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Rich Tehrani

[November 10, 2004]

What the Recent FCC Vonage VoIP Ruling Really Means


The FCC announced on November 9, 2004, that Vonage DigitalVoice service is not able to be separated practically into interstate and intrastate components, precluding dual State and Federal regulatory regimes. According to the statement, the use of Internet telephony makes it very difficult to determine if calls are local, interstate or international.

Whereas many articles I have seen on this topic lead one to believe that VoIP (define - news - alert) is free and clear from regulation and taxation, it is a mistake to believe that this is accurate. A thorough reading of the statements by the Commissioners shows that there are still areas of confusion that need to be satisfied.

That is not to say that Vonage (news - alert) isn’t happy about the ruling. In fact, according to Chris Murray, the Director of Governmental Affairs at Vonage, “This decision was as much as a home-run as we could hope for. All five commissioners agree that our service is interstate.” Murray continued, “This frees us up to improve our product and innovate by adding new features such as rolling out E911 to our entire subscriber base.”

I asked if this decision would help the financial community investing in the VoIP space. Murray went on to mention that much of the VoIP regulatory uncertainty has gone away. Until this decision, it was possible for each state to regulate VoIP in a different way.

In his statement, Chairman Powell makes some good points regarding VoIP and seems to be the industry’s biggest cheerleader, mentioning that “… VoIP allows tremendous flexibility in personalizing communications allowing a ‘My Telephone’ just as you have a ‘My Amazon’ or ‘My Tivo.’ To subject a global network to disparate local regulatory treatment by 51 different jurisdictions would be to destroy the very qualities that embody the technological marvel that is the Internet.”

According to Powell, “… the founding fathers understood the danger of crushing interstate commerce and enshrined the principle of federal jurisdiction over interstate services in the commerce clause of the U.S. Constitution.”

Powell goes on to say that in the same vein, “Congress rightly recognized the borderless nature of mobile telephone service and classified it as an interstate communication. VoIP properly stands in this category and the Commission is merely affirming the obvious in reaching today’s jurisdictional decision.”

He concludes, “the Commission expresses no opinion here on the applicability to Vonage of State’s general laws governing entities conducting business within the State, such as laws concerning taxation; fraud general commercial dealings; marketing and advertising.”

A Bit of Dissent

More interesting and less harmonious are the comments from Commissioner Michael J. Copps who mentions the need for a framework to explain the consequences for homeland security, public safety and 911. He continues, “… we need a framework for consumer protection as well as one to address inter-carrier compensation, state and federal universal service and the impact on rural America. But all I see coming out of this particular decision is … more questions.

“The Commission’s constricted approach denies consumers, carriers, investors, and State and local officials the clarity they deserve. These are not just my musings. A growing chorus of voices is urging the Commission to stop its cherry-picking approach to VoIP issues. When the National Governors Association, the Association of Public Safety Communications Officials, the National Association of Counties, the National League of Cities, the United States Conference of Mayors, the Communications Workers of America, AARP, the Independent Telephone and Telecommunications Alliance, the National Telecommunications Cooperative Association, the Organization for the Promotion and Advancement of Small Telecommunications Companies, the Western Telecommunications Alliance, the National Association of Regulatory Utility Commissioners, the National Association of Telecommunications Officers and Advisors, the National Consumers League, and local directors of 911 service in cities and counties around the country all suggest that moving ahead in piecemeal fashion is irresponsible, I think we should take heed.”

Perhaps most ominous is the following:

“I want to point to language in this item — albeit it’s in a footnote — that warns people not to draw unwarranted conclusions from the narrow jurisdictional finding that we make. What we do today should not be interpreted as anything more than it is. Yes, Vonage’s DigitalVoice service has an interstate character. But what exactly that entails we do not say. All that important work lies ahead. Wouldn’t it be sad if we were to let it go at this, pretending we have done something truly responsive to the questions that need to be answered, and then not proceed to tackle the related issues quickly and comprehensively? And wouldn’t it be tragic if the blunt instrument of preemption was permitted to erode our partnership with the states? We have worked long and hard to nourish a common federal-state commitment to a pro-competitive telecommunications environment. This is no time to abandon that commitment.”

Commissioner Jonathon Adelstein points out:

“The Act charges this Commission with maintaining universal service, which is crucial in delivering communications services to our nation’s schools, libraries, low income consumers, and rural communities. Universal service has been the cornerstone of telecommunications policy for over 70 years and has enabled this country to enjoy unparalleled levels of access to essential communications services. That access has improved our economic productivity and our public safety in immeasurable ways and has been vital in fostering economic development in rural and underserved areas. The Act also expressly permits States to adopt consistent approaches to preserve and advance universal service. At least 24 States have answered that call, disbursing over $1.9 billion annually from their own universal service programs. Many of those States and other commenters express legitimate concern that our decision here could increase pressure on the federal universal service mechanisms and could potentially lead to rate increases for rural and low income consumers. With those reasons in mind, I’ve called for the Commission to quickly convene a universal service solutions summit modeled after the ones we’ve held for other public policy issues. Regrettably, this item does not acknowledge its potential impact on those programs, nor does it propose any solutions, or even make firm commitments to resolving these issues. We are left to hope that these unaddressed issues do not gridlock or curtail the full reach of the promised IP superhighway.

“I also have reservations about our preemption of a State’s efforts to ensure the public safety of its citizens, based here on the linkage of the 911 requirement with a State certification. Our approach of overriding States’ public safety efforts without clear federal direction takes us into a dangerous territory in which consumers may come to rely on services without the benefit of the critical safety net that they have come to expect.

“Ultimately, I cannot fully endorse an approach that leaves unanswered so many important questions about the future of communications services for so many Americans. Rural and low-income Americans, the countless governmental and public interest groups who have expressed concern about our piecemeal approach, and the communications industry, itself, all deserve more from this Commission. If this Commission is to ensure that innovative services are widely available and also achieve the important public policy goals that Congress has articulated, the Commission must begin to wrestle in earnest with difficult issues that are largely ignored this Order. We simply cannot afford to slow roll these issues.

So the question becomes, what happens to the Universal Service Fund? According to Vonage’s Murray, “Vonage pays into the USF today.” He continues, “VoIP is not the cause or solution to the USF problem. Vonage wants to sign up and pay into the USF as it is to everyone’s advantage.” We continued our discussion and Murray mentioned Metcalfe’s law stating the value of the network is proportionate to the square of the number of nodes on the network. A final comment on the topic was that everyone should have state-of-the-art technology.

Other issues we discussed are that he believes (although it isn’t Vonage’s official position) that broadband should have USF fund support as well. This is an important point, as the U.S. is falling so far behind in broadband access; any assistance from the government is not only welcome but necessary if we are to remain competitive in the world economy.

Getting back to funding the USF, Vonage had done a rough calculation and found that if regulators count on VoIP customers to pay into the USF until it recovers from its multi-billion dollar deficit, each monthly VoIP bill (assuming 2 million users) would have a $100 surcharge or about five times the average monthly VoIP bill! Obviously we need a better solution to the problem.

I have mentioned before that Broadband would have to contribute to the fund if we are to keep it going. Murray has a broader idea. Contributors to the fund should be very wide and not deep so that all access technologies such as broadband pipes and VoIP would pay into it.

In summary, the FCC gave our industry a great gift today but by the same token, they didn’t answer all the questions or solve all the problems that the industry faces in the future. Taxation, 911 issues, USF problems, CALEA and other important issues still remain, and there is the potential for new problems to cloud the regulatory framework surrounding VoIP. For now, we can breathe a sigh of collective relief and thank Vonage for going to bat for the industry and the FCC for issuing a positive ruling, allowing more investment to flow into our market, for prices to fall and for new services to be created.

Rich Tehrani is TMC's president. He welcomes your comments. Participate in our forums.

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