Internet Phone Service Threatens Industry's Giants

[Dave Farber <dave () farber net>]

Delivered-To: dfarber+ () ux13 sp cs cmu edu
Date: Fri, 28 Nov 2003 20:03:46 -0800
From: Dewayne Hendricks <dewayne () warpspeed com>


Internet Phone Service Threatens Industry's Giants

FCC to Consider Thorny Issue Of Whether Calls Made Online Deserve Freedom
From Regulation

By ANNE MARIE SQUEO
<http://online.wsj.com/article/0,,SB106997759940872800,00.html?mod=technology_main_whats_news>

When is a phone call not a phone call?

Federal regulators plan to tackle this thorny question Monday, when they
will hear arguments about whether and how to regulate voice calls that are
sent over the Internet. The fast-growing service 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, a system called
Voice-over-Internet-Protocol, or VOIP, is one of many technologies moving
more quickly than regulators can react. The technology converts a
conversation into digital "packets" that fly over the Internet and are
reconstructed at their destination as normal speech. 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 Internet, on the other hand, has been left largely unregulated, to
spark innovation and broad acceptance. As a result, Internet telephone
start-ups aren't subject to the same rules, fees and taxes levied on
traditional phone companies. This gives them a powerful advantage,
allowing them to charge far lower rates even as they offer similar
services such as unlimited calling and voice mail.

For example, AT&T Corp. charges 86 cents a minute for calls from the U.S.
to Botswana, according to the company's Web site; Internet phone service
Vonage Holdings Corp. charges just 14 cents. And if that call were placed
between two Vonage customers, it would be free.

"It throws the entire regulatory system into a tailspin," says Gene
Kimmelman, director of public policy for Consumers Union, the nonprofit
group that publishes Consumer Reports.

It's not just the phone giants that are worried. Federal legislators,
especially those from rural states, say that calls placed over the
Internet shouldn't be exempt from paying into a national fund that helps
subsidize phone service in less populated parts of the country. And state
regulators fear the loss of billions of dollars in tax revenue if Internet
telephony isn't subject to the fees paid by traditional phone-service
providers.

With companies and government officials staking out defensive positions,
the Federal Communications Commission 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.

VOIP providers "are not telephone companies in the traditional sense and
we shouldn't view them as such," FCC Chairman Michael Powell said in an
interview Wednesday. "That's not to say it shouldn't necessitate some
regulation, but it's a horrible, historical mistake to embrace emerging
innovations as if they're the same thing that we dealt with in 1919."

The big phone companies say that letting the newcomers go free while
keeping regulations for them and others is anticompetitive. "Where people
are using different technologies to deliver the same services the same
rules ought to apply," says Eric Schwartz, assistant vice president of
strategic market planning at BellSouth in Atlanta.

Much is at stake as the new technology spreads. AT&T and others already
are offering a form of Internet phone service to large business customers.
Cable-TV giant Time Warner Inc. is testing Internet phone service in
Portland, Maine, and Rochester, N.Y. And a number of smaller Internet
phone-service providers are making inroads.

One of the fastest-growing consumer services, Vonage, gives its customers
an adapter to turn a high-speed Internet line, either via a cable-TV modem
or a digital subscriber line from the phone company, into an Internet
phone. The privately held Edison, N.J., company has signed up 70,000
customers in the past year and says it adds more than 10,000 each month.
And about three million people have downloaded free software from Skyper
Ltd. that lets them use personal computers to make unlimited calls
world-wide at no charge to other users of the company's Skype software
(www.skype.com1) over the Internet.

Even with the growing interest, Internet phone providers say they still
represent a tiny slice of the phone business and argue that onerous rules
and requirements would stifle their development and undermine benefits to
consumers.

"The regulatory alarmists are jumping the gun a little bit," says Jeffrey
Citron, chief executive and founder of Vonage. He estimated that VOIP
residential services represent about 100,000 out of 300 million
traditional phone lines at this point. He proposes a five-year moratorium
on regulation and fees to see if the situation doesn't sort itself out.

But at this point, maintaining the current lack of controls on Internet
calls could prove difficult. In the absence of clear rules from the FCC, a
number of states have tried to start regulating the new business.
Minnesota took the lead, ordering Vonage to register as a phone company. A
federal court in that state overturned that rule last month.

In a separate but potentially related ruling, the U.S. Court of Appeals
for the Ninth Circuit, in San Francisco, recently ruled that cable-modem
Internet service is partially a telecommunications service, rejecting the
FCC's argument that it is an unregulated information service. While that
decision likely will be appealed, it could affect the current debate since
many consumers are getting their Internet phone service through their
cable box.

Write to Anne Marie Squeo at annemarie.squeo () wsj com

Archives at: <http://Wireless.Com/Dewayne-Net>
Weblog at: <http://weblog.warpspeed.com>

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