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Telcos running scared of Net phones

Telephone companies say Internet telephones, devices that let users make long distance calls almost for free, threaten their existence. Nonsense, say Net software vendors. Who decides? The government.

Telephone companies are afraid of people like Rod Grimes.

Since retiring from his job at General Motors on disability, the 50-year-old Southern California resident has discovered the Internet telephone, an invention that Grimes says has changed his life--and, many long distance carriers claim, threatens to undermine their very existence.

"About six months ago, I was using the Internet, and my kids had moved to Texas. We started out just using email, but something better came along, from VocalTec," said Grimes, who stayed behind in Simi Valley, unable to sell their house because of the real estate slump. Now, he says, he is able to speak every day with his 15-year-old twins, who moved to Wichita Falls when GM relocated their mother's job.

He may not know it, but Grimes and other users of Internet telephones are in the middle of a classic battle of American free enterprise. On one side is an army of established telephone companies that view long distance communication as their sovereign territory. On the other are a bunch of Silicon Valley upstarts who have figured out a way to let people talk to each other from great distances through their computers--virtually for free.

The fight could lead to vast changes in the telecommunications industry, especially for about 400 smaller long distance carriers with limited ability to expand their business to Internet telephony. And because part of the issue hinges on the definition of what kind of communications the government can control, the debate could affect every one of the Internet's estimated 30 million users.

"The broad picture goes beyond telephony to audio, radio, video, multimedia," said Sandy Combs, director of the Voice on the Net Coalition, which announced its formation Monday in response to recent challenges to Internet telephony. "It's a matter of whether the FCC can regulate content over the Internet."

The debate came into full public view this month when a trade organization of long distance companies, called America's Carriers Telecommunication Association (ACTA), filed a "special relief" petition with the Federal Communications Commission (FCC) to stop the sale of software used to make calls over the Internet.

ACTA says that recently developed technology lets PC users "bypass" the phone companies by making long distance calls over the Internet while allowing telephony software developers to do business without being subject to tariffs and other regulations imposed on telcos.

And that, ACTA members say, is unfair. "It is not in the public interest to permit long distance service to be given away, depriving those who must maintain the telecommunications infrastructure of the revenue to do so," ACTA said in its petition. "Nor is it in the public interest for these select telecommunications carriers to operate outside the regulatory requirements applicable to all other carriers."

Notably absent from the petition are such major long distance carriers as AT&T and MCI Communications. Industry analysts say the big telcos are staying neutral because they are beginning to make their own forays into the Internet market and don't want to close off any options by aligning themselves with ACTA.

But to the 130 smaller carriers that compose ACTA, allowing Internet telephony companies to operate without oversight is a threat to their commercial viability and could create "serious economic hardship on all existing participants in the long distance marketplace and the public which is served by those participants."

Telephony developers scoff at such Cassandra-like doomsaying, arguing that there's plenty of business to go around. "When fax machines came onto the horizon, everyone got scared that Federal Express would go out of business," said Elon Ganor, chairman and CEO of VocalTec. "Did that happen?"

Besides, he says, the FCC has no right to regulate the Internet because that would be "totally contradictory" to the commercial freedom provided by the recently signed Telecommunications Act. Moreover, Ganor and others say, Internet technology is completely different from telephone systems and should therefore be exempt from FCC regulation.

The telephone companies, on the other hand, say talk is talk--regardless of the technology--and that means the software developers should be regulated right alongside them.

There's one catch: To do that, the government must first define what kind of communication is subject to regulation, the same question that forms the heart of the American Civil Liberties Union's challenge to the Communications Decency Act now in federal court.

"Technology may once again be surpassing government's ability to control its proper use," ACTA said, likening telephony to the development of cable technology 30 years ago. The FCC must "define the type of permissible communications which may be effected over the Internet."

Easier said than done, says Daniel Briere, president of TeleChoice, a telecommunications consultancy in Verona, New Jersey. "I don't know how they can outlaw this. It's the equivalent of the U.S. Post Office saying that only certain types of mail are valid. Every single letter needs to be opened, examined--where do you draw the line?"

The FCC has given no indication how it will rule on the petition, saying the process has only just begun. The agency will accept public comment on the filing starting next month.

"This obviously raises some novel issues," one FCC attorney said. "Historically, the FCC has not regulated the Internet, and it raises some serious jurisdictional questions."

Some analysts say ACTA's concerns are premature because telephony technology has a long way to go before it becomes a tangible threat to the current telco market.

For one thing, telephony communication is possible only if both parties are signed on at the same time and have the same software installed. And the often dubious quality of the connection, along with frequent transmission delays, makes it a far cry from regular phone service.

Still, it's more than good enough for Rod Grimes. With his software, which he says can be purchased for the onetime cost of about $50 to $70, he's able to keep in daily contact with his family in Wichita Falls.

"If I couldn't use the Internet, my calls would have to be cut down to once a week, at the most," Grimes said, estimating that his bills would top $300 on regular phone lines. "I couldn't afford to carry on a normal household."

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