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Regulators Look At Internet Phone Service

Vonage In Print News

February 9, 2004

By William Glanz

Federal regulators on Thursday will weigh in on a new phone service that has caused a ruckus in the telecommunications industry.

But it is unlikely the Federal Communications Commission will resolve the raging debate about voice over Internet telephony, an unregulated phone service that is attracting consumers who find it an appealing low-cost alternative to standard phone service.

"What they're going to do is lay down a marker, lay jurisdictional claim [to the issue]," said Scott Cleland, chief executive of Precursor Group, a telecommunications research firm in the District.

AT&T Corp., Free World Dialup and Vonage Corp., the nation's largest Internet telephone company with 100,000 subscribers, have filed petitions asking the FCC to clear up the regulatory uncertainty surrounding the new phone service.

"If we don't get some clarity from the federal government pretty soon, where will we be?" asked Jeffrey Citron, chief executive of Vonage, a privately held company.

FCC Chairman Michael Powell gave some indication as to how the agency will respond to calls to regulate the service. In a letter to Rep. Billy Tauzin, outgoing Louisiana Republican and chairman of the House Energy and Commerce Committee, Mr. Powell repeated his position that the FCC must act with a light regulatory hand.

"It is critically important that we let these services develop unfettered by unnecessary government regulation, and apply only the minimum oversight necessary to ensure that consumers receive the unparalleled benefits that [Internet] tele-phony services offer," Mr. Powell wrote.

Among the issues the FCC must determine, the most difficult perhaps is whether to classify Internet calling as a data service. If the FCC says Internet calls are a data service, the calls would be exempt from access fees, the charges that long-distance carriers pay to local phone companies to connect calls.

Regional Bell operating companies don't think that's fair, Verizon spokesman Larry Plumb said.

"It's a sense of fairness. You buy phone service, and part of what you pay is controlled by a regulator," he said.
Standard access charges on interstate calls are one-half cent a minute to originate a call and one-half cent a minute to end a call.

A federal judge in Minnesota ruled in October that Vonage is a data service and exempt from regulation in that state.
The FCC also must decide whether Internet phone companies have to contribute to the universal service fund, a program funded by taxes on most phone bills to subsidize phone service in rural areas and for the poor.

Regulators also must decide whether Internet phone companies are required to make 911 service work on their networks and whether law-enforcement officials can tap Internet phone calls.

It's simply too early to regulate Internet phone service, Mr. Citron said during a luncheon speech last week. But Vonage would pay into the universal service fund and find a way to let subscribers place 911 calls with the Internet phone service, he said.

State regulators and incumbent phone companies are loath to give Vonage a regulatory pass.

"We think the communications market is unbelievably competitive right now and all providers should be playing on a level playing field," said Allison Remsen, spokeswoman for the U.S. Telephone Association, which represents local phone companies.

The regulatory uncertainty hasn't slowed down Vonage. Mr. Citron predicted the company will have 400,000 subscribers by the end of the year.

"We clearly have a lead, and it's going to be hard to catch up with us," he said. "We like this market. We're going to be aggressive and we're going to make a lot of money."

Others are racing to catch Vonage. AT&T Corp., Qwest Communications and SBC Communications Inc. were among the companies late last year that announced plans to introduce residential Internet telephone service.

The number of Internet telephone subscribers nationwide is not clear because the service is not regulated, Mr. Cleland said.

But the potential for growth is significant. Subscribers must have a high-speed Internet connection to use Internet phone service, and about 20 million U.S. homes have broadband service now.

The market for phone calls over the Internet is expected to rise to $15.1 billion by 2007 from $3.3 billion in 2003, according to technology researcher IDC.

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