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Grappling With VoIP


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Grappling With Voip
Rise Of Internet Services Causes Stir Among Phone Companies, Regulators


April 1, 2004

By Kevin Rademacher

Las Vegas businessman Maurice Gallagher watched with interest recently as telephone companies struggled to extract meaning from a U.S. Appeals Court ruling.

The order, which is subject to a U.S. Supreme Court appeal, could limit competitors' access to the telephone networks created by former monopoly providers. Those dominant providers hailed the ruling as a return to fair play.

Competitors, and some consumer groups, said it could put an end to competition and spark higher phone rates.

Gallagher, who nine years ago helped launch the competitive phone company that would eventually become Mpower Communications, said they could all be wrong as a new technology threatens to render those coveted networks obsolete.

"I'm not sure it all means much," he said. "With the Voip sector developing, the network requirements are changing."

Voice-over Internet Protocol -- Voip -- allows customers to make local and long distance calls using a broadband Internet connection instead of traditional telephone lines.

The service had been considered a fringe telecommunication offering. Recent advances in the technology, however, have improved sound quality and created a formidable competitor.

Voip has created a stir among phone companies whose role in an evolving market could be limited. It also has regulators scrambling to figure out how to manage -- and tax -- the service.

"It's a melting pot of stuff," Gallagher said. "And the last battle has not been fought."
Not even close.

On federal, state and local levels debates are raging over several key points surrounding VoIP. Those center around the creation of mechanisms to require Voip companies to pay into funds that support 911 emergency services, as well as include 911 features on the Voip service. Other issues involve allowing law enforcement agencies access to Voip lines for wiretapping and enforcing existing mandates for providing service to those with disabilities.

Many regulators also want Voip providers to contribute to a Universal Service Fund that subsidizes phone service to rural communities.

Federal Communications Commission Chairman Michael Powell has promised to tackle those issues in an ongoing rulemaking proceeding. He has indicated, however, that efforts to tax the new technology will be looked on with skepticism.

Similarly, Senate Bill 150, which is making its way through Congress, would declare Internet telephony part of the existing tax-free environment that dominates the World Wide Web.

"In examining Voice-over IP, we should begin with the non-regulation of the Internet as the first article of faith because limiting government intrusions -- both at the federal and state level -- maximizes the potential for innovation and increases opportunity for the nation as a whole," Powell said in recent comments to the Senate Committee on Commerce, Science and Transportation.

Powell's approach has been called a "soft touch." Recent comments from Nevada Gov. Kenny Guinn, however, indicate the soft touch could be expensive. He said Nevada stands to lose more than $22 million to $50 million in annual telecommunications tax revenue as Voip gains ground.

Sprint, the dominant local phone company in Las Vegas, paid 2003 franchise taxes of $13.6 million to Clark County, Las Vegas, North Las Vegas, Boulder City and Henderson, company officials said.

"It changes the whole equation," Greg Bortolin, spokesman for the governor, said.

Existing phone companies -- such as Sprint -- have complained that allowing Internet-based calls to escape municipal taxes, as well as paying access charges to complete calls that must go through the existing network, create an unfair advantage for Voip providers.
In a corporate statement, Sprint said that Internet voice services should be considered telecommunications services and be subject to access charges, Universal Service Fund contributions and 911 obligations.

Sprint, however, offers broadband service of its own and has indicated that, should Voip continue to be afforded a competitive advantage, it will begin to expand its currently limited offering of Voip service. Currently, Sprint does not offer Voip in Las Vegas.

Voip providers, however, said that burdening the emerging technology with regulations and taxes will kill progress.

"If full-bore regulaton went into place right now, it would kill the industry," said John Rego, chief financial officer for New Jersey-based Vonage, the nation's largest Voip company. "There would be no point."

Cox Communications in Las Vegas has debated offering Voip through its cable modem service. Steve Schorr, the company's local vice president for government and public affairs, said burdensome new regulation could end those plans.

"The best way to kill a new technology is to regulate it," he said. "(VoIP) is a wonderful technology. It's the future."

Today only about 160,000 U.S. households receive phone service through VoIP, and about 60 percent of those homes are served by Vonage. That compares to about 187 million wireline phone lines in the country. The industry's growth lies in the 24 million homes currently receiving broadband service.

Industry experts predict that 4 million homes will be placing Internet-based calls by the end of the year.
With those growth projections, Gallagher has taken on a role in financing a Las Vegas-based Voip company -- CommPartners. That firm expects to begin offering service through a national network of broadband partners by mid-summer.

David Clark, president of CommPartners, said that with the industry's strong growth projections, taxing authorities will find a way to collect their share.

"It's hard to believe that states are going to just watch their taxing pool drift away," he said.

Rego also pointed out that Voip companies are paying regulatory fees and taxes, albeit indirectly. Internet carriers, in order to complete long distance calls to lines served by a traditional phone network, must strike partnership deals with carriers that have access to those lines.

Those companies are including those taxes and fees in the long distance access deals, he said.

As Voip begins to dominate the telecommunications market, there could be a time when it is necessary for the Internet carriers to pay additional fees, Rego conceded.
"Part of that question is when is that time," he said. "We don't think it's now."

In some states, such as Minnesota, regulators have taken an aggressive approach in handling the Voip push, tacking on a charge of 50 cents per Internet-based call.

Since no one has requested an inquiry by the state Public Utilities Commission, Nevada regulators will likely take their cue from the results of the FCC's rulemaking proceeding.

"We now have the luxury of sitting back and waiting to see how the FCC proceeding comes out," Charles Bolle, a policy advisor for the Nevada commission, said.

That will ultimately save the state from backtracking in order to comply with the federal rules that should come within 18 months.

"The FCC could ultimately overrule all the regulations put in place by the states," Bolle said. "If that happened after we went through hearings, we would have wasted everybody's time."

That tactic apparently satisfies Nevada lawmakers.
"Unless we start to see (VoIP) companies do things that are anti-competitive or anti-consumer, I don't see any need to impose new regulations," Assemblyman David Goldwater, D-Las Vegas, 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 www.vonage.com/911 for details.

** Certain call types excluded.

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