Powell's VoIP 411: Limit the Regulation

1/18/2004 7:00 PM Eastern

Just in case some folks were on the other line, Federal Communications Commission chairman Michael Powell proclaimed once again that he's not interested in heavy regulation of Internet-delivered phone calls.

In a speech here last Wednesday, Powell said that widespread consumer access to voice-over-Internet protocol (VoIP) services should become a reality prior to the adoption of government regulations, because rules now instead of later might actually hinder the rollout of the hottest new communication product in years.


Powell, whose VoIP evangelism began in early December, explained that the promise of Internet phone calling was profoundly important to consumers and that government had to demonstrate an abundance of caution in response to claims that VoIP was no different from traditional phone service and deserved comparable regulation.

"If the consumer stands to benefit significantly from Internet voice, we should let it blossom," Powell told a National Press Club audience that included lobbyists from cable companies and a cross-section of telecom players with an interest in VoIP regulation. "The burden should be placed squarely on government to demonstrate why regulation is needed, rather than on innovators to explain why it is not."

A hands-off policy would save VoIP providers a bundle. Cost savings could come from exemptions from payments into the multibillion-dollar universal service fund and from payments to other companies for handing off voice traffic.

Costs can also pile up in outfitting VoIP with 911 services and technology to help the FBI track criminals and terrorists who use the Internet. Hiring lawyers and lobbyists to tangle with 51 state authorities also has its costs.


Powell's insistence upon a VoIP market totally unfettered by regulations has its limits, especially with regard to national security. Universal service, the program making phone service affordable everywhere in the U.S., is another Powell favorite.

"We should promote a society where every single American can affordably connect everywhere they go," said Powell, who did not elaborate on how VoIP providers or customers should kick in to the fund.

But with respect to the reams of regulations that built up around monopoly phone carriers, Powell said that tradition should not apply to VoIP.

"Don't shove the round Internet into a [square] regulatory hole," he said. "Do not dumb down the genius of the Net to match the limited visions of the regulator."

VoIP comes in several flavors, all of which take advantage of broadband connections provided by cable and phone companies.

Computer-to-computer VoIP involves loading software and using headphones and microphones to talk.

Phone-to-phone VoIP entails plugging the broadband wire and the traditional phone wire into a set-top device to achieve compatibility.

In these examples, voice conversations race across the Internet or private IP networks as packets, just like e-mail or instant messages.

Over the last year, interest in VoIP has exploded in reaction to quality improvements and declining deployment costs, relative to the costs of provisioning the circuit-switched phone service that has been a telecom staple for a century.

Comcast Corp., Time Warner Cable, Cablevision Systems Corp. and Cox Communications Inc. are all expected to be major VoIP players among traditional cable companies. The Baby Bells, AT&T Corp., MCI Inc. and Sprint Corp. plan to offer their own VoIP products in response to cable's moves.

But the regulatory status of VoIP and the regulatory burdens providers will need to shoulder could have a large impact on how and when companies deploy VoIP and how much they charge.

Sorting out the regulatory issues is the FCC's job. But the agency's ruling will likely be trailed by years of litigation that could reach as high as the U.S. Supreme Court.


Powell has the FCC positioned to begin the regulatory work soon. Prior to his speech, he told a few reporters that he expects the agency to release a notice of proposed rulemaking in February.

A threshold issue is the level of government at which the regulatory treatment of VoIP will be decided. States have traditionally shared jurisdiction in regulating local telephone companies.

In a sign he's prepared for a turf battle with the states, Powell indicated that he was not sympathetic to expanding state authority to include VoIP.

"It is a global network, not a local network," he said. "To regulate the Internet in the image of a familiar phone service is to destroy its inherent character and potential."

A spokesman for the National Association of Regulatory Utility Commissioners (NARUC) declined to provide a specific reaction to Powell's speech.

"We just need a debate on this. State regulators have a valuable place in this," the NARUC spokesman said.

Some companies are fighting with state regulators. Vonage Holdings Corp. — for now a niche VoIP player that had a promising 2003 — took Minnesota to court after the state blocked the company from signing up more VoIP customers until it complied with laws governing telephone companies. A federal judge issued an injunction in support of Vonage, ruling that Congress intended a minimally regulated Internet.


Time Warner Cable, by contrast, has adopted a cooperative approach, in that the No. 2 cable company has gone to state regulators seeking certification as a competitive local-exchange carrier until the rules governing VoIP are no longer in limbo.

"If and when we are granted approval, we voluntarily remit the associated taxes and fees to the appropriate governing authority," said Time Warner Cable spokesman Keith Cocozza.

To the extent states are ultimately barred from regulating VoIP, Time Warner Cable expects to change its current policy.

"If the states and/or the FCC rule that VoIP offerings should not be regulated in the same manner as traditional phone service, we will be able to adjust accordingly," Cocozza added.

In financial terms, cable companies see VoIP generating operating margins of 40% and recovering its capital expenditures with 24 months.

Cox, cable's most aggressive proponent of circuit switched-telephony, joined the VoIP bandwagon in December with a commercial launch in Roanoke, Va., charging $39.95 a month for unlimited local and domestic long distance service to cable-modem subscribers who are also Cox video customers.

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