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Friday, February 11, 2005

The Outlook for VoIP: Regulatory Battles and New Competition

(Via knowledge@wharton)VoIP has grown into a more reliable product offered at rates as much as 50% lower than traditional phone service.Such savings are cause for concern among state officials who worry that as consumers drop highly taxed and regulated landline service for VoIP, they will no longer contribute to tax and surcharge revenues that the states rely upon to meet important social needs. Social obligations - supported by required contributions to the Universal Service Fund - are a collection of subsidy programs for telecommunications services in rural and high-cost areas, including, for example, broadband connections for schools and libraries as well as 911 emergency calling. The Universal Service Fund is supported partially by surcharges on certain communications services and partially by fees embedded in the rates companies pay each other to exchange telephone traffic.
"VoIP promises to be pretty scary for anybody invested in traditional wireline phone," such as the state regulatory commissions, says Gerald Faulhaber There's a lot of money here, about $5 billion to $8 billion sloshing around," part of which has always gone to the states. Fear of losing this revenue source has mobilized more than two dozen states in the US to regulate VoIP. A ruling in November by the FCC only heightened states' concern when the federal agency declared that Internet telephony service "is not subject to traditional state public utility regulation" and that the FCC "has the power to preempt state regulations that thwart or impede federal authority over interstate communications." VoIP services terminate on the public switch network and they don't pay the same rates as other carriers, they are being subsidized by those other carriers. VoIP [customers] are also being subsidized by those who use the traditional phone carriers." The goal of any state regulator, as per some states, "is to let market forces work." The idea of enhanced services in a totally unregulated space became an arbitrage opportunity, for example, for people to develop Internet telephony completely outside the realm of traditional telephone regulation," says Faulhaber. "The states are saying, 'This is a local telephone service, and we are the local telephone regulators.'"
The issue of jurisdiction aside, the prospect of taxing VoIP suddenly looms larger The Congressional Joint Committee on Taxation states that taxing voice services, but not data and Internet services, creates an "economic distortion." The most aggressive proposal that could affect VoIP suggests taxing all voice and data services because the two are becoming "interchangeable and integrated parts of modern communications." While the number of VoIP subscribers is minuscule compared to residential phone lines subscribers, VoIP's growth is likely to accelerate, driven largely by lower prices that are the direct result of light regulation. Forecasters expect the number of VoIP subscribers to increase from about one million subscribers in the U.S. now to 18 million by 2008.
Leading VoIP providers - including Vonage, cable operators like Comcast,and some regional bells - face a threat from players using innovative technologies that skirt the need for telephones or telecommunications networks at all. Services like Skype and Free World Dialup allow consumers to use software for free to connect to others over peer-to-peer networks. The companies hope to generate revenue by charging for added services, like video conferencing or calls placed to traditional phone numbers.Another nascent technology is even further out on the fringes of VoIP but carries an enviable pedigree because its creator, Jeff Pulver's new Bellster Network,however, is not yet ready for prime time due to technical installation difficulties that currently limit its general appeal. Whether any of these forms of VoIP can out-muscle traditional landline services remains doubtful largely because of the technical restrictions on Internet telephony. After all, to place a telephone call over the Internet, consumers must first have a computer connected to the Internet via a broadband connection. "I think VoIP will get a sizable piece of the market, but I don't think it will become dominant," says Faulhaber. "If anything is going to [displace] traditional wireline, it is going to be wireless because that technology is not limited to homes that have broadband." Telecom - being a trillion dollar industry always has so many lobbies working at loggerheads - added to the fact technological changes are among the fastest to be adopted by this industry and significant volume of services are targetted mostly at commoners and the impact is widely felt.

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