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The VOIP Revolution

By Cynthia L. Webb Staff Writer
Monday, December 1, 2003; 9:52 AM

It’s showdown time once again at the Federal Communications Commission, and the stakes could be significant for consumers and big businesses, as major telecom providers and upstart technology firms square off over whether Internet phone calls should be regulated in the same way as traditional phone services.

Today the FCC will host a forum on Voice over Internet Protocol service — VOIP for short.

The Wall Street Journal set the stage for the forum in a Friday article, reporting that VOIP “could radically transform the $300 billion telecommunications industry and is renewing doubts about whether the Internet should remain regulation-free. Sending phone calls over the Internet … is one of many technologies moving more quickly than regulators can react. … In some such calls, traditional phone lines are effectively cut out of the process. That strikes fear among Bell phone companies such as BellSouth Corp. and SBC Communications Inc., which charge fees when traditional phone companies such as long-distance providers use their lines to complete calls (long-distance companies usually don’t own the lines that go into customers’ homes or offices). The Bells must provide service to everyone, and remain heavily regulated in areas from pricing to emergency 911 services.”

The Washington Post also defined the issue’s importance in a Saturday article: “The stakes in the debate are huge. Federal and state governments could lose billions of dollars in revenue from regulatory fees if calls moved onto the Internet are no longer subject to the charges. And if the FCC chooses not to regulate Internet calls, it could raise questions about the future of the Universal Service Fund, a $6 billion federal program funded by telephone fees that subsidizes phone service in rural areas and Internet service for schools.”

“With companies and government officials staking out defensive positions,” the Journal reported, “the [FCC] is aiming to craft clear guidelines in the coming year. In 1998, when VOIP was more theory than reality, the FCC deemed it an ‘information service’ and thus free from existing phone fees and regulations. In recent interviews, senior FCC officials have signaled their continued aversion to saddling the emerging technology with decades-old phone-industry rules that could crush the newcomers.”

FCC Chairman Michael Powell is already on record against treating VOIP the same way as traditional phone service. Internet call providers “are not telephone companies in the traditional sense and we shouldn’t view them as such,” Powell told The Wall Street Journal.

First Step in FCC’s VOIP Review

If you’re dying to follow today’s hearing, you can watch the webcast. The FCC Web site said the first set of panelists will speak about “how the FCC might distinguish among the numerous services employing VoIP, and whether it could feasibly distinguish between VoIP and other IP-enabled applications facilitating communication (ranging from e-mail to instant messaging to videoconferencing to interactive online gaming).” That first panel includes Time Warner Cable’s chief operating officer and a high-level Cisco Systems executive are on the agenda. Cable firms, of course, are adding VOIP service to their broadband offerings, and Cisco wants to sell the equipment that makes Internet phone calls possible.

In a second session, utility commissioners from California and Florida, the chief executive of VOIP provider Vonage and others will “address public policy questions raised by VOIP. Panelists will be asked to address what, if any, regulatory obligations currently imposed upon traditional circuit-switched voice service providers should be placed upon VOIP providers and whether from either legal or technical perspectives such obligations are feasible.”

“The hearing kicks off a months-long proceeding in which the FCC is expected to decide what, if any, rules and fees should apply to phone calls over the Internet or Internet protocol networks. The debate has huge implications for the rapidly shifting telecommunications industry. VOIP calls — which now can be made with regular phones — are expected to gradually supplant traditional voice calling over the next 20 years,” USA Today reported on Friday. “But state regulators and some local phone companies say these upstarts are getting a free ride by dodging regulatory burdens, such as taxes, universal service fees to subsidize rural phone service, access fees to local phone companies to deliver calls and 911 emergency calling requirements.”

If you’re looking for more insight into what FCC chief Michael Powell thinks about VOIP, check out his remarks from an October Technology Advisory Council gathering. The bottom line according to Powell? The technology should be viewed uniquely. “I think there is going to be a very, very important set of decisions to be made as to how we embrace Internet premised, Internet-based IP type communications and whether we will tailor a set of regulatory clothing uniquely for it, or whether we will make it wear Ma bell’s hand-me-downs,” Powell said at the October meeting. “And I think a public debate about it not being just a telephone or just an incremental change off of the way we have looked at the telephone system for 100 years is a very, very important part of the crossroads. The micro judgments about what regulatory policies apply then seem to me to be easier, or start to fall in place, if you at least create national consensus that this thing is different, it’s different from a historical prospective, its different from a technological perspective and it’s deserving of a sort of singularly unique policy examination, as opposed to what I see at risk right now, which is regulating it by accident.”

Powell said the FCC is going to start focusing on VOIP “more directly. And that is not to say regulating it either, only to put a marker down that it’s time to start having these policy questions in forums that matter. … And I think that we run the risk that if we don’t move quickly to at least show that we’re focused on it, then if you don’t have a state jurisdiction do it, you will have a court do it.”

Telecom Transformation Already Underway

In a separate article on Friday, the Wall Street Journal noted that while the Baby Bells are worried about VOIP, they’re also jumping in and creating their own discounted VOIP services. It’s the old adage, if you can’t beat them, join them. “Qwest Communications International Inc. is launching an Internet phone service for residential customers in early December. Verizon Communications Inc. says it will follow with a similar service by next year’s second quarter. SBC Communications Inc. may also launch a VOIP service next year, depending on the regulatory environment and improvements in the technology, which it thinks still has some issues,” the newspaper said. The San Antonio Express-News reported on Nov. 20 that SBC Communications “has provided VoIP services for several years, but those required businesses to invest in new, potentially costly phone systems. SBC’s new offering operates via equipment the phone company maintains on its own network and doesn’t require clients to make major system upgrades, officials said.”

The Journal piece mentioned one VOIP company that must be particularly daunting for the Bells. “Skyper Ltd., based in Sweden, offers free voice calls among users of the company’s service, called Skype ( Skyper hopes to make money by selling more advanced services to the users it’s attracting.” (A side note: The company is brought to you by the same brain trust behind file-swapping site Kazaa. Skype works on the same technology — peer-to-peer connections).

“[F]iber-optic network operator Level 3 Communications has offered VoIP technology since 1999, but it’s been a small part of the company’s overall business. That could change, and rapidly, which could reshape the foundation of the $300 billion telecommunications industry,” The Rocky Mountain News said in an article today. (Level 3’s chief executive is also on the speaker’s list for today’s FCC hearing). “VoIP recently has been growing at a clip of more than 20 percent a quarter and accounted for nearly one-third of all business telephone equipment line shipments in the second quarter, according to Telephony, which tracks the industry,” the newspaper noted.

The technology gets props as well from oft-quoted telecom analyst Jeff Kagan. “Voice over IP is the technology of next century. Yet there are so many unanswered questions,” Kagan told the Chicago Sun-Times in an article published today. “We regulate traditional phone services, but we don’t regulate data services. Voice over IP blends both.” The newspaper said that the Internet phone technology “has about 100,000 users in the United States. That’s less than 1 percent of the calling market, according to Kagan. But with millions of Americans getting cable modems or DSLs, the number of Internet callers is expected to multiply. Voice over IP calling can be 25 to 30 percent cheaper than traditional phone service. … Internet calling is cheaper because companies that provide it avoid taxes and fees levied on traditional calls. But now, with the FCC poised to step in, all that could change.”

A USA Today piece from Friday noted that VOIP isn’t anything new for the Baby Bells, it’s just that the market is shifting from businesses to homes. “Most phone companies have sold Internet calling to big businesses for years,” the newspaper said. “That’s because big businesses have the fast Internet connections needed to make it work well. Now, the quickening spread of broadband in homes and small businesses makes Internet calls more feasible for others. Plus, Internet callers can pick their area code and keep phone numbers while moving, thanks to the computers at the heart of the system. These features will further propel the market, says Rick Moran, a vice president at network-gear maker Cisco Systems, a big backer of Internet calls.”

Everyone Wants a Piece of VOIP

A front-page Wall Street Journal piece today looks at an effort to revive dotcom bomb as a VOIP firm. Excerpt: “ Version 2 has an entirely different business: phone service over the Internet. At its height, the company employed nearly 300 at a sleek lower-Manhattan building. Now, it is dubbed voiceglo and has 40 employees, some sitting in rose-colored cubicles in Fort Lauderdale and 12 others in Vermont. The company isn’t doing much advertising, relying instead on word-of-mouth. To minimize the sales force, customers sign up by themselves online.”

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