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Internet Phone Victory

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Internet Phone Victory; FCC Says Firms Not Subject To State Regulations, Taxes

November 10, 2004

By Todd Wallack

Federal regulators sent a powerful message Tuesday to California and other states to leave the fledgling Internet telephone industry alone for now.

The Federal Communications Commission voted unanimously to support a request by Vonage Holdings Corp., one of the largest Internet telephone providers, to classify the technology as an interstate service, exempt from most local regulations.

The move bars California and other states from treating Vonage, Santa Clara's 8X8 Inc. and other Internet telephone providers like traditional local phone companies, such as SBC Communications and Verizon Communications, which are subject to an array of local regulations and taxes.

The California Public Utilities Commission had previously asked Internet telephone providers to register with the PUC, and decided in February to launch a formal investigation into how it should regulate the industry. Some other states and cities have also taken tentative steps toward regulating Vonage and other services using so-called voice-over-Internet protocol or asking them to collect taxes from customers.

FCC Commissioner Kathleen Abernathy, a Republican, said streamlining regulation of such companies will help the industry grow. "By fencing off these services from unnecessary regulation, this order will help unleash a torrent of innovation," she said.

Susan Kennedy, a PUC member who is also generally wary of regulation, also supported the move. "The FCC did the right thing today. We need a uniform national framework" to help Net phone technology develop further.

Several companies and investors cheered the decision. Stock in 8X8, which has 26,000 Internet telephone subscribers, soared 23 percent Tuesday.

Still, two Democratic commissioners on the FCC expressed concerns that the ruling didn't address other issues facing Net phone providers, such as whether they need to pay into a fund to subsidize rural telephone service or offer emergency 911 service.

"The commission's constricted approach denies consumers, carriers, investors and state and local officials the clarity they deserve," Commissioner Michael Copps said. "These issues can't be ducked and they can't be dodged if we are truly serious about these technologies."

Consumer watchdogs also criticized the decision. Janee Briesemeister, senior policy analyst for Consumers Union, said the FCC "tied the hands of state regulators" trying to protect customers.

This week's FCC decision won't necessarily block all state regulation.

It's possible the states could still play an important role in investigating customer complaints and penalizing companies that mislead consumers, just as they sometimes do with long-distance providers.

The FCC won't decide until later whether to classify Net phone technology as an interstate phone service, similar to long-distance companies subject to some regulations, or an information service that is largely exempt from state and federal rules.

"The ruling is 50 percent of the battle," said 8X8 chief executive Bryan Martin. "The first thing we had to decide is, who is going to set the rules. The issue that remains is what are those rules.

The decision also does not address the controversial issue of access charges, or how much Internet telephone providers must pay traditional phone companies to complete calls to their lines.

Vonage has been battling public utilities officials in Minnesota, who want the company to register in the state as a telecommunications service, subjecting it to rate regulation and other state rules.

The company argued its service is interstate because customers can make calls from any place that has a high-speed Internet connection. That means there's no way to tell whether a customer who has a billing address in Minnesota is making a call from that state or another one, the company 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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