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FCC: Telecom Or Information Service?

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Net Calls Put Regulators In A Quandary
FCC Considers Whether They Are Telecom Or Information Service

September 19, 2004

By Joelle Tessler

Internet phone calls could be the biggest thing to hit telecommunications since Congress began deregulating the industry in 1996.

Rock-bottom prices and features such as the ability to check voicemail online and make local phone calls from anywhere in the country promise to draw millions of callers onto the Internet. But one big question mark is hanging over this booming market: how to regulate it.

Should Internet phone ventures, like traditional phone companies, be forced to offer 911 service and accommodations for the disabled? Should they be required to build wiretapping capabilities into their networks? What taxes and consumer protections should apply?

The Federal Communications Commission, state utilities regulators and Congress are walking a fine line as they sort out these thorny issues. They don't want to compromise public safety or allow the Internet to become a hiding place for criminals and terrorists. But they also seek to avoid costly regulatory burdens that would unduly hinder the market's growth.

"It's clear that neither legislators or regulators want to see the technology handcuffed because it's good for consumers," said Stephen Greenberg, chief executive of Net2Phone, a Newark company that provides cable companies with technology to offer their customers Internet telephone service. "It's a quality product at a cheap price."

Net2Phone is one of a wide range of companies with a stake in the debate. Others include startups such as Vonage, Skype and Then there are the Baby Bells and cable companies, which are also rolling out Internet telephone service.

All of them are watching the FCC, which wants to keep regulation to a minimum and in February opened an inquiry.

Ultimately, if the FCC classifies Internet phone calls as a "telecommunications service," traditional rules will apply. If the FCC deems them an "information service," they will remain largely unregulated.

The FCC already decided this year that a service like's Free World Dialup -- which sends phone calls exclusively via the Internet and bypasses conventional phone wires altogether -- is an information service.

It also ruled that phone calls that start and end on traditional phone networks but travel via data lines aren't exempt from the access charges -- the fees paid to the Baby Bells to hook up to their networks -- that apply to regular phone calls.

What the FCC is still trying to determine is how to classify phone calls that start on the Internet and end on an old-fashioned phone line. Those are the calls driving much of the market's growth. Frost & Sullivan, a consulting firm, projects there will be 16 million residential subscribers to Internet phone service in 2008, up from 1.1 million this year.

Ava-Marie Madeam, a staff attorney with the New Jersey Ratepayer Advocate's office, said she believes consumer-protection rules are good for the market. "If the public is to have faith in this new technology and give it a try, there need to be consumer protections," she said.

Consumer advocates say most people don't distinguish between traditional phone calls and Internet phone calls and expect the same basic level of service and the same features from both.

This issue is highlighted by the 911 dilemma. In an emergency, most people assume they can dial 911 from any telephone and the dispatcher will know where they are calling from.

Most Internet phone companies offer basic emergency service, routing emergency calls to a 911 dispatch center. But the ability to access Internet phone service from any Web connection means providers may not be able to offer "enhanced" 911 service, which enables emergency personnel to track a caller's location and call-back information.

Providing these capabilities is crucial if Internet telephone service is to be a real replacement for traditional local phone lines, said Frost & Sullivan analyst Jon Arnold. That has companies such as Vonage trying to develop the technology to make enhanced 911 possible.

Madeam said the debate about regulation also comes down to fairness. Under current rules, telecom companies must pay taxes and access fees to the Baby Bells to help maintain the public phone network. They also must contribute to the universal service fund used to ensure everyone has access to phone service.

Services that never touch traditional phone wires -- such as's Free World Dialup -- should be exempt from these charges because they don't place a burden on the public phone network, Madeam said. But most Internet calls begin online and end on traditional phone wires and should therefore be subject to fees and taxes to help support the network, she said.

"It's a social obligation," Madeam said.

Executives in the Internet telephone business believe the traditional telecom rules shouldn't apply to them. For one thing, Vonage Chairman and Chief Executive Jeffrey Citron said Internet phone service is more like e-mail than conventional phone service.

And Jeff Pulver, founder of, fears too many rules and taxes would drive up the cost of doing business and push up prices for customers -- scaring away investors and stifling innovation.

"This industry is way too immature to consider regulation," he said. "Why regulate something that is so new?"

Regulation is unnecessary, he said, because the Internet phone market has plenty of competition, unlike the traditional local phone business, which is a monopoly.

The industry is particularly determined to block states from exerting regulatory control, arguing Internet calls cross state lines. Already, Vonage has won court rulings preventing New York and Minnesota from regulating its service.

"We need to know that we can invest in this and not have to deal with 50 different sets of rules and regulations on a state-by-state basis," said Net2Phone's Greenberg.

For now, it's unlikely that the Internet telephone business will escape regulation altogether. The FCC already tentatively concluded the 1994 law requiring telecom carriers to build basic wiretapping capabilities into their networks should apply to Internet phone companies.

Still, the issue is far from resolved, with the FCC just beginning a thorough examination of the wiretapping debate and the broader issues still to be addressed.

Pulver, for one, is confident the government watchdogs will figure out how to protect the market without hurting it.

"The people in D.C. have a keen sense of what's at stake, and they are destined to get it right," he said.

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†AK and HI residents pay $29.95 shipping. ††Limited time offer. Valid for residents of the United States (&DC), 18 years or older, who open new accounts. Offer good while supplies last and only on new account activations. One kit per account/household. Offer cannot be combined with any other discounts, promotions or plans and is not applicable to past purchases. Good while supplies last. Allow up to 2 weeks for shipping. Other restrictions may apply.

1Unlimited calling and other services for all residential plans are based on normal residential, personal, non-commercial use. A combination of factors is used to determine abnormal use, including but not limited to: the number of unique numbers called, calls forwarded, minutes used and other factors. Subject to our Reasonable Use Policy and Terms of Service.

2Shipping and activation fees waived with 1-year agreement. An Early Termination Fee (with periodic pro-rated reductions) applies if service is terminated before the end of the first 12 months. Additional restrictions may apply. See Terms of Service for details.

HIGH SPEED INTERNET REQUIRED. †VALID FOR NEW LINES ONLY. RATES EXCLUDE INTERNET SERVICE, SURCHARGES, FEES AND TAXES. DEVICE MAY BE REFURBISHED. If you subscribe to plans with monthly minutes allotments, all call minutes placed from both from your home and registered ExtensionsTM phones will count toward your monthly minutes allotment. ExtensionsTM calls made from mobiles use airtime and may incur surcharges, depending on your mobile plan. Alarms, TTY and other systems may not be compatible. Vonage 911 service operates differently than traditional 911. See for details.

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