Feds should hang up VoIP regulations

WASHINGTON--Here's a quick question: How much extra do you pay every month for your phone because of taxes levied by federal and state governments?

If my own phone bills are any indication, items like "gross receipts tax surcharge," "federal universal service fund surcharge," and federal and state taxes make up at least one-third of what I hand over to Verizon Communications every month. That adds up to a hefty chunk of cash.

Now, a tax-hungry band of bureaucrats at state and federal agencies is trying to figure out how to levy those fees on voice conversations carried across the Internet, a practice commonly called voice over Internet Protocol (VoIP).

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If these "taxocrats" get their way, Americans will pay more when signing up for VoIP service through companies such as Vonage, which currently offers an unlimited U.S. and Canada calling plan for $35 a month. With a one-third increase, that price would spike up to $46.67 a month.

But that's just the beginning. Currently, VoIP is viewed as an "information service," exempt from a dizzying array of regulations, obligations and other requirements that date back to the early part of the 20th century when the Bell System was just about the only way to make a phone call.

Over the last 70 or so years, Congress has glued more and more regulations on so-called telecommunications services, which have accumulated like encrusted barnacles on the underbelly of the former Bell companies.

Those may have been necessary at one time, but it would be a horrific mistake for governments to say that VoIP is a "telecommunications service" subject to all the encrustations of Title II of the Telecommunications Act of 1934. Born in the days of the Bell monopoly, the law permits the Federal Communications Commission to set prices, impose interconnection requirements on carriers, regulate equipment for access by the disabled, levy pay-per-call requirements, and so on and so on. Still, other laws order such companies to guarantee easy wiretapping access by police.

Imposing those regulations would crush fledgling VoIP companies with the weight of volumes of "bureaucratelia."

Imposing those regulations would crush fledgling VoIP companies with the weight of volumes of "bureaucratelia." Hiring Washington insiders to lobby the FCC is expensive. So is tripling the size of your legal department to make sure you're complying with Title II.

"The FCC would have to open numerous proceedings, one after another, to figure out how to apply the rules and the laws," says Phillip Marchesiello, a lawyer with Akin Gump Strauss Hauer & Feld who advises VoIP companies. "All the rules would have to be tinkered with to see how they'd have to change. I think we'd see congressional intervention. I think someone would have to step in to prevent the whole industry from being lost."

Take the example of Vonage, which has concluded it's feasible to sell unlimited VoIP service for $35 a month. More than 72,000 Vonage subscribers believe the company's service is an attractive alternative to traditional landline phones. But if additional regulations raise Vonage's costs, it would likely be forced to raise its prices. Add one-third taxes on top of the monthly fee, and it becomes a far less attractive alternative.

Even worse, the ongoing uncertainty over what regulations may or may not apply would discourage new VoIP start-ups and investors from entering the market. "If history is any guide, people in power use regulatory gaming to retain power," Marchesiello said. "From a consumer perspective, the biggest thing (about new regulations) is that everything slows down."

Next steps

We've already seen examples of what the regulatory expansionists hope to accomplish.

We've already seen examples of what the regulatory expansionists hope to accomplish. The Minnesota Public Utilities Commission tried to license Vonage to do business in its state, but its efforts were rebuffed by a federal judge in October.

Last week, the FCC's two Democratic Party members suggested that VoIP firms need to be regulated. Such FCC action would "bring equity and effectiveness to rules and regulations that protect the public interest," FCC Commissioner Michael Copps said. (Before getting his FCC gig, Copps was busy representing the public interest as a lobbyist for automotive carpeting and instrument panel-making company Collins and Aikman. And before that, he was a lobbyist for the American Meat Institute.)

Fortunately, Copps and the other Democrat appear to be in the minority. FCC Chairman Michael Powell and his two Republican colleagues suggested that the FCC should borrow the credo of the medical profession and "first, do no harm." Powell said bluntly that he believes "IP-based services such as VoIP should evolve in a regulation-free zone."

Powell and his Republican allies like to talk about the free market and America's entrepreneurial spirit, but their votes don't always match their rhetoric. This is an opportunity to let them back up their words by permitting VoIP to flourish without government intervention.

The FCC could do two things to accomplish that: first, make it clear that VoIP is, in general, an "information service" not subject to interference by state governments, and second, let entrepreneurs figure out what consumers want and find efficient ways of meeting their needs.

For instance, traditional 911 emergency service can be problematic with VoIP because you can plug in your Internet phone anywhere in the world. The Democrats seem to believe the only solution is for government to regulate. But two weeks ago, the National Emergency Number Association and the VoIP industry adopted a joint resolution to work toward a solution. And Vonage already has 911 service in place.

More to the point, it's possible to envision far more useful services than being placed on hold while waiting for a 911 operator in an emergency situation. Karl Auerbach, a CalTech fellow who's a former Cisco Systems engineer, suggests that "a VoIP phone could be designed to notice the 911 number and instead of building a VoIP call, it could instead launch an instant message or other notification--such a notification could easily get through to the appropriate dispatcher much more quickly than the operator-assisted systems of today."

A 911 alert from within a corporate office complex could notify all nearby phones and PCs, for example, which warn their users to leave the building.

One-size-fits-all rules from the Feds tend to stifle this type of creative innovation and codify practices that are woefully out of date. Government intervention should be a last resort, not the first choice. Let's hope the FCC agrees.