses. <snip>

The question, of course, is whether the above disclosure is good enough, since Limelight had factual knowledge of the Level 3 infringement letter at the time.  I'm guessing that the above disclosure is adequate, but I don't have direct experience in the nitty gritty of this kind of SEC matter, so I'm interested in hearing readers' opinions.

While trolling through the Limelight S-1, though, I did find some other interesting information:  Limelight claims to have 14 pending patents in the United States, and another 36 regional and national patent applications pending outside of the United States.  If any of these patents are granted in the near term, then they could help Limelight mount a defense against the Level 3 patent suit.

Also, Limelight has been mounting a defense against a patent infringement suit from Akamai and MIT, which is expected to go to trial in 2008.  Apparently, Limelight's defense in this suit has been effective, since the court found in July that Akamai was trying to patent a process rather than a technology, and rejected Akamai's claim.  The case will still go to trial, though.

More Details About Level 3's Patent Suit Against Limelight

Dan Rayburn has posted the links to the court documents for Level 3's patent suit against Limelight Networks, on his Business of Online Video blog, and it turns out that Level 3 is asserting four patents against Limelight.  As I suspected in my post a few days ago, patent  6,654,807, "Internet Content Delivery Network", is one of the patents named in the lawsuit. 

The other three patents are: 

• 6,185,598, Optimized Network Resource Location (filed 2/10/1998 by Sandpiper Networks)
• 6,473,405, On-Demand Overlay Routing for Computer-Based Communication Networks (filed 6/25/2001 by Digital Island)
• 7,054,935, Internet Content Deiivery Network (filed 3/13/2002 by Cable & Wireless)

Level 3 owns all of these patents by virtue of a long history of mergers and acquisitions.  Sandpiper, who filed the first patent, merged with Digital Island in late 1999.  Digital Island filed the second patent in mid-2000, and then was purchased by Cable & Wireless in 2001.  C&W filed the third and fourth patent applications in 2001 and 2002.  Savvis acquired the assets of C&W in 2004, and Level 3 completed its acquisition of Savvis' CDN business in January, 2007. 

Level 3 must have had a very clear idea of the value of these patents at the time of acquisition, because within just a few weeks of completing the Savvis CDN acquisition, Level 3 sent a letter to Limelight to ask them to stop infringing the four patents. 

Limelight has certainly known about these patents ever since they received that letter, and Level 3 claims they have done nothing to stop infringing in the intervening ten months.  Why would Limelight not respond?  I can think of several potential scenarios:

1. Limelight might believe they can get the patents thrown out because they are aware of "prior art" that would prove that the ideas in the patents were well known prior to the patent filing date.
2. Limelight might believe they are not infringing the patents due to some loophole in their implementation.
3. Limelight might know they are infringing, and may have tried to license the technology from Level 3, and Level 3 may have refused the license request and may have insisted that Limelight shut down their infringing CDN.  Limelight may have felt that such a move would be too damaging to their business, so they fell back to a plan B (as in scenario 1 or 2).
4. Limelight might have filed competing and improved patent applications that we don't know about yet (because the patents have not yet been granted), and once these patents grant, Limelight will have ammunition for a counter-suit and possible cross-licensing settlement. 

Having looked at the claims in these patents, they are very broad, so I would assume that Limelight is infringing them. 

The court documents clearly accuse Limelight of willful infringement, and if Level 3 wins then it could include an award of treble damages.  Level 3 is also asking the court for an injunction to prevent Limelight from continuing to sell the infringing services.

If Level 3 wants to play hardball and insist on shutting down the infringing Limelight CDN, it could severely damage Limelight's business. 

Specials Don't Scale

One of the big struggles in any telecom service provider is maintaining your focus.  And one of the easiest ways to lose focus is to allow yourself to be tempted into selling a service that you are not prepared to operationally support. 

The temptation is constant:  you have a quarterly revenue goal, you might be a little behind plan, you have a big opportunity with a new customer that will help you make your quarter, but the opportunity is not a standard product and you don't have standard pricing and your provisioning database doesn't have a data field defined for the kind of off-net circuit that needs to be provisioned, and your network management system will have no visibility into the health of that circuit.  You know that your team is capable of provisioning and operating the circuit, but they are going to have to invent manual systems and paper filing records to get it done. 

Should you accept the special order or not? 

Ideally, your management team takes the long view, and resists the temptation to do specials, because they know that as specials accumulate, the operational complexity in your business will make your operational costs climb and also impair the level of service that you are providing to even your normal customers. 

Inevitably, though, you will find some specials that you will want to do, either to make a key revenue target or to please a strategic customer.  Perhaps the best reason to do a special or two is when you are expecting to develop a corresponding product in the near future, and you understand that you can learn more about the requirements by installing a few "beta" orders.  Be sure to warn the customer, though, of any temporary weaknesses in your ability to support the service.   Many customers will conveniently forget these warnings, of course, but at least you have attempted to warn them. 

Licensing The Blues

In case you haven't spotted them yet, there are some excellent comments on my post from a few days ago, "Should Software Be Patentable?", from Tim Lee and Brough Turner.   Tim Lee's post on the Technology Liberation Front motivated me to ask the patent question on this blog in the first place.

Tim points out that he thinks

" it's a mistake to assume that the people getting the patents and the people doing the innovation are the same people."

...and that

"More often than not, software patents seem to be an alternative to innovation, not a reward for it."

My own experiences bear out the truth of these statements.  While I did receive some additional compensation from MCI through their patent program, it was hardly commensurate with the potential value of the resulting patents.

On the other hand, I drew a salary from both MCI and Level 3 while working on these patents, and I understood from my employment agreement that MCI and Level 3 would own anything I invented while employed by them.  So, I'm not bitter about their owning the patents...the rules were understood from the start of the game.  And my employers could certainly be justified in believing they played by the rules and "paid" for those patents in my salary and bonuses.  So, I think that Tim's "fairness" argument doesn't hold up well.

But that is hardly the centerpiece of Tim's argument.  Tim asserts that copyright should be adequate protection for software, and that patents for software are harmful because they inhibit innovation.  I find that argument far more fascinating. 

I found myself comparing software to music.  Music is not patentable, but it is subject to copyright.  So, at the risk of oversimplifying, Tim is proposing that we treat software in the same way that we treat music.

Imagine if music were patentable...what kind of changes would it have caused in the music industry?  I imagine that somebody along the way would have patented the twelve-bar blues, the classic blues form that frames so many great blues songs.  For the ensuing twenty years, nobody else could have written a twelve-bar blues song without "licensing the blues" from the patent holder. 

To me, the patentability of music would have created a grave inhibitor to creative expression, and would have deprived the world of many great musical works.  I would definitely not favor patenting music.

Then why should my attitude about patenting software be any different?  I don't know...I want to think through the analogy a bit more, to see if software really mimics music, to see if this little analogy holds. 

What do you think?  Should software be treated in the same way as music?

Level 3 Files A Patent Suit Against Limelight

Level 3 is flexing its muscles in the growing patent wars, asserting that Limelight Networks is infringing  content delivery patents that Level 3 acquired when it bought SAVVIS' CDN business about a year ago. Dan Rayburn reports on his Business of Video blog that Level 3 has over 850 worldwide patents and patent applications.  That certainly puts them in the big leagues in terms of size of patent portfolio, though they would have a long way to go to catch up with IBM. 

Level 3 hasn't announced which patents they think are being infringed, though one of them could be 6,654,807, "Internet Content Delivery Network", filed in late 2001 by Cable & Wireless.  SAVVIS bought most of the assets of C&W back in 2004, so Level 3 may now own this patent. 

The patent contains some very interesting claims describing the caching of information on "repeater servers" around a network, and delivering that information from a selected repeater server to  a client upon request.  This kind of caching is at the heart of most Content Delivery Network solutions.

Limelight says on their web site that "Limelight has built a global network of logical CDN locations with extensive storage capacity across the United States, Europe, and Asia that is capable of rapidly delivering digital media worldwide."  If Level 3 is asserting that the "repeater server" patent is being infringed, then Limelight's task is to prove that their implementation somehow avoids caching. 

I'd lay odds that Limelight is infringing and this one will settle before trial, with Limelight paying a royalty to Level 3 to license the technology. 

This continues Level 3's aggressive push into the CDN business.  In October, Level 3 announced that they were pricing CDN services at the same rate as normal Internet access, which hurt both Akamai and Limelight. 

Should Software Be Patentable?

Tim Lee has a thought-provoking post over on the Technology Liberation Front, about software patents, questioning whether anybody should have been allowed to patent software. 

If you are interested in learning more about the detailed history of the patentability of software, you might want to check out the bitlaw site.   I'll summarize some key historical points here:

1. Before the 1980's no software was patentable
2. In 1981, the Supreme Court allowed for software to be patented when the software was incorporated into a process that included non-software elements.  (The test case had to do with heating rubber under computer control).  At that point, many in the industry weren't sure if software was patentable or not.
3. In the early 1990's a federal circuit court decided that some clarity was needed, and tried to come up with new definitions for patentable vs. unpatentable software.  It was still about as clear as mud. 
4. In 1995, the US PTO tried to define patentable software vs. unpatentable software along the same lines as the earlier court decision, with no improvement.
5. In 1998, the circuit court considered another case and basically decided that all software is patentable.

Is having patentable software a good thing, though?  I can see pros and cons.  In the case of the VoIP patents that I've blogged about on this page, I can see some bad effects, as it has created a lot of uncertainty in the VoIP industry about who is infringing up on patents, and who could sue whom.  In Vonage's case, it has certainly hurt their business and may eventually deny them freedom to operate their business. 

Basically, these VoIP patents grant a temporary (20-year) monopoly to the patent holder over some of the basic algorithms and message exchanges used in VoIP.  This can't be good for encouraging competition and ensuring consumer choice, both of which can be seen as good for the public.

On the other hand, don't innovators need the chance to be rewarded for their inventions?  Isn't the chance for remuneration a powerful incentive to innovate?  And it costs money to do research and try out new ideas.  Shouldn't a company be allowed to recover its costs? 

I can certainly see the argument from both sides, having been an inventor on 18 patents, all of which are assigned to my former employers.  I've seen the damage that software patents can cause in the VoIP industry, so I do think that some patent reform is in order, but I also think that some intellectual property protection should be preserved.

The problem with patenting software is that our industry moves very quickly, and patents can act as a brake on progress.  A twenty-year patent life for software seems excessive to me.  Why not cut that in half, to ten years?  If you can't monetize your software invention in ten years, then it may be that either the software has little value, or that the invention is valuable but is owned by a corporation or individual that is having difficulty leveraging it, and in somebody else's hands the invention could be truly useful. 

Looking at the VoIP industry, I think a ten-year patent life would have worked well.  Many of the big VoIP patents that have made news this year would have been expiring right about now.  A Vonage might have paid back royalties on a patent judgment, but would be free to operate in the future without paying further royalties. 

What do you think?  Is the current patent framework ideal?  Or, should software patent law be revised?

Devices Becoming More Specialized

Andy Abramson has a good post on the trend toward more specialized devices, incuding an IM gadget from Zipit2, and a forthcoming video conferencing device from Creative Labs.  I'd add Amazon's Kindle to that list - a specialized device aimed at heavy-duty readers.  I posted a few days ago about what makes the Kindle great. 

I think this trend toward specialized devices will continue, and Andy deserves credit for noticing the trend.

Retractions

I have updated my posts from today, after some thought.  In hindsight, they were too harsh toward Level 3, and I think I was just venting my frustration as a shareholder that has endured some losses.  I do believe in the management team at Level 3, and I reiterate that I believe Jim Crowe is the right man, and he has the right team to lead the company through its current issues, and I do not advocate a change in management.  When I honestly think about it I can't think of another team that can do the job better.

Nobody has asked me to make the changes and nobody has asked me for an apology, but I apologize nonetheless.  I'm new to this blogging thing and I am learning that I need to think through my posts before posting.

I do think that Level 3 could have handled the PR aspects of their mid-quarter update better.  I think I showed today that I need to handle the PR aspects of my own blog better as well.

Level 3 Mid-Quarter Presentation: Nice Slides, Poor Results

Level 3 Communications published a mid-quarter update yesterday, describing the company's response to their disappointing 3rd quarter earnings report, in which the company reduced guidance due to problems in installing orders.  The company reiterated that sales were above plan, but installation capacity did not meet demand and the company saw reduced financial performance as a result. 

My take-away from the mid-quarter update: demand for Level 3's services has declined to meet Level 3's capacity to install those services.  Translation:  Level 3 has left significant money on the table as a result of the installation capacity shortfall.  President and COO Kevin O'Hara spent a good portion of his section explaining why the company suddenly turned bearish in October after being publicly bullish in September, and while some in the market may have needed to hear that, it wasn't what I was listening for.   I was hoping to hear more about how he was fixing the actual provisioning problems in the business. 

Level 3 also said in the update that the low end of their guidance calls for a recovery in their ability to install revenue late next year (in 2008!).  That's a delay of a full year in their ability to install revenue at a rate that takes full advantage of market demand rates.  I, for one, would be very disappointed if it really takes that long to increase installation capacity to the required levels. 

I am a shareholder of Level 3, and I have to say that the update was not reassuring.  I was hoping to hear of some improvement in the company's ability to install orders, but if anything, I sensed a potential extension in timeframes for a provisioning fix. 

The most optimistic data points were provided by Sunit Patel, stating that the company has tripled EBITDA in just a couple of years (largely through acquisition), and extended debt maturities (largely through Sunit's efforts). 

In the end, the problems will be fixed, I have no doubt of that.  I  only fear that the timelines will be longer than I had hoped.  I sincerely hope that I am wrong. The next six months will tell the tale. 

Level 3 Sells Vyvx Advertising Unit, Recovers Some Cash

Level 3 Communications announced the sale of the advertising distribution unit of Vyvx for $129M to DG Fastchannel, Inc.  Vyvx was a subsidiary of WilTel when Level 3 bought WilTel back in 2005.  At the time, Vyvx had both a content delivery business (strategic to Level 3) and a satellite-based advertising distribution business (not strategic to Level 3, since it didn't use the Level 3 network).  Now, Level three is selling the advertising distribution part of the business and recovering some of the $370M in cash they paid for WilTel.  Level 3 also paid 115 million shares of stock for WilTel.

It's good to see Level 3 getting good value for the asset and adding a little more cash to the balance sheet.

FCC Chair Martin Again Demonstrates His Double Standard

There is an excellent editorial in this morning's Wall Street Journal, speaking out about about FCC Chairman Kevin Martin's decision to cap the market share owned by any single cable company at 30%.  Of course, AT&T controls on the order of 37% of the US wireline consumer market, and 34% of the US business telecom market.

Martin continues to demonstrate his allegiance to the telephone companies and bias against cable. 

How Much Revenue Share Does Apple Get From iPhone?

The Wall Street Journal reported this morning that Apple may be close to a deal with a Japanese wireless carrier to distribute a new 3G version of the iPhone in Japan.  Steve Jobs is playing NTT Docomo, the number one Japanese carrier, against Softbank, the number three Japanese carrier, to try to get a lucrative revenue sharing deal of the sort he got with AT&T in the U.S.  Piper Jaffray's Gene Munster estimated a few months ago that Apple may get as much as $18 a month in recurring revenue from each AT&T iPhone customer. 

I don't believe Munster's numbers.  Typically, a sales-distribution revenue-sharing deal of this sort provides a greater revenue share at the time of sale, and then a smaller percentage of the recurring revenue over the life of the contract.  For example, Apple might make 50% of the first month's revenue on each new iPhone contract sold in an Apple store or through the Apple web site, and then make 8% per month for every month thereafter.  So, for the least-expensive $59.99 per month plan, Apple might make $30 in the first month and $4.80 every month thereafter.  This averages out to $5.45 per month, which is still an impressive number for Apple but not as high as some have thought.

Of course, Apple might have a deal that pays them a revenue share even on phones that Apple doesn't sell in their stores and on their web site, since Apple is clearly doing a great deal of advertising and marketing for the iPhone.   I wouldn't be surprised if we learn over time that Apple had a clause in the AT&T deal that obligated Apple to spend a portion of the revenue share on iPhone advertising.  Seen in this light, Apple's revenue sharing is just Steve Jobs enjoying a markup on his legendary marketing abilities. 

The real story here is that Apple is the first handset manufacturer to leverage its own distribution capabilities, including its 200+ stores in the U.S., to eat into the distribution piece of the handset value chain in a meaningful way.

Apple has seven retail stores in Japan, not as many per capita as in the U.S., so that may hurt Apple's ability to generate as much recurring revenue share in Japan as they are generating in the U.S.

Why Amazon's Kindle Is A Big Deal

I am hoping to find a Kindle under the tree at Christmas.  I think that Amazon has hit a home run with their new book-reading device.

What is so cool about it?

1. It has built-in 3G EV-DO hardware, so you can download newspapers and books wirelessly, wherever you are.
2. It has a built-in wireless data subscription on Sprint Nextel's network, meaning you never get a bill from Sprint Nextel or any other wireless provider.  The cost of the network access is built in to the price of the books and newspapers that you buy.
3. It is easy on the eyes, using E-Ink, which looks like regular ink on paper.
4. It automatically saves any books or papers that you buy up in the network, in case your Kindle dies, or in case you lose your Kindle, so you never have to worry about backing it up.
5. It is environmentally correct.  Think of all the paper you avoid using!

I admire Amazon for daring to innovate on the business model for Kindle, and hiding the wireless data subscription costs from their subscribers.  Think of it: what brick and mortar book store charges you extra for the truck that brought the books to the store?  What you really want to buy is a book, so why should you have to worry about renting space on the truck to get it to you?  This is similar to the way that Amazon has free super-saver shipping for orders that are large enough, to help remove shipping costs as a barrier to sale.  Amazon has done the same with Kindle, and just removed the distribution costs from the offer price for a book.  And the book price is often lower than the paper book would be, because they saved the cost of printing the book and putting it on a truck. 

Good product.  I hope Amazon sells a ton of them.  Now, if they would only integrate an RSS reader with it, for access to free web content, I wouldn't even wait for Christmas to get one.

Performance-Enhancing Drugs Destroying MLB

The publication of last week's The Mitchell Report only told us what we already knew, that a lot of professional baseball players are taking performance-enhancing drugs to try to get an edge.  There are two big problems with this:

1. The game ain't fair.
2. Because the game ain't fair, players who wouldn't ordinarily consider cheating are pressured to take drugs, just to keep their jobs, and in the process, they endanger their health.

Fairness in professional baseball needs to be restored so that fans can believe in the integrity of the game, and believe in the records that are broken by today's players, and so that players can compete without risking their health.  That is no easy task, because some performance-enhancing drugs can't be detected by testing, like Human Growth Hormone.  Still, MLB needs to put in place a drug testing program with some teeth in order to let players know they are serious about restoring fairness.  Shame on MLB for not doing it sooner.

As for taking steroids or HGH to try to get an edge, I think the temptation will always be there for players.  Who among us hasn't been tempted to sacrifice our health for career advancement?  I can certainly give countless examples in my own life of skipping workouts in order to complete work assignments, and botching my diet while on business travel.  This is human nature, and it is not limited to baseball players. 

Still, MLB needs to do everything in its power to reduce the temptation to cheat, and to restore the integrity of the game.  If it does not, it risks losing its fan base, starting with me.

Can Web-VoIP Platforms Succeed Where Others Failed?

Om Malik posted yesterday about Ribbit, a company that has just announced its Web-VoIP integration platform.   The company has published application programming interfaces for the development of Flash applications, claiming to hide the dirty details of VoIP under the rug so that the developer can simply create applications.   The first of these applications leverages a "connector" that integrates with SalesForce.com, an online sales force automation tool. 

Ribbit will likely face competition from Adobe, who is planning to launch ther own Flash VoIP platform next year.  Om also mentions Google's GrandCentral, along with Lypp, as other players that are going down the platform route. 

The central problem these companies are trying to solve is the perception that nobody has created the killer application that combines VoIP and the Web, and apparently they are pointing to a deficit in toolkits as the key inhibitor.  They claim that a platform like Ribbit's will hide the vagaries of multiple operating systems and VoIP protocols from the developer.  "If only I had a better toolkit, then I could make a VoIP-Web mashup work!" 

Well, color me skeptical, but my grandpa always told me that "it is a poor craftsman who blames his tools." 

I think there are several good VoIP-Web mashups on the market today and making good money, with the most obvious being Broadsoft's Broadworks platform, and the cool web dashboard that they use.  As for integrating with SalesForce.com, Broadsoft announced their SalesForce.com connector in October, and Cisco announced their Unified Call Connector in May of this year. Neither Cisco nor Broadsoft needed the benefit of a third-party toolkit, though in fairness, Ribbit isn't targeting Cisco and Broadsoft as customers. 

But this points out the problem with the new platform strategy.  Ribbit doesn't have a large existing customer base to sell into, while Broadsoft and Cisco do.  So far, Broadsoft and Cisco are building the useful apps into their products more quickly than Ribbit. 

Of course, Ribbit hopes that by publishing an API, they will "let a thousand flowers bloom," and a Ribbit-based developer will invent something that leapfrogs the state-of-the-art. 

I think, though, that the real deficit here is not the lack of a platform, but the lack of imagination, and a platform isn't likely to change that, at least at this stage of industry development.

I applaud the new innovation in the VoIP industry, but I think that sometimes we technologists are seduced by the flashy lights and buttons, without realizing that the new app doesn't really help us.  I'm as guilty as anybody in this regard...I bought my first PDA years ago only to find I was spending more time trying to sync it with Outlook than I was saving by having a portable calendar and contact list, so I ditched it a few months later. 

If you are trying to grow a VoIP technology company, I have one question for you: Is VoIP's success your company's objective, or are you trying to solve real problems, like improving productivity?  Your answer will determine whether your company succeeds, or ends up in the tech landfill.

Facebook Hasn't Tripped My Trigger, Yet

My brother invited me to join Facebook a few months ago, so I signed up, eager to see what all the fuss was about.  I haven't invested a ton of time into it...I guess it hasn't sucked me in.  Frankly, the last thing I need in life is yet another time-sink.  Reading and writing blogs serves that purpose just fine, thank you very much!

So, I guess I'm not buying into the Facebook craze, at least not yet.  Facebook has this huge valuation and everything, but to me it looks like people have found another Internet fad in which to invest their time and energy and coin. 

Tried MySpace and Plaxo and Google Groups and LinkedIn a while back, too.  Of all of these, LinkedIn has had the most practical value for me.  It has really helped me create and maintain a good professional directory for myself, and has also helped me recruit some execs for clients of mine. 

I view all of these social networking tools as good early experiments on the way to something better.  Meanwhile, I'm not getting all crazy about it.   How about you?

Feisty Vonage Should Have Let Sleeping Nortel Dog Lie

Friday's news that Nortel has sued Vonage for infringing a dozen patents is really just the latest battle in a patent war that Nortel has been fighting since 2004.  Over three years ago, Digital Packet Licensing sued Nortel in a Texas court for infringing three patents.  DPL was a patent troll and was just trying to shake Nortel down for some cash on three patents that DPL themselves had acquired from Republic Telcom Systems Corporation/Netrix Telcom Systems Corporation. 

Fast forward two years to June, 2006, when Verizon sued Vonage for patent infringement.  A month later, as Vonage began to realize the precarious situation they were in, Vonage acquired three patents from DPL in an effort to bolster their VoIP Patent portfolio.  Yes, these were the same three patents that DPL had already used to sue Nortel.  Owning those patents didn't change the outcome of the Verizon case - Vonage still lost that, and also ended up paying AT&T and Sprint Nextel to settle additional patent suits out of court.  I don't really know, but I'm guessing that Vonage did some cross-licensing of their DPL patents with AT&T and Sprint Nextel in order to reduce their settlement fees.

Vonage could have dropped the lawsuit against Nortel back when they acquired the DPL patents in 2006, but they elected to continue that lawsuit.  This suit is different from the other Vonage patent lawsuits of the past year, in two big ways:  Vonage is the one doing the suing, and they are suing an equipment/sofware manufacturer and not a service provider.  Usually in these kinds of cases, service providers don't sue manufacturers, and vice versa, because there is an unwritten understanding that manufacturers don't sue their potential customers, the service providers, and service providers return the favor. 

Vonage, being a new player in the old telecom world, may not have understood the rules of the road, and having been repeatedly targeted by big service providers for lawsuits for the past 18 months, may have figured "They're all out to get us!"  Not only did Vonage continue the Texas lawsuit on the DPL patents, Vonage filed another lawsuit in Delaware in August, trying to invalidate three Nortel patents.

Vonage exacerbated their own intellectual property problem when they didn't drop the Nortel suit for 18 months, and eventually provoked a retaliatory countersuit from Nortel.  It seems to me that Vonage is acting like a wounded animal, lashing out at any target within reach.  Did Vonage really think they could nab Nortel on patent infringement without provoking Nortel to check their deep trove of VoIP patents to see if the could counter-sue?

The comedy of intellectual property errors at Vonage continues.  This comedy, though, is looking more like a tragedy all the time.

Vonage Takes Another Patent Hit

The patent woes continue for Vonage, and this time they are being sued by Nortel.  However, Vonage is dealing from a stronger hand than in past lawsuits from Verizon, AT&T, and Sprint Nextel.  Vonage acquired three VoIP patents last year from Digital Packet Licensing, and DPL had already sued Nortel for violating those patents, and Vonage just continued that lawsuit.  Now, Nortel has retaliated and claims that Vonage is violating 12 Nortel patents. 

According to court documents from the US District Court in Delaware, Vonage actually sued Nortel in August this year to get three Nortel patents disallowed.  Nortel now claims that Vonage is violating those three patents, and nine others.  The original three Nortel patents in question are:

1. 6.091,808 - Methods of and Apparatus for Providing Telephone Call Control and Information
2. 6,445,695 - System and Method for Supporting Communications Services on Behalf of a Communications Device Which Cannot Provide Those Services Itself
3. 7,050,861 - Controlling a Destination Terminal From an Originating Terminal

The three patents that Vonage acquired from DPL last year are:

1. 4,782,485 - Multiplexed Digital Packet Telephone System
2. 5,018,136 - Multiplexed Digital Packet Telephone System
3. 5,444,707 - Packet Switching Communication System

These three patents are in the area of compression technology frequently used in VoIP services.

It's good for Vonage that they are on the offensive in this fight, though it is likely that Nortel has more ammunition than Vonage.  At least Vonage has some patents to fight back with, now. 

I'll keep digging to try to find all the other nine Nortel patents involved in Nortel's counter-suit, and will report on them when I find them.

Management: Like Painting a Masterpiece, While Others Hold Your Brushes

I heard an interesting story on NPR's Weekend Edition this morning, about how rock musician Dan Pritzker is directing a couple of movies about Buddy Bolden, the founder of jazz.  I love jazz, but what really caught my attention was what Pritzker said about the jump from being in a band to directing a movie. 

Pritker said, and I quote the NPR story here, that "compared with being in the band — where he's collaborating with fewer than a dozen people — calling the shots on a movie set is an entirely different experience. He likens it to painting a picture 100 yards away with 40 people holding your paint brush."

Isn't that the central issue for us when we transition from "individual contributor" to "manager" roles in business?  Most of us start our careers as the artist holding the brush and responsible for painting our piece of canvas.  As we climb the career ladder, we find that our success no longer depends on our ability to wield the brush.  Instead, we guide others who are holding brushes, asking for brighter colors here, and a different perspective there. 

And that is the challenge in managing larger and larger businesses, isn't it?  We assume that larger businesses require more management layers, and we get further removed from the actual work of painting a masterpiece. 

To me, this little analogy points out the importance of hiring a great team, one that works together well, and one that has incredible talent.  It is also a caution against creating too many management layers, lest the upper layers become too far removed from the actual work!

Complain Early And Often At The FCC

The old adage about Chicago voters is that they vote early and often, and sometimes even deceased voters vote in Chicago elections.  It turns out the FCC complaints box has also been stuffed with complaints from dead people, and from celebrities.  Recent complainers have included Donald Trump, Paris Hilton, Leon Trotsky, Joseph Stalin, and even Jesus Christ.    Matt Lasar has an entertaining but uncensored post here.

Net Neutrality Bill A "Solution" Looking For A Problem

Representative Edward Markey is getting ready to reintroduce an "Internet Freedom Preservation Act" in Congress, in response to the hysteria about trying to preserve Net Neutrality.  Congress has already considered a half-dozen of these bills this year, and rejected them all, and for good reason.  Unfortunately, these kinds of bills create more problems than they purport to solve.

If the forthcoming bill is anything like the last batch, it will require the following:

1. Broadband operators must provide only a single class of best effort Internet packet delivery service, unless they don't charge extra for higher priority delivery of certain kinds of application traffic.
2. Broadband operators must not block or impede an particular class of service.
3. Broadband operators must allow any device to be connected to their network.

These kinds of bills generally delegate responsibility to the FCC to enforce the Net Neutrality requirements.

Here are the problems I have with this kind legislation:

1. It ties the network operator's hands with respect to providing the service that the market demands.  Let's look at one shining example: the VoIP services offered by cable operators.  For many years now, these services have used the PacketCable and DOCSIS standards to provide priority to to VoIP packets over the rest of the best effort Internet traffic on the cable network.  The cable industry developed these standards for two big reasons: to provide a consistently high-quality voice service to their subscribers, and to avoid investing in antiquated and expensive circuit switching equipment to provide those voice services.  In other words, they were trying to compete with the telcos with a service of roughly equal quality and they found a cheaper and more advanced way of providing that service at lower cost than the legacy telco solution.  And yes, the cable company charges extra for the voice service.  Do we really want to tell the cable company that they can't prioritize their voice packets any more?  Of course not.  I am betting that there will be additional services in the video arena that may demand packet prioritization as well, and if "Net Neutrality" regulation such as Markey proposes passes, it will just impede progress by crippling the business models for these services.
2. Packet prioritization can be a good thing for real services.  Why prevent it?  Lots of IETF RFCs go to great lengths to provide ways to implement packet prioritization, and lots of equipment vendors, like Cisco, have built these capabilities into their router products.  It seems to me they wouldn't have done that unless there was some market demand for it.
3. The big fear of a true multi-tier Internet seems far-fetched.  End-to-end packet prioritization across multiple network service providers on a public Internet is really hard, and it hasn't been done effectively in any big application yet, despite real efforts to make it happen. 
4. It will be really hard, and expensive, for the FCC to police.  If this regulation passes, the FCC is likely to get gobs of complaints and will have a hard time getting the data to judge whether a net neutrality violation has really occurred.

I do think there are real net neutrality "violations" to worry about, such as the Rogers attempt to do data-insertion on web sites without permission. 

However, the kind of sweeping regulation proposed by Markey is a big mistake.

VoIP Security Flaws: Trojan Horses, Malware, and XSS Attacks

One of the most common security mistakes people make with VoIP is that they think of VoIP as if it is a separate thing, and therefore it is somehow immune to the kinds of security flaws that plague the rest of their IT infrastructure.  Of course, a VoIP application is like any other Internet application, meaning VoIP is vulnerable to same attacks as web servers and PCs. 

Take the "soft VoIP client", for example.  This is just software that runs on a PC and enables voice-over-IP calling to other PCs or phones.  Often, this is software that is downloaded and installed on your PC (like the Skype client), and increasingly it is taking other forms, such as software that runs within a browser or within a flash application.  It turns out that hackers are finding interesting ways to exploit these VoIP software programs.

Here is one example: Skype has reported a malware program, "Skype Defender", that disguises itself as a Skype security plugin, but is really a trojan horse designed to steal your login information.  It displays an eerily accurate replica of a Skype login screen, and when you try to login in it always fails the login, but sends the username and password you entered to a remote web site that collects your login data.  Because your login attempts fail, you are tempted to try other usernames and passwords you might be using, and the program collects those as well. 

Any PC-based VoIP application that runs in a browser may also be vulnerable to standard broswer-based attacks, such as injection of malicious client-side scripts from a compromised web site, often called a cross-site scripting (XSS) attack. 

So, you may be thinking "I'm okay because I don't use a VoIP software on my PC...I use a separate VoIP phone instead."   Not so fast... any VoIP device that contains a web server in it, as many VoIP phones and adapters do, could be vulnerable to XSS attacks.  Cisco recently reported a vulnerability in the built-in web browser in their IP phones, that allowed hackers to gain access to the phone and eavesdrop on your phone conversations. 

And these vulnerabilities are not limited to standard web browser/server technologies such as HTTP.  Security experts are now demonstrating ways to use Session Initiation Protocol (SIP), a widely-used VoIP call setup messaging standard, to perform rudimentary XSS attacks, too.  A Blue Box podcast recently reported a Linksys SPA-941 vulnerability to an XSS attack that uses the Session Initiation Protocol (SIP) to launch an XSS attack on the Linksys VoIP Adapter by altering the FROM: field of the SIP message to refer to a malware program. 

To fight these kinds of XSS attacks, it helps if your VoIP software inspects incoming and outgoing messages to check the values of any data field that can contain a script, and reject messages that contain scripts.  Most VoIP applications will work fine without using any embedded scripts, so it is easiest just to block messages that attempt to use scripting.

iPhone and Apple TV: Widely Divergent Adoption Patterns

There are two interesting articles in this morning's WSJ, tracking adoption rates for two different classes of applications: mobile web browsers and Internet video players with TV interfaces.

In the category of mobile web browsers, Apple's iPhone seems to have broken through, and mobile web browsers are finally starting to register on the Internet radar. The Journal reports that in November, nearly 1% of all web page views were served to an Apple iPhone.  This is in spite of the fact that only 1.4 million iPhones had been sold by the end of September, while devices using Microsoft's mobile operating systems sold 3 million in 1Q07 but only accounted for 0.06% of web page views in November.  Clearly, Apple did something a whole lot better with their web browser, and users are proving it.

In contrast, Apple's internet video player, Apple TV, is languishing along with the entire category of Internet video players.  These devices make it possible to view internet video, such as the videos sold on iTunes or the videos given away on YouTube, on your TV.  A Forrester Research report shows that in the 3rd quarter, 80% of poll respondents weren't interested in buying a device like Apple TV at any price, and another 11.1% wouldn't pay more than $30 for it.  Apple charges $299 for their low-end, 40GB device, and only 0.2% of the people surveyed by Forrester said they would pay more than $200!  There is a chasm that has yet-to-be-crossed in Internet video players.

While price is one reason why these devices aren't selling, I think the biggest reason is that for now, folks are satisfied with watching Internet video on their PCs and mobile devices, and don't want to go to any great lengths to see the videos on their TVs.  Maybe that will change as more good content becomes available on the Internet and as more mongo-wide TVs are sold.  For now, though, it seems these Internet video players are ahead of their time.

VoIP Barbarians Are Still At The Gate

There was a good post by Daniel Berninger over on GigaOm today, recounting the 1995 paranoia about VoIP at AT&T Bell Labs.  Daniel laments that a dozen years later, VoIP still hasn't eliminated the phone company business model. 

It took me down memory lane, because I was part of very similar conversations at MCI at the same time.  As an engineer that was leading some of the VoIP research at MCI back then, I was pulled in to meetings with executives every now and then to talk about VoIP, and I always felt like the execs couldn't make up their minds about whether VoIP was a threat or an opportunity.  Sometimes they would say disparaging things about VoIP, such as "it is like ham radio, a toy for hobbyists."   I saw it as a big opportunity for MCI, though, arguing that we finally had the tool we had been looking for to end our slavery to the circuit switch manufacturers.  Sure, our top line revenue might suffer as prices declined, but if we played our cards right, we could rapidly compress our costs as well by moving off of old circuit switched technology and onto an all-packet network, while focusing our attention on growing our Internet backbone.

Wow, I was naive. 

MCI ended up getting bought by Worldcom and never really bought into the risky strategy of replacing circuit switches with new networking technology based on VoIP.  In fact, while all of the major long-distance carriers did a lot of research on VoIP and applied for patents on the technology, none of them really wanted the technology to succeed and all of them tried to milk the circuit-switched cow for the next decade.  They watched their residential phone businesses shrink and were eventually acquired by their arch-enemies, the Regional Bell Operating Companies. 

But was it VoIP that caused the collapse of the long-distance carriers?  No, in the end it was a combination of wireless encroachment, lost regulatory battles, and corporate malfeasance (in the case of WorldCom) that did a lot more damage to the long-distance carriers than VoIP.  Sure, VoIP did help crater the high-margin international long-distance business, but that by itself wasn't enough to kill the inter-exchange carriers. 

Like Mr. Berninger, I expected VoIP to wreak more havoc by now.  I wouldn't have guessed back in 1995 that twelve years later, I would still be thinking VoIP's best days are ahead of it.  My views are more nuanced now; I no longer believe VoIP wins in a frontal assault on the gates of the telco fortress.  VoIP is already winning in more subtle ways, as the technology is incorporated into mainstream product offerings (Comcast Digital Voice, for example), and into emerging standards (the IP Multimedia Subsystem, for example).  VoIP is sneaking its way into fixed-mobile convergence standards, too.   VoIP still wins in the end, but folks might not notice, or care, that it is VoIP under the hood.   

More Verizon Forbearance News

So you thought the Verizon forbearance news was over with last week's FCC decision to reject Verizon's latest forbearance petition?   Verizon lost that round, but they had actually won a prior forbearance petition in early 2006, and a federal appeals court upheld that win for Verizon on Friday.  It turns out that Qwest and Sprint Nextel were jealous that Verizon had won a little bit of forbearance, while Qwest and Sprint had none, so they did the American thing...if you can't beat them, sue them.

Actually, Qwest and Sprint didn't sue Verizon...they appealed to the government to overturn Verizon's old 2006 forbearance win.  And the news today is that Qwest and Sprint lost their appeal.

So, this is probably getting kind of confusing.  Verizon won some forbearance and lost some other forbearance?  How did that happen? And what is this forbearance thing all about, anyway?

Back when congress passed the Telecom Act of 1996, requiring the big incumbent local exchange carriers to sell access to their plant at wholesale prices, congress did what congress does best:  they created a loophole.   This particular loophole said that if a regulated incumbent thought enough competition had developed in one of their markets, they could petition the FCC for relief from regulation, and that if the FCC didn't act on the petition within a year and 90 days, then the petition was "deemed granted".  Kind of like when you sign up for a few free issues of a magazine and forget to cancel it before you have to start paying for it.  You forget to act and you're stuck.

That's what happened with that old 2006 Verizon forbearance petition, which was just for regulatory relief on large data services like ATM, frame relay, and optical services.  The FCC sat on the petition and sat on the petition without acting on it, and as the deadline neared, they were deadlocked at two votes for the petition and two votes against it.  The FCC normally has five commissioners, but the fifth commissioner was pending congressional approval and hadn't been seated yet.  Republican Chairman Kevin Martin and Commissioner Deborah Taylor Tate were in favor of granting the petition, while Democratic Commissioners Jonathan Adelstein and Michael Copps were against it. 

The deadline came and it suited Martin and Tate just fine, because at the passing of the deadline the petition was deemed granted, and Verizon got regulatory relief, even though Martin and Tate didn't have a majority of the votes needed.

This created a mess, of course.  Now, Verizon has regulatory relief on some parts of its business, while none of the other incumbent telcos has the same kind of relief.  AT&T, Qwest, and Sprint might be justified in feeling left out of the regulatory relief bonanza. 

Verizon, flush with success from the granting of that petition in early 2006 submitted additional forbearance petitions in hopes that they would be granted too. 

Meanwhile, Commissioner Robert McDowell was approved by the Senate and was seated in June, 2006.  Like Martin and Tate, McDowell is a Republican, but he doesn't always vote with Martin and Tate.  Recently, he lined up against Martin on the issue of cable regulation, and on the issue of forbearance petitions, McDowell has usually imposed a higher standard.

Most notably, McDowell has looked for real evidence that an incumbent has lost reasonable market share to competitors as an indicator that a forbearance petition should be approved.  Martin has used a lower standard of looking for evidence of the existence of facilities-based competitors, whether or not they have won significant market share, in order to favor approval of a forbearance petition.

Personally, I think McDowell is on the right track, while Martin is not.  Sure, you can point to the cable industry as evidence of facilities-based competition in residential telephone service, but two competitors do not make for much price competition.  The two giant competitors usually engage in a kind of dugout-to-third-base-coach signing and sign-stealing exercise that amounts to a "I won't cut prices if you won't cut prices" understanding, and consumers are stuck overpaying.  All it really takes is for an executive of one of the companies to do an interview where they say something like "We think prices will stabilize here" and the other company gets the message loud and clear, and if nobody cuts prices for a few months after that then they know they got agreement.

And while cable is a facilities-based competitor, they are more formidable in the residential space now than in the business space, so it would be way premature to unregulate the telcos on wholesale T1 and DS3 pricing, which are the products most often purchased by small and medium-sized businesses. 

So, the FCC is living with the mess they created by granting Verizon's first big forbearance petition, but not granting very many other petitions after that, and as a result, they have a fractionally unregulated world in which there is not a level playing field.  The debate these days is whether to undo the one big Verizon forbearance petition that has already been granted.  That's pretty messy, too, since Verizon says they have already signed a few hundred large business customer contracts with the new unregulated pricing. 

I think this mess is on Chairman Martin's head.  When he allowed the 2006 Verizon forbearance petition to be granted, and on the recent cable regulation issue, he tried to act before he really understood if he had the political support he needed to finish the job.

Trend for '08: Why Own a PVR?

Good post this morning over on GigaOm, noting that 86% of Internet users dowload videos at least once a month.  If you read the Horowitz Associates research report that was the source on this stat, you'll see that most of these folks are downloading TV shows that they missed.  In other words, they are using the Internet as a substitute for their Personal Video Recorders. 

People are still using the television as their primary source of video entertainment content, but I can't help thinking that as more and more people become accustomed to the Internet as a video source, and as more and more good content is available through the Intenet, then more and more people will turn to the Internet as their primary source of video entertainment, rather than as just as a PVR substitute.   Watch out, cable!  You're about to be disintermediated.

In an act that was (pick one) incredible foresight, extreme laziness, or misguided frugality, I never bought a PVR.  Now my vision/slothfulness/thriftiness is being rewarded, and I have a fine Internet-based PVR at my service.  I wonder what other goodies will come my way, just by waiting? 

The Problem With Ideology

I am on record as a fan of the Technology Liberation Front, which is a kind of technology public policy blog with a libertarian slant.  I'm the kind of person that likes to read the editorial page in a good newspaper, just because it makes me think, and the TLF blog does the same thing for me.  And, I kind of have some libertarian leanings, so I often find myself agreeing with the posts on the blog.

Sometimes, though, I think the libertarian ideology gets the TLF bloggers into the weeds and they post some off-base ideas, as in the case of Hance Haney's post a couple days ago on FCC Forbearance.  In this one, Mr. Haney trots out some oft-repeated falsehoods about CLECs, stating that

"[CLECs] invested in sales and marketing rather than their own facilities. They are mere retailers who can only offer the incumbents’ services under a different name. Now that cable companies offer VoIP and wireless pricing is comparable with wireline rates, there is no non-political reason for the CLECs to exist." 

Mr. Haney is slamming the entire CLEC industry in support of a standard libertarian goal of reducing or eliminating government regulation. 

The truth is that many CLECs actually add value over and above the underlying facilities that they re-sell, and do not sell only on the basis of price.  Sure, there are example CLECs that support Mr. Haney's thesis, but there are many more that are exceptions to his generalizations.  I commented on his post that CBeyond is an example of a CLEC that is offering an innovative and value-added service.  Another one is Unity Business Networks.  Both of these exciting companies are bringing real value to their small and medium sized business customers, and both would be severely damaged if the ILECs were granted their forbearance petitions, and suddenly free to set their own wholesale prices for access to the 98% of buildings that are not served by a competitor.  When a forbearance petition was granted in Omaha, Qwest raised prices 30%!  Obviously, that's bad for consumers and bad for value-added CLEC service providers, and it is a gift-wrapped boost for Qwest's earnings.  Thankfully, the FCC rejected a similar gift to Verizon by rejecting their forbearance petitions yesterday. 

So, that points out the problem with knee-jerk ideology.  Ideology can, and often does provide a useful framework for thinking about policy problems, but If an ideologist doesn't do his homework and doesn't keep an open mind in trying to research the facts, then he will be tempted to latch onto the first "facts" he finds that support his hypothesis.  In this case, Mr. Haney's ideological assumption seems to be that "regulation is always bad."  In this case, Mr. Haney's assumption is wrong.

FCC Chair Martin Snubs Cable on Birthday Invites

The cable television industry is reeling after they weren't invited to this year's December 14th birthday party for FCC Chairman Kevin Martin.  "I don't know where it went wrong...we were, you know, really close," a teary Comcast CEO Brian Roberts said, after learning of the snub.  "He said he loved us, and now, he won't even return my calls!"  Unidentified sources reported that Cox and Cablevision were unavailable for comment, as they were too distraught, and were rumored to be in sessions with their industrial therapists.

There were unconfirmed reports that Martin was seen laughing and smiling while dining with Verizon Chairman Ivan Seidenberg while on vacation on the French Riviera.  If these reports are true, it could explain Martin's suddenly chilly relations with the cable industry.

Industry social columnist Hadda Chotsky speculated that the source of the rift was an ugly incident at last year's party, where Martin overheard a drunken cable executive uttering "an expletive so foul that it violated the Chairman's decency standards."

Ms. Chotsky added that the estrangement might be due to the gift that the Chairman received from the cable attendees to last year's party.  Apparently, the cable industry had pooled their money and purchased a bundle of gifts from a department store, and delivered it in a single gift-wrapped bundle, and Mr. Martin was unhappy with some of the individual items enclosed, such as the new 700 MHz phone that doesn't work on AT&T's network.  Mr. Martin was overheard asking if he could return some of the items and not others, and was dismayed to learn that he could not unbundle the gifts.

Meanwhile, Google has announced that they have been invited to the Chairman's bash for the first time.  "We're really excited, and are trying to decide what to wear," gushed Andy Rubin, Google's Director of Mobile Platforms.  "I just hope we make a good impression, and are invited back next year." 

Editor's note: the above is completely fictional, and any similarity to actual events is either accidental or on purpose.

Forbearance? You've Got To Be Kidding Me!

Thankfully, the FCC rejected Verizon's Forbearance Petition yesterday.  Verizon was asking for relief from regulation that requires them to provide wholesale access to their plant, so that CLECs can resell T1s and DS3s, in six metropolitan areas:  Boston, New York, Philadelphia, Pittsburgh, Providence, and Virginia Beach.  Had the FCC granted the petition, CLECs would no longer have the option of reselling the incumbent local exchange carrier plant in those areas, and it would have set a horrible precedent.  It would have been the death knell for the CLEC industry.

I can't help thinking, "what is Verizon smoking?"  While I can understand why Verizon would be interested in the demise of the CLECs,  how can they possibly believe that there is sufficient competition from CLECS with their own lines in the ground to justify regulatory relief from wholesale reequirements?  Andy Lipman posts on FreeToCompete that fewer than 2% of buildings in these six markets are connected to CLEC facilities. 

And the mere possibility that the FCC might have actually approved the petition is scary.

I do consulting work with CLEC VoIP carriers who are providing innovative services to businesses through the resale of these high-capacity circuits, and the competition is not just "sell the same thing as the ILEC but at a lower price."  These companies are selling improved services, often at higher prices than the ILEC.  What more proof do we need that businesses value these services from the CLECs? 

The bottom line:  wholesale access to incumbent local exchange carrier T1 and DS3 lines has been a great thing for businesses, because competition has meant that businesses are getting better service, not just lower prices, and without this competition these businesses would still be stuck with a monopoly provider that doesn't care about them.  Verizon should be ashamed of asking for relief.

More on GigaOm, here and here, on FreeToCompete here, and a contrarian view on Technology Liberation Front. 

How Anonymous is VoIP?

Pop quiz:  Which kind of call is easier for a called party to trace, a traditional phone call (phone to phone), or a VoIP call (Skype client to Skype client)? 

The answer might surprise you...in some cases, the Skype call might be easier to trace.   You can usually find the IP address of the sender of the Skype signaling and voice packets and at least trace the caller to the city of origin, and often even closer.

Contrast that with an anonymous PSTN caller using caller ID blocking and calling you up on your regular phone.   The receiver of the anonymous call cannot trace the call on their own...if the call was a malicious call, they can only dial *57 and ask their service provider to trace the call for them, and even then it is only law enforcement authorities that are given the information.  My bet is that 99% of the population doesn't know the star code for tracing calls in the first place, so in reality, tracing of anonymous calls is impractical for most people.  And there is no "hack" you can do on your POTS phone to intercept some signaling that will reveal the identity of the caller, because nothing about the calling party is sent down the line to your phone.

So, in many cases, the good old PSTN does a better job of preserving the anonymity of calling parties than VoIP.  And the issue isn't just limited to Skype.

Some VoIP providers will actually go to great lengths to mimic the "anonymous calling" capabilities of the PSTN, and will block the caller ID from being delivered to the calling party when requested.  For example, the CableLabs PacketCable Application Spec for Residential SIP Telephony goes into great detail about how to block a caller ID, in Chapter 7.2.  However, after the call is set up, the two VoIP clients do end up sending RTP packets directly to each other's IP addresses, so if the receiver of the call wanted to hack their VoIP Phone or trace their local ethernet, they could discover the IP address of the caller.  Once you know the IP address, you can find out lots of interesting bits of information, like what city the caller was likely in, and what service provider they used.  So, while the caller's identity remains anonymous, an enterprising called party has a lot more clues about the caller than a similar PSTN called party would have. 

Of course, there is one way to truly preserve a caller's identity, and that is to use a Session Border Controller or a Conference Bridge up in a service provider network to do "selective topology hiding," only for calls that require complete anonymity.  Most service providers I've talked with aren't contemplating going to these kinds of superhuman lengths to finish the job of providing anonymous calling features for their subscribers.

In fact, most subscribers don't care about remaining anonymous, so this VoIP limitation won't bother them a bit.  But if you are really, really private, and want to make sure you remain anonymous, then you might want to stick with POTS.  If you really, really want to use VoIP and want to remain anonymous, then you might want to check out an anonymizer service, like www.findnot.com.  These services charge you a monthly fee to use VPN technology to hide your real IP address.