It's almost an iron law of modern telepolitics: Innovation attracts regulation.
For a while, firms that helped people complete calls over the Internet could function like traditional phone companies, but with none of the regulatory migraines.
That deregulatory bliss is coming to an end.
Federal Communications Commission chairman Michael Powell said last Wednesday he would embark the agency on a mission to classify voice-over-Internet protocol telephony within the meaning of federal telecommunications law.
It could end up that the FCC continues to shield VoIP providers from heavy regulation. But aggrieved parties that feel VoIP is getting a competitive edge would undoubtedly challenge the FCC in court.
The FCC had to grapple with the issue, Powell said, because VoIP represented an unprecedented fusion of voice, video and data that had traditionally been regulated as distinct products. A cable company like Comcast Corp. was regulated one way, information service providers like EarthLink Inc. in another manner, and phone companies like Verizon Communications Inc. and BellSouth Corp. in yet another way.
"Virtually any service can be delivered [as IP], and those will raise amazing, blockbuster questions for the traditional regulatory environment that's never before truly imagined a communications platform where the services are separated from the platforms," Powell told reporters at agency headquarters. "I really think that world is coming and is coming a lot faster than people appreciate."
The agency would not stop at an analysis of just VoIP. Powell said the agency had to look ahead to the day when video services ride shotgun on broadband platforms in the way that IP telephony does.
"I don't believe you can treat this issue as voice-over-IP and think you are done," said Powell. "I think this is about 'anything-over-IP,' because what happens when you have cable services that are defined a certain way are suddenly video over IP?"
Not illogically, that could mean a city might someday be able to tell a teenager streaming IP video-on-demand from a basement server that he needs a cable franchise, has to pay franchise fees and has to build a public-access studio.
Conversely, maybe a cable company doing the same thing would lose its legal identity as a cable company — and cities would lose their legal authority to regulate MSOs. For now, it's a jump ball.
"It has the seeds of completely tearing apart the existing regulatory regime," Powell said.
The outcome is not academic for cable. Time Warner Cable and Cablevision Systems Corp. have begun to roll out commercial service offerings, with Comcast Corp. and Cox Communications Inc. not far behind.
The scope of FCC regulation could influence the pace of rollout, take-rates and bundling opportunities.
Regulatory history is repeating itself. When cable operators began offering high-speed Internet access, local government stepped into a regulatory void left by the FCC's leave-it-alone policy. Local governments tried to impose open-access mandates to help unaffiliated Internet service providers, which led to court cases and then to eventual FCC classification of cable-modem service as an information service.
The U.S. Court of Appeals for the 9th Circuit is reviewing that decision.
In the case of IP telephony, companies such as Vonage Holdings Corp., Pulver.com, and Gemini Voice have exploited broadband network technology to woo customers over to IP telephony.
The FCC, again, has stood to the side, hoping the service grows and promotes competition.
But IP phone companies don't need state certification, don't have to provide 911 service, don't pay access charges (which cost AT&T Corp. and MCI Inc. billions of dollars a year) and don't contribute to the universal service fund. That disparity, in addition to concerns that consumers might not realize that their unpowered VoIP connection might go down in a network crash, has prompted states to step in.
Minnesota's Public Utility Commission recently ruled that Vonage's DigitalVoice service was an intrastate telephone service within the meaning of state law, and ordered the company to obtain state certification, file tariffs and create a 911 plan comparable to the emergency service offered by traditional phone carriers.
Vonage is barred from signing up new customers in the state until it complies.
Vonage is seeking an injunction in federal court. Two weeks ago, the Edison, N.J.-based company asked the FCC to pre-empt Minnesota's PUC and declare VoIP an information service beyond state jurisdiction.
Vonage said last Thursday it was "encouraged by Chairman Powell's comments yesterday and agrees that the FCC should take the lead in regulating interstate, IP services — not leave it to the states.
"If anything, the FCC should set a moratorium — even if it is a short one — on regulation of IP services to give itself some breathing room to establish a proper record."