Rego explains that the question of whether VoIP is an information service (an application that should not be regulated) or a telephony service (a piece of the network that should be regulated) is still being debated.

Rego expects the FCC to leave VoIP unregulated, but to produce rules in specific areas where the federal government has an interest, such as 911 and CALEA (enabling the government to do a wiretap).

Out with the old, in with the new
Jason Talley, CEO of Nuvio, another VoIP company that is also lobbying the FCC, told ISP-Planet that the real problem is that the regulatory structure is old, and does not fit the new technology.

"Copper in the ground was physically located in a state, and the state could exercise some jurisdiction over it. The FCC had jurisdiction for encouraging the provision of a nationwide system. The whole regulatory structure dates back to the nineteenth century."

VoIP breaks out of this system, because, like the Internet, it crosses borders. "Is jurisdiction dependent on where the customer is located, where the service is offered, where the connection to the PSTN is made, or where the business is located? None of these works. If one state exerts jurisdiction based on where a company is located, and another based on where the customer is located, you could have dueling jurisdictions."

On the other hand, VoIP may simplify some issues. Wiretaps, for example, are easy. "We could come up with a system that would be more efficient. Currently, law enforcement has to tap a phone call to allow an investigator to listen in. That requires going to a switch. With VoIP, just tell us where to send a copy of the media stream. We could send it to the DoJ in D.C., or to FBI headquarters, or to a local FBI field office."

"VoIP looks and feels like a telephone service, but it's a new medium and it doesn't fit in the same phone box we've used for the past hundred years. So you have you want to construct a new box," concludes Talley.

But if the RBOCs fail to get the FCC concerned about potential revenue losses, they're also raising the issue with their investors. In its latest quarterly SEC filing, SBC notes that one threat to revenue is "The ability of our competitors to offer product/service offerings at lower prices due to adverse regulatory decisions, including state regulatory proceedings relating to UNE-Ps and non-regulation of comparable alternative technologies (e.g., VoIP)."

Experts expect some revenue erosion, but not on the scale that the RBOCs are hinting at. Competitive DSL providers have less than 10 percent of the market, and competitive VoIP providers will eventually do better, but not quickly. Joe Laszlo, Jupiter Research Senior Analyst, tells ISP-Planet that he forecasts 400,000 U.S. households will be using VoIP by the end of 2004, about 0.3 percent of the market. In five years, by the end of 2009, that number will rise to 12.1 million, but even that will be only 10.1 percent of the market.

Vonage's Rego is more optimistic (but you'd expect that from a VoIP provider). He says that VoIP will be used for 30 to 40 percent of all calls by 2009. In fact, both Laszlo and Rego could be right. If the heaviest users switch to VoIP, the per user minutes generated by VoIP users will relatively high.

Rego says VoIP service doesn't need to be better than landline. "Look at the cell phone industry. Today, there are more cell phones than wireline phones. The quality of calls are lower, but more people have cell phones, and 5 percent have cell phone only. The public is suggesting that call quality may not be what's most important. It's price and features, and that's what we VoIP providers bring to the table."

But VoIP is just the start of what should be a long fight over a large number of applications. That's exactly the future that Talley predicts. "This is a significant starting off point for what we view as a regulatory overhaul that will allow broadband to flourish. VoIP is the first salvo, but video will be an issue too. People what to be able to choose."

EarthLink agrees. The blog BoingBoing noted yesterday that EarthLink has developed a P2P file sharing application and posted a manifesto. The manifesto says in part:

EarthLink believes an open Internet is a good Internet. An open Internet means users have full end-to-end connectivity to say to each other whatever it is they say, be that voice, video, or other data exchanges, without the help of mediating servers in the middle whenever possible.

The dinosaurs survive and the mammals die
But Bruce Kushnick of TeleTruth believes that the RBOCs' success in owning DSL shows that they have the clout and the will to take control of applications like VoIP too.

Partly, it will depend on pricing. If the RBOCs are able to force customers to buy their VoIP in a basic bundle, companies like Vonage may find it difficult to sell a VoIP package to customers who already are paying for VoIP.

And then there's the federal government. "Congress will tax everything," Kushnick predicts. In fact, he says, it already has, and it isn't checking to see that the phone companies are collecting only what they're allowed to.

"A large portion of the USF goes back to the phone companies. In rural, areas, they have an EBITDA of about 55 percent, and almost half of that is USF. And this fund has never been audited."

Cable companies, too, Kushnick notes, may be able to force customers to buy their VoIP service as part of a bundle.

Finally, there's the issue of cross-subsidy. If a cable company raises the price of basic cable, it could offer VoIP as a free add on. "The Bell phone company's SEC filings don't explain how they built a new business, long distance, essentially for free. That's because the Bell companies enjoy the ability to cross subsidize all of their new businesses."

Kushnick foresees a bleak future. "The long distance companies will be taken apart, and only the Bell and cable companies will survive."

— End

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