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FCC's First Public VoIP Forum

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Speaking At The FCC's First Public Voip Forum, Chairman Michael Powell Said "As One Who Believes Unflinchingly In Maintaining An Internet Free From Government Regulation, I Believe That IP-Based Services Such As Voip Should Evolve In A Regulation-Free Zone

December 2, 2003

By Staff

Speaking at the FCC's first public Voip Forum, Chairman Michael Powell said "as one who believes unflinchingly in maintaining an Internet free from government regulation, I believe that IP-based services such as Voip should evolve in a regulation-free zone. No regulator, either federal or state, should tread into this area without an absolutely compelling justification for doing so.

Innovation and capital investment depend on this premise." Powell advocates the adoption of the medical creed "do no harm" to avoid poisoning the innovative technology with regulations. He said the burden of proof should be on those wishing to impose regulations rather than service providers arguing why they should be exempt.

FCC Commissioner Michael Copps said "what we have here today is a wake-up call. The network is evolving. The long-awaited convergence of voice, data and video onto Internet-based networks is on the verge of turning the pipe dreams of just a few years ago into new commercial reality...we do no favors to anyone if we sit back and practice benign neglect. It’s both pro-consumer and pro-business for the Commission to bring clarity to this dialogue."

FCC Commissioner Jonathan Adelstein said "I hear the arguments that allowing this technology to move forward free of any regulatory constraints would encourage its development, availability and use. On the other hand, such “hands off” treatment could mean we are undercutting the safety of consumers, law enforcement and national security, and the integrity of the underlying network and the universal service funding mechanism."

Voip is nearly a decade old, said Kevin Werbach, Founder of the Supernova Group, and nearly seven and a half years have elapsed since a group called ACTA filed the first petition asking the FCC to ban calling over the Internet. The FCC was right to reject that petition, said Werbach, saying the greatest threat to Voip now is not FCC action, but FCC inaction. Voice should not be confused with traditional POTS, he said, noting that voice is just one type of data traffic in the new packet world. "It is a useless exercise" to try to put various packets into different regulatory buckets. The FCC needs to step back and think again about how to implement a new set of rules for this new environment.

Voip is starting to deliver on its promise of transforming the way in which we communicate, said Charles H. Giancarlo, SVP & General Manager of Cisco Systems. It is not just another means of transmitting cheaper phone services. He believes Voip will fundamentally change the economics of providing phone services to consumers and that it will increase competition. Giancarlo listed a whole range of new applications that combine voice and data into a richer service, such as touch screens with directory services, high-definition voice quality, presence-information in telephony, one number availability or follow-me service, video between phones, online gaming with voice, etc.. He argued that Voip permanently lowers the cost of providing voice services and changes the economic basis for charging customers. Instead of paying for time and distance, new metrics such as services and bandwidth will now apply. Giancarlo said service providers know that they must evolve quickly to survive. He recommends that regulators shift their focus to ensuring broadband access for all.

Jeff Pulver, CEO of and publisher of The Pulver Report, put forth several positions on VoIP, including setting a temporary regulatory moratorium for VoIP; endorsing an agreement that has been reached between the Voip industry and emergency officials on providing enhanced 9-1-1 services to users; and setting a uniform regulatory approach to Internet communications that treats each communication method (voice, data, video) equally. He observed that IP communication features are becoming part of everyday consumer appliances, such as game terminals, cameras and PDAs.

"VoIP presents the RBOCs with their greatest challenge yet," said John Hodulik, Managing Director, Communications Group for UBS Investment Research. "While they stand to benefit from Voip as an insurgent technology in the business market, their dominant share of the consumer market will erode at a faster rate as this technology is deployed." Hodulik argued that the "de-coupling” of services from the underlying physical transport infrastructure dramatically lowers barriers to entry for new competitors and turns on its head the relationship between profitability and investment intensity in the telecom sector. He predicts operating cash flow margins in the sector will fall as local service revenues contract. UBS estimates that local voice and switched access revenues generate approximately 60-65% of Bell wireline revenues and at least 75% of the profits. It will be difficult for incumbent carriers to replace these profits with new services, which typically have lower margins. He also predicts that even if the regulatory environment for Voip remains uncertain, the incentive for incumbent carriers to shift traffic to IP-based platforms will remain strong.

Time Warner Cable believes that Voip services by cable operators will enable facilities-based residential local phone competition on a national scale, said John K. Billock, COO of Time Warner Cable. Time Warner initially deployed a residential circuit-switched telephony service in Rochester, New York in 1993. In May 2003, Time Warner Cable began offering residential Voip in Portland, Maine. Time Warner's Voip already supports enhanced 911 services. The company is contributing to both state and federal Universal Service Funds and it permits authorized law enforcement agencies to capture both call identifying information and call content. So far, 7,200 customers in Portland have signed up and 70% have ported their old home telephone numbers to the Voip service. Time Warner is planning additional Voip rollouts in the coming months. Time Warner currently provides cable modem service to some three million customers.

"VoIP is an irresistible force like gravity," said Michael Gallagher, Acting Assistant Secretary, Department of Commerce, because it delivers tremendous operating savings to carriers and new applications for users. However, he said "if Voip is gravity, legacy regulations are inertia" The Department of Commerce believes that Voip can unleash tremendous growth and efficiency gains in the nation's economy if the service is regulated correctly. Gallagher said it is especially important to ensure that IP does not become the "red light" district of telecommunications. He said the FCC needs to move fast to head off the regulatory arbitrage that will result if a patchwork of state and local rules emerges. He called for consistency across the range of convergence technologies. Gallager also argued that regulatory uncertainty for Voip ultimately harms investors, consumers and industry participants. He warned regulators not to let the Voip opportunity move offshore as this would hurt national competitiveness, lead to the loss of U.S. jobs, and raise homeland security issues.

Among all the panelists, Carl Wood, Commissioner with the California Public Utilities Commission, was the strongest advocate for regulating Voip services. The California PUC is currently asserting its authority over several Voip providers and proceeding are underway. Wood argued that regulations should be technology neutral. He noted that the evolution from analog to digital technology did not lead to carriers being exempted from existing regulations. The same could be argued for mobile service providers, who also must follow a long list of regulations. Wood said that unregulated Voip services threaten a long list of state services, including rural access, universal service fund access, and programs that provide Internet access for public schools and libraries.

Unregulated service providers could also undermine the enhanced 911 emergency services that have taken decades to develop. Wood also argued that 30 to 50% of the operating budgets for rural ILECs in California come from the access fees that Voip providers are refusing to pay. If they lose this support, Wood believes the rural carriers will either need to raise their fees substantially or be driven out of business. Finally, he argued that RBOCs will cannibalize their existing customer base if Voip is left unregulated, leading to a fast collapse of the existing telecom regime. The solution, he believes, is not to treat regulation like a single ON/OFF switch. Different regulations apply to RBOCs, ILECs, IXCs and wireless carriers. He believes it would not be unusual to have new regulations tailored just for Voip providers.

Charles Davidson, Commissioner for the Florida Public Services Commission, took the opposite view arguing that a "hands-off" approach is best at the state level. Unlike Minnesota and California, Florida is pursuing the position that "free market competition benefits consumers far more than regulatory tweaking." Davidson noted that Voip is not tied to state and local boundaries; the build-out of the new Voip infrastructure is not the result of public subsidies; and the new environment is not a monopoly and is already thriving with competition. To address law enforcement and e-911 concerns, Davidson argued in favor of a federal Voip regulatory regime "with a light touch." Regarding universal service fund obligations, Davidson called for a reassessment of its long term goals, noting that any extension of USF should not constitute a new tax but a merely a shift in the burden of who should pay for it.

The fate of many industry participants depends on the outcome of this debate, said James Crowe, CEO of Level 3. He observed that many people will remain in favor the existing telecom subsidies, although his hope is that the future will belong to the innovative Voip providers. Still, he believes the correct approach for regulators is to be sensible to both points of view. Voip should support e-911 and the FCC also should insist on packet equivalents for law enforcement obligations. Crowe said Level 3 believes there should be reform of the Universal Service Fund mechanism, basing future charges on transport rather than access fees. Intercarrier compensation issues must also be addressed. Crowe agreed that the FCC should maintain a "light touch."

The long standing U.S. government policy of "hands off the Internet" has been a tremendous successes, said Tom Evslin, CEO of ITXC and VON Coalition, and imitated in many countries. The FCC has followed this policy of regulatory forbearance especially well, said Evslin, but the time has come to make that forbearance an explicit policy rather than just a tacit understanding. He argued that Voip has been a force for demonopolization and competition all around the world. For instance, Voip has enabled competitors to enter markets such as India, where costs for in-bound calls have fallen by 60% due to competition. He also predicted that Voip will make it possible and necessary for RBOCs to compete against each other in local services across the nation. Evslin observed that Voip is an accelerator of broadband deployment, especially as evidenced in Japan. He also observed that IP has an excellent track record of innovation, which will ultimately provide better answers for access for the disabled or enhanced emergency services. Finally, Evslin said the "quacks like a duck" argument in favor of Voip regulation is intellectually broken -- "the record tells us to continue the success of the forbearance policy."

The question should not "be how to regulate VoIP" but "why regulate VoIP", said Jeffrey Citron, CEO of Vonage. He noted that the incumbent carriers are joining the Voip race, bringing the competition that the Telecom Act of 1996 originally aimed to achieve. Citron warned that imposing regulations on Voip would open "a Pandora's Box of regulation for the Internet," perhaps extending to email, instant messaging, web conferencing, etc. He also said that CALEA and e-911 compatibility should not be used as excuses to impose regulations, as both of these areas are being addresses by Voip carriers, sometimes in ways that are better than legacy providers. Citron also argued that access charges and carrier compensation mechanisms need to be reevaluated. Why should it cost more to connect a local call of less than one mile than an international call traversing 6,000 miles? Citron urged the panel to reject "unsound calls" to regulate VoIP. He also noted that Vonage is already providing service and U.S. phone numbers to many people outside of the U.S. and in countries where it has no physical facilities what so ever. Conversely, it would be just as easy for an overseas Voip provider to capture U.S. customers, and neither the FCC nor state commissions would be able to stop it easily.

Regulatory obligations must be preserved to ensure that the disabled are given full access to new telecom services, said Dr. Gregg Vanderheiden of the University of Wisconsin. For example, hearing aid compatibility for telephones was lost when mobile phones appeared on the market because the regulations were not specifically extended to cover mobile network providers. Similarly, people with visual disabilities cannot tell when they are going to be hit with expensive roaming charges because market forces have not provided adequate solutions for their needs. In such instances, regulations are needed for the social good. Vanderheiden said Voip inherently provides some advantages for the disabled and, even without regulations, some industry participants are working toward extending access for the disabled. Still, if service providers are not required to make their services accessible to the disabled, often they will choose not to do so for competitive reasons. Vanderheiden believes IP will be far easier to adapt to the needs of disabled than any previous technologies. For instance, software changes to a Voip server could make every IP phone capable of supporting text text-to-speech services for the deaf. He believes it is necessary and prudent to carry forward regulations for the these services.

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