A VoIP Primer Ken Brown December, 2003 Copyright © Alexis de Tocqueville Institution After a decade of fits and starts… Internet telephony finally appears ready to go mainstream…. The upshot, according to analysts, may be lower costs for consumers and brutal price competition for phone companies. The Washington Post October 23, 2003 What is “Voice over Internet Protocol”? First used in the mid-1990s, VoIP is an emerging technology for telephone calls and other data transfer. The concept is relatively simple: Use the multiple networks that comprise the Internet to carry telephone calls. These networks already route data into homes and businesses – email, web page graphics, documents. By converting voice sounds into bits of data, VoIP is a logical extension of this capacity. About 15 percent of all phones shipped to businesses today use VOIP technology, a figure that is expected to rise to 50 percent by 2006, according to Gartner Inc. How does VoIP work? Internet protocol calls (VoIP) originate on any broadband line: coaxial cable, DSL, wireless or even satellite. The call is routed to the VoIP company, where a computer converts the sound into data packets – similar to the packets used to transfer Internet data such as email. Sending data by packets is far more efficient as it enables the same line to handle more information simultaneously. These data packets are sent through any of the Internet's multiple networks to a recipient of the call. The caller can receive the call via a wireless provider, a broadband provider, or a local phone carrier. How does a long distance carrier determine which calls are routed over the Internet and which use circuit switching? It all depends on whether there is a residential telephone service provider (often called a CLEC – Competitive Local Exchange Carrier or an RBOC – Regional Bell Operating Company) that services the call’s recipient. If there is such a service, a computer may instantly digitize the call and route the call over the Internet. If there is not, the computer will send it over a typical switched circuit. What advantages does VoIP offer the consumer? More than 1 million residential consumers, or less than one percent of the market, had VoIP phone service in 2002, says research firm In-Stat/MDR. However, the firm projects that this number will rise to 5 million in 2007. Among VoIP’s advantages: • New choices in calling plans. Flat-rate “all you can call” pricing plans, long resisted by the Bell companies, are likely to become a more prevalent option. • Cost savings. VoIP calls tend are more stable and efficient than ordinary phone networks. This will translate into increased consumer savings. • Advanced, consumer-friendly networks. Increased use of VoIP will spur investment and development of advanced networks that will allow millions of consumers to use a single line for both voice and data. How is this different from a regular voice call? Calls using the normal copper phone networks use a dedicated electronic path. This involves a process called circuit switching, in which a direct link is opened between two (or more) phone users. The call is not converted into data packets. Instead, it is an uncut solid stream and therefore less efficiently handled than a VoIP call. Are there different types of VoIP? Yes. VoIP calls can begin or end on either a phone or computer. A VoIP call can “travel” over the Internet alone or a combination of the Internet and the usual phone network. What are current difficulties with the service? VoIP is ultimately dependent upon a broadband connection. If consumer’s broadband connection isn’t operating smoothly, VoIP quality may suffer. When used with a narrowband connection, (such as a dial-up modem) VOIP transmission has significant problems. For VoIP to work on a larger scale, providers will also need better software so that they can manage millions of calls simultaneously. How will VoIP affect the Bell companies? If VoIP technology proves workable on a large scale, it will hasten the growth of digital networking throughout the U.S. While this will provide better, cheaper communications services, it represents a significant threat to the Bell companies. The success of VoIP technology would reduce and/or eliminate the need for the role of Bell networks and facilities. The Bell companies are backing regulatory policies that would stifle this technology, and ultimately delay consumer adoption. Proposed regulation on Internet calling would also increase the price of broadband services, subsequently, slowing overall broadband adoption. So how are the Bells trying to hike prices on Internet calling? At the insistence of the Bells, The Federal Communications Commission is currently evaluating whether the Bells may charge new unfairly high per-minute fees on long distance VoIP calls. How does pricing typically work in long distance calling? Assume a typical call from New York to San Francisco. The caller’s local company (for example, Verizon) collects an access fee – about a half-cent per minute– for originating the call. The call is then transferred to a long distance company which collects a transport fee to route the electronic signal to San Francisco. That company then “hands off” the call to the recipient’s local phone company (for example, SBC), which collects another half-cent per minute. What the Bells Are Arguing Regarding Long Distance? At issue is what’s involved with the termination of that hypothetical New York to San Francisco call. Significant technological upgrades now allow calls to be carried in digital format over the Internet. These calls are then terminated (with the data “reassembled”) by a competing local carrier in San Francisco, which might need to pass the call to SBC – the same as it would any local call. The Bells are lobbying Federal regulators for the right to slap long-distance access fees on the calls – because in their opinion, they were originally long distance calls. So how much should the Bells be paid for “receiving” these calls? There is an established process for this called “reciprocal compensation.” It’s the way local phone companies compensate each other for terminating calls, including the millions of calls Internet users make each day to the Internet. Why do the Bells prefer long distance access fees to “reciprocal compensation” fees? The Bell companies’ long distance access fees generally are 500-600 percent higher than the cost of reciprocal compensation fees for local call completion. UBS Warburg estimates that the Bells collect a total of more than $16 billion a year in access fees to terminate typical long distance calls. Has the federal government taken a position on Internet telephony? According to both the expressed will of Congress and the FCC, Internet communication is an “information service.” Therefore, in keeping with the federal government’s “hands off” Internet policy, the calls should be free from the large access charges demanded by the Bells. For example, the FCC’s 1998 Universal Service Report to Congress explicitly conceded that since the technology involved with Internet communication was so new, decisions about fees should be postponed: "We defer a more definitive resolution… pending the development of a more fully-developed record because we recognize the need, when dealing with emerging services and technologies in environments as dynamic as today's Internet and telecommunications markets, to have as complete information and input as possible." The FCC has not issued any orders since then about this issue. Furthermore U.S. Public Law 47 USC 230(b)(2) explicitly states that “It is the policy of the United States… to preserve the vibrant and competitive free market that presently exists for the Internet.... unfettered by Federal and State regulation….” Between that 1998 report and the 2003 FCC VoIP hearing, have there been any notable FCC actions? In April 1999, the FCC summarily rejected an attempt by Qwest to place large access fees on Internet calls. Has the current FCC chairman weighed in on the issue? In 1998, FCC chairman Michael Powell stated that the “infinite flexibility” of VoIP services meant that distinctions between voice and data were “difficult if not impossible to maintain.” He also stated that it could “stifle innovation and competition in direct contravention of the [Telecommunications] Act” if “innovative new IP services” were “all thrown into the bucket of telecommunications carriers” and subject to the same “regulations and their attendant costs.” What happened recently in Minnesota? On September 13, 2003, the Minnesota Public Utilities Commission (MPUC) ordered Vonage, a VoIP service provider, to comply with Minnesota laws that regulate intrastate telecommunications carriers. The MPUC based this decision on its determination that the service provided by Vonage is the “functional equivalent” of any other telephone service. In response, Vonage sued in US District Court, arguing that VoIP is an information service, not a telecommunications service, and therefore not subject to common carrier regulations. The Court held: "Vonage's services… only [use] telecommunications, and does not provide them. The Court can find no statutory intent to regulate VoIP…. What Vonage provides is essentially the enhanced functionality on top of the underlying network, which the FCC has explained should be left alone." Will VoIP harm Universal Service? No. Implicit subsidies have been removed from interstate access charges. To the extent that this has not yet occurred at the state level, the states should follow the FCC’s lead in removing universal service subsidies from intrastate access. At this juncture, telephone subscribership in the U.S. is at its peak, confirming that VoIP has no adverse effect on universal service. Public Policy Outlook – Summary • FCC should recognize that VoIP regulation is a slippery slope that will harm not just VoIP, but competition and broadband deployment. • VoIP users should actively encourage their leadership to keep VoIP out of regulatory reach. • The FCC should discount Bell threats that VoIP will extinguish universal service fund contributions. VoIP will not eliminate traditional phone service. VoIP and traditional phone service can and will successfully coexist. • Overall, the proper regulatory approach is to allow the Internet and Internet applications to continue evolving.