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Heads up VoIP--regulation incoming

Though the FCC indicated that it favors applying a light hand on Internet telephony, it's clear that it will not completely escape regulation or taxation.

Commentary: Heads up VoIP--regulation incoming
By Forrester Research
Special to CNET News.com
April 8, 2004, 8:45AM PT

By Lisa Pierce, Vice President

Although the Federal Communications Commission has indicated that it favors applying a light hand on regulation of voice over Internet Protocol, it's clear that VoIP will not completely escape either regulation or taxation.

The FCC's stance, taken in its recent Notice of Proposed Rulemaking on IP Services, could be especially problematic for VoIP providers with business cases that are heavily dependent upon avoiding specific functions the FCC requires of telecommunications service providers--and thus escaping telecommunications-related fees and taxes.

For instance, there is no federal requirement for VoIP services to interconnect with operator, directory assistance, 911 or E911 services. VoIP services are not required to support local number portability or to pay into the Federal Universal Services Fund. All this could change.


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Customers who use services that have not incurred these types of costs should anticipate that they will, and they should also expect prices to rise as a result. Such well-known VoIP upstart providers as Vonage and Net2Phone could find themselves forced to raise their prices as regulatory fees are assessed. Consequently, given a shrinking cost gap between incumbents who offer VoIP services and new providers, some VoIP services or carriers will cease to exist. Providers that don't have the cash flow from a broad portfolio of services are at the greatest risk.

Expect the FCC's future VoIP ruling to be issued after Nov. 2--this is an election year--and to be purposefully vague, which will create market uncertainty. That will dampen the pace of provider VoIP service deployment and adoption, especially by business customers.

Even though VoIP traffic is a small percentage of total global minutes--about 1 percent in 2003--it is rapidly growing, more so overseas than in the United States. Nonetheless, U.S. service providers are leading the way in using technology to introduce new services or enhance current ones, so U.S. regulatory moves will be important on a global scale.

And the battleground is not just the FCC. At least six broadband bills have been introduced in Congress and seven state public regulatory bodies have opened VoIP proceedings, as has the European Union Commission, whose decisions will impact U.S.-based providers, vendors and callers.

Services with VoIP
The

For example, many VoIP services originate over broadband connections, but these calls can connect to any individual who uses traditional phones and phone lines. Such calls not only make use of the existing telecommunications infrastructure, they often use the standard North American telephone-dialing plan for such purposes.


Related story

The regulators seek public
comment on Internet phone
calls that reach traditional phones.


However, VoIP proponents correctly state that their new services provide capabilities that aren't typically supported by mass-market PSTN calls. For instance, multimedia and unified messaging capabilities are add-on features available with many VoIP services, but such capabilities are not available over traditional local and long-distance service.

The FCC must delineate a framework to determine which of these ancillary services are integral to placing and receiving VoIP calls, and which are optional. The more IP functions that are included in basic VoIP calls, the more regulatory obligations a VoIP service provider will likely avoid. Pulver.com successfully met the FCC's existing regulatory requirements by a combination of capabilities--it is a free, not fee-based service, only available to similarly equipped users, and it does not use the traditional telephony dialing plan.

The federal approach toward the regulation of communications has long been based on technology, not application, and it is outmoded. For instance, federal regulation of wireless services was extremely light for many years, even though such services supported analog voice calls and were interconnected with the traditional landline telecommunications infrastructure.

However, as adoption of that technology rapidly increased, regulatory expectations also matured. The imposition of local number portability requirements on wireless services is a case in point.

Getting with the times
The entire financial intercarrier payment structure is based on extremely outdated costing models that go back almost 40 years, to the time when analog switching and analog interswitch facilities were the predominant method of communications. At that time, distance was equated with cost.

That has not been true for more than 15 years--ever since digital (circuit-switched) facilities became the prevalent method to interconnect digital switches.

The advent of IP exacerbates the need to overhaul the entire set of crumbling assumptions concerning the artificial distinction between digital communications technologies and the use of costing methodologies that are medieval in their construct. (To aggravate this problem, there isn't one ancient costing model, but one per state.)

This requires many sacred cows to be gored, but it is also essential for the country's communications infrastructure to be based on a solid foundation in the future. In a world where the latest communications technologies are the bedrock for economies in developing countries, it is an imperative for this nation's economic competitiveness.

© 2004, Forrester Research, Inc. All rights reserved. Information is based on best available resources. Opinions reflect judgment at the time and are subject to change.