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Vonage to Uncle Sam: Hands off VoIP

While the debate over the future of VoIP heats up, Vonage Holdings CEO Jeffrey Citron weighs in on the debate.

In the marketing din surrounding Internet telephony, few companies have made more noise than Vonage Holdings.

The three-year-old Edison, N.J., upstart has grabbed headlines as the biggest little company in its class, recently clearing 100,000 subscribers for its voice over Internet Protocol (VoIP) service. It's also been in the frontline in a burgeoning regulatory battle that promises to reshape more than a century's worth of assumptions over telecommunications service.

The fight came to a head in Minnesota last year, when Vonage took on local officials and ultimately won a federal court decision, finding that its service was not subject to traditional phone regulations in the state. That ruling was bolstered Thursday, when the Federal Communications Commission ruled that traditional phone regulations don't apply to voice calls that travel entirely over the Internet.

All of the signs point to validation for VoIP pioneers like Vonage, after years of skepticism. But with success has come new dangers. Vonage and other VoIP pioneers such as Net2Phone and VoicePulse are now bracing for competition, as cable companies, the Baby Bells and AT&T all begin to roll out similar services.

CNET News.com recently spoke with Vonage CEO Jeffrey Citron, before the FCC's ruling on Thursday, to discuss the reasons for VoIP's sudden success, the regulatory climate and the prospects for his company in an increasingly crowded field.

Q: Is VoIP the new bubble?
A: I do not want to comment on any kind of bubble or not. But as an industry, people are realizing that VoIP can transform a lot of companies in the way in which we communicate not tomorrow but over the next five years. Many players will come, and a lot of players will go.

A lot of players are going to remain at the end of that, and the technology is going to change. The way we do business today is not going to be the way we do business in the future. I think that what Lindows.com CEO Michael Robertson is doing, which I could qualify as an interesting project, is interesting. Customers will choose the winners and losers. Capital markets are going to vote on the winners or losers.

What are the biggest obstacles that you face, from a customer perspective? What is it that you hear when customers say, yeah, a $15 phone service sounds mighty good, but what are the bugs?
Well, I think there is an awesome number of bugs. I think there are large educational processes, where people are not sure whether it is going to be as good as (standard phone service) or whether it is going to be as reliable. That is an educational process, and that takes time. Telephony service is a carefully considered purchase. You don't just walk out and change phone companies overnight, because you saw some ad on TV. Consumers do a lot of research about services; they ask a lot of questions; they want to talk to a real person.

VoIP services have been around for a long time. Why is the regulation issue heating up now?
PC telephony--IP telephony--has been around a long time. There were Net-to-phone or PC-to-phone applications when AOL had its free phone calling from a computer.

They can't say, "We need to regulate you, because we need to tax you." It is an unfair argument.
Microsoft had its free calling programs back in late '90s. No one came out and said, "We have to regulate these things." Obviously, once someone is able to offer a product that some people view as very threatening to the established industry, the regulatory machines start to move. All we did was shrink the PC into a little tiny box you plug the phone into--that was a big change in the progress of IP telephony.

Minnesota got the ball rolling with a federal court decision last year, finding that the state's public utilities commission couldn't regulate Vonage. How will this ruling influence other states and the FCC?
Even prior to the Minnesota decision, there was a dichotomy between how states viewed VoIP. Florida actually ruled that VoIP was not a telecommunications service but rather an information service, for the purposes of the 1996 Telecommunications Act. And suddenly, the state of California steps in to say, "If Minnesota is going to treat you as a phone company, then so are we."

What is interesting is a couple of things that are going to sort of act as boundaries around what occurs. I think that the first boundary is what the FCC believes will be the first turf battle: whether VoIP is an intrastate or interstate service. I think they have been pretty clear to state that it is going to be interstate in nature.

That's probably one of the easiest parts to decide, because you basically have universal agreement among many of the players. You really can't tell what jurisdiction exists for VoIP phone calls. Now, the states probably won't like that, because once it is deemed to be interstate, then any powers that might ever be granted to the states in the area of regulation will have to be granted through the FCC process, and they may choose to fight back.

It seems as if there are some legitimate gray areas in the law, particularly when you get to interconnecting the VoIP network to the traditional telephone network. Some FCC commissioners have openly suggested that if someone is connecting and making use of the traditional telephone system, some of the old schemes should apply.
That's really interesting, but you know, that's the whole computer-to-telephony decision, which goes back to the formation of the basis of the Internet itself. Obviously, every single thing in the computer world connects in the telecommunication network.

The telecommunication network is defined by physical wires on the ground that communicates signals from one point to another point and back, so it is the basis of the Internet. Obviously, Congress had to carve out what was considered "basic service." Merely connecting to the network by no means defines you

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as a telecom service. The question everyone must ask themselves about regulation: "Is it regulation for the purpose of taxation?"

Is it an economic policy decision? Or is it a decision of protection of people, and delivering service and quality? Once you turn it into economic arguments, the states have to lose.

They can't say, "We need to regulate you, because we need to tax you." It is an unfair argument. It is not proper, and it is not just. Now, there are some very valid points around a number of areas you raise: servicing rural markets; emergency services or 911; wire tapping for law enforcement; consumer protection; interconnection fees; and people with disabilities.

Does Vonage support 911 service?
Yes, but in a limited form today, and that is basically what we call "speed-dial 911." You dial 911, and we will then send the call to your local Public Safety Answering Point over the public networks close to the dedicated 911 networks.

Subsidies are meant to ensure service in areas where companies wouldn't normally choose to lay miles of wires, because the markets are too small to earn a profit.
I am not going to disagree with that particular statement, but the bottom line is that Vonage has customers in rural markets that are not subsidized, only because the service is cheaper, and we don't draw on the system--we could.

We have to put circuits in rural markets in order to interconnect those markets to our IP networks to deliver service to customers.

The question everyone must ask themselves about regulation: "Is it regulation for the purpose of taxation?"
Cable companies deliver cable phones or cable TV service to a large number of rural markets, over which a company can run IP phone service, and they don't get any subsidy for delivering that particular service. People have to question what the Universal Service Fund (USF) is for.

I don't want to get into a debate over the USF, but I do want to highlight one particular fact: Vonage pays USF. I have issued the paper to the FCC that basically shows Vonage's method of contribution. We pay a dollar per user into USF every single month to subsidize the phone system. The subsidy is still there, and you don't need any form of regulation in order to have subsidy, as a matter of fact.

Do you think there will ever be a time when it will become appropriate to regulate VoIP services?
That's a great question. If there were to be a monopolistic company 10 years down the road that dominates the whole world, then you absolutely need regulation to protect consumers. But where the consumer can sit down or walk in and say, "Right now, I can choose from 100 different phone companies," how much regulation is required? The wireless industry is actually a pretty good model for this. Therefore, it is a regulatory approach, using a very light touch and very little state regulatory items at all.

To what extent is cable a sleeping giant in this business? How can Vonage hope to compete, once the big guys get in the game in a serious way?
Vonage has a set of services extremely different from what cable can offer and, quite frankly, very compelling for users. The great thing about this is that customers have choices--and they can choose whatever makes sense--so obviously, additional customer choice is large. More people probably voluntarily have chosen Cablevision Systems in its service area, and we think that that is a good example of what might happen. Time Warner has a great service and an important name. This is great; customers have a choice, and choice is good.

What happens when the Bells get into the market?
In the end, I think it is great to see a lot of players come to the marketplace. I think there is a lot of innovation. I think it will cause a lot of equipment to come down in price dramatically, as more and more people are buying this gear.

Do you see a time line for the convergence of wireless and VoIP?
It is already happening. Push-to-talk, in a lot of ways, is really nothing more than an IP application. I think that over time, we will see it, but it probably won't happen until 3G gets here that the networks really become truly IP.