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COURSE OVERVIEW AND INTRODUCTION................................................................................5I. VOIP – TECHNICAL ASPECTS OF IP TELEPHONY................................................................5

1. Introduction -- What is VoIP KW ?..............................................................................................5

1.1 Definitions: Introduce relevant terms for the discussion & short history introduction...7

1.2 How does an IP network function?..............................................................................................8

1.3 Explain various types or classifications of IP Telephony.........................................................8

1.31 VoIP vs. Internet Telephony................................................................................................81.32 PC to PC...............................................................................................................................81.33 PC to phone..........................................................................................................................81.34 phone to phone.....................................................................................................................8

2. Packet switching versus Circuit switching and PSTN vs. IP networks. How IP networks differ from the PSTN? KW and Karl...............................................................................................9

System architecture.........................................................................................................................10Pricing.............................................................................................................................................11Numbering, Quality of Service, Reliability,....................................................................................11

3. How is VoIP being adopted and used?........................................................................................13

3.1 Current and potential applications. KW...................................................................................133.2 Why does everyone want it? (e.g., can carry voice and data on the same IP network, etc.) KW.........................................................................................................................................................14

II. ECONOMIC AND FINANCIAL ASPECTS OF IP TELEPHONY..........................................144. Introduction – What is the current and future market for VoIP?...........................................14

4.1.Players & Providers...................................................................................................................144.11 Equipment providers, i.e. Cisco, Lucent, Juniper, Ericsson and Alcatel............................144.12 Wholesale carriers (e.g., iBasis, ITXC)...............................................................................144.13 New service providers (e.g. Vonage, Net2Phone)..............................................................144.14 Telcos..................................................................................................................................144.15 Pirates..................................................................................................................................14

4.2 Users..........................................................................................................................................144.21 End-users (e.g., large consumers of international and national long distance voice traffic, such as big business, small business, governments and consumers.)..........................................144.22 Telcos..................................................................................................................................14

5. Advantages – Cost Savings: The increasing popularity of IP Telephony is driven largely by two types of economic and financial advantages............................................................................14

5.1 Infrastructure related cost savings.............................................................................................145.11Cheaper equipment...............................................................................................................155.111 Equipment is standards based, not proprietary – and therefore costs less........................155.112 Need only a VoIP gateway and an IP router (can get equipment on eBay for a few thousand dollars).........................................................................................................................155.12 Cheaper transport costs, etc.................................................................................................155.121 better bandwidth utilization;(An important issue for consideration given the more limited availability and higher cost of international bandwidth in Africa.)............................................15

5.2 Savings in Regulatory Fees and Costs......................................................................................15

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5.21 Termination Rates ( See http://www.ipcb.net/sales/az.php3).............................................155.22 Universal Service obligations..............................................................................................155.23 Special numbers emergency and information.....................................................................155.24 Offshore accounts, money laundering.................................................................................15

6. Overview of the current telecommunications markets in Africa and how these markets compare to, and differ from, other parts of the developed and developing world......................15

6.1 Historical context – [Telecom in Africa?].................................................................................156.3 Subsidy and Business Models for Traditional telephony –Pricing/etc.:...................................15

6.31 Traditional local and long distance – The need for tariff rebalancing creates opportunities for arbitrage.................................................................................................................................156.32 Termination and origination rates.......................................................................................156.33 International call revenues / Settlement rates – High international tariffs create the opportunity for arbitrage.............................................................................................................15

7. How the conditions described in Section 6 create economic incentives for VoIP and other forms of Bypass and undermine traditional business models for telecom...................................16

7.1 What is bypass?.........................................................................................................................167.2 Who benefits from telco bypass and why?................................................................................167.3 Development of VoIP “pirates” who provide illegal or grey market VoIP..............................16

8. Economic Risks of VoIP- Impact of IP Telephony on Incumbent Telecommunications Operators...........................................................................................................................................16

8.1 What effect does VoIP have on incumbent telcos and how are they responding?....................168.2 Many telcos are responding by adopting VoIP to lower costs and recapture traffic lost to the “pirates.”..........................................................................................................................................168.3 How do you beat the “pirates”?.................................................................................................16

8.31 Technical Responses...........................................................................................................168.32 Legal & Regulatory Responses...........................................................................................168.33 Competition.........................................................................................................................16

9. Other Economic Benefits of VoIP- Additional potential economic and social benefits of VoIP that may be relevant to policymakers?..................................................................................16

9.1 Providing cheaper and more accessible telephone service to rural areas..................................169.2 Other examples..........................................................................................................................16

III REGULATORY ASPECTS OF IP TELEPHONY......................................................................1610. Overview of Effective Regulation / General Principles of Internet Regulation...................17

10.1 Market Reforms......................................................................................................................1710.11 Encourage competition and liberalization in the provision of services............................1710.12 Establish an independent regulatory body........................................................................18

10.2 Regulatory Approaches and Techniques................................................................................1810.21 Understand Differences Between the Internet and Other Modes of Communication, Such as Telephony................................................................................................................................1910.22 Consider a “Light” Regulatory Touch or Non-Regulation for Internet Applications......1910.23 Where Regulations are Desired, They Must Be Purposefully Drafted............................1910.24 Transparency....................................................................................................................1910.25 Acknowledge Enforcement Limitations...........................................................................20

11. Regulatory Treatment of IP Telephony...................................................................................20

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11.1 Overview.................................................................................................................................2011.2 What is IP Telephony?............................................................................................................21

11.21 Definition..........................................................................................................................2111.22 Technical Issues................................................................................................................21

11.3 Regulatory Frameworks for IP Telephony.............................................................................2411.31 Which regulatory and legal classification applies to IP Telephony – voice telephony or data?.............................................................................................................................................2411.32 How are regulatory frameworks applied to IP Telephony services?................................30

11.4 Policy Issues for IP Telephony...............................................................................................3511.41 Market Entry Requirements.............................................................................................3511.42 Universal Service.............................................................................................................3711.43 Numbering........................................................................................................................4011.44 Security / Surveillance......................................................................................................41

12. CASE STUDIES.............................................................................................................................41How is VoIP being regulated in different parts of the world? Provide a brief comparative review of market conditions and VoIP related regulations in the following countries:..............................41

12.1 CASE STUDY – United States................................................................................................41

12.11 Who is using IP Telephony ?...............................................................................................4112.111 Telephone Carriers.........................................................................................................4112.112 Consumers......................................................................................................................4212.113 Businesses......................................................................................................................42

12.12 Who is providing IP Telephony services?............................................................................4212.13 Which government entities are responsible for establishing regulatory policies on IP Telephony?......................................................................................................................................4312.14 Does the government have an ownership interest in any telecommunications service provider?..........................................................................................................................................4612.15 What is the current regulatory status of IP Telephony? Is there an explicit policy?...........46

12.152 What are the FCC’s policy goals in adopting rules for IP Telephony?..........................4712.153 What has been the regulatory framework for IP Telephony to date?.............................4712.154 The FCC has been actively reevaluating its policy on VoIP since the fall of 2003. What has the FCC accomplished on VoIP since that time?........................................................4812.155 PC-to-PC Telephony Communications:.........................................................................4912.156 VoIP and Access Charges:.............................................................................................5112.157 Broad Rulemaking Proceedings:....................................................................................5312.158 Are there penalties for providing IP Telephony service? (e.g., fines, license revocation, jail)..............................................................................................................................................53

12.16 What have been the costs and benefits of IP Telephony within the country?......................5312.2 Morocco (closed regulatory regime) Karl.............................................................................55

12.21 Who are the current VoIP users (e.g., cyber cafes? Universities? Businesses? Etc)...........5512.22. Who are the current VoIP providers.....................................................................................5512.23. Which government entity is responsible for making regulatory policies on VoIP?............5512.25 What is the current status of VoIP regulation?.....................................................................55

12.251 Is there an explicit policy?.............................................................................................5512.252 If so, what are the penalties for providing VoIP service? (e.g., fines, license revocation, jail)..............................................................................................................................................55

12.26. What have been the costs and benefits of VoIP services within the country?.....................55

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12.3 Rwanda Albert...........................................................................................................................56

12.31 Who are the current VoIP users (e.g., cyber cafes? Universities? Businesses? Etc)...........5612.32. Who are the current VoIP providers.....................................................................................5612.33. Which government entity is responsible for making regulatory policies on VoIP?............5612.35 What is the current status of VoIP regulation?.....................................................................56

12.351 Is there an explicit policy?.............................................................................................5612.352 If so, what are the penalties for providing VoIP service? (e.g., fines, license revocation, jail)..............................................................................................................................................56

12.36. What have been the costs and benefits of VoIP services within the country?.....................56

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COURSE OVERVIEW AND INTRODUCTION

I. VOIP – TECHNICAL ASPECTS OF IP TELEPHONY

1. Introduction -- What is VoIP KW ?

What VOIP is

5

VoIP crash course

Voice Over IP is the process of transmitting voice communications, like phone conversations, over an IP based network like the Internet. It uses IP addresses instead of phone numbers, and Ethernet cable in place of phone wire. VoIP can performed by an application like Skype, or a device like an IP phone.

The major difference between IP based voice communication and the telephone network we are all accustomed to using is the method of sending data. Both methods convert sound to electrical signals (data) and send it over a network to the recipient, where it is converted back. The networks they are sending data over are vastly different, however.

A Public Switched Telephone Network (PSTN), our standard phone system, forms a circuit between the caller and the callee which stays connected for the duration of the call. IP calling uses the Internet, a packet-based network. This means that data is transferred in discrete packets which are sent from source to destination independently and assembled when they get there. This is more efficient and much less subject to distance issues than a PSTN. This is half the reason why VoIP calls are so much cheaper than PSTN calls. The other half is the fact that the Internet is more or less globally maintained, whereas phone systems are implemented and maintained by individual governments and corporations. So while you and your phone company need to pay for the right to use a remote phone system to connect, there is no such need on the Internet. Once you are on it, you can send data without restriction or cost.

http://www.pcstats.com/articleview.cfm?articleID=1563

The US FCC writes that http://www.fcc.gov/voip/VoIP allows you to make telephone calls using a computer network, over a data network like the Internet. VoIP converts the voice signal from your telephone into a digital signal that travels over the internet then converts it back at the other end so you can speak to anyone with a regular phone number. When placing a VoIP call using a phone with an adapter, you'll hear a dial tone and dial just as you always have. VoIP may also allow you to make a call directly from a computer using a conventional telephone or a microphone.

VoIP Voice over Internet Protocol, is another way of saying IP Telephony. It involves the transmission of telephone calls over a data network like the Internet. In other words, VoIP can send voice, fax and other information over the Internet, rather than through the (PSTN) or regular telephone network.

PSTN stands for Public Switched Telephone Network, or basically what we all call the telephone network. When you pick up your telephone handset and dial a number, the call is routed through the telephone switch of your telephone company, and a connection established with the person you called

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Figure 11 depicts the a range of VOIP

1 http://www.fcc.gov/voip/

6

IP Telephony offers many advantages over the regular Public Switched Telephone Network (PSTN), including new advanced services, lower costs, efficient resource utilization, and ease of management through consolidation of network resources. Despite these benefits and rapid advances in development of standard protocols and interfaces for IP Telephony, there remain significant challenges in supporting toll quality voice over a converged PSTN and IP network. These challenges stem from the inherent differences between the PSTN and the IP network. The latter is still primarily a best effort network and hence, unlike the PSTN, provides no guarantees on the Quality of Service (QoS).

http://networks.cs.ucdavis.edu/~ghosal/Research/ip-telephony.html

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1.1 Definitions: Introduce relevant terms for the discussion & short history introductionThe Learning Objecitve (LO) is to review basic terms used in this course and to provide a brief overview of the history of Internet and VoIP.

Terms:IP Network

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Internet Protocol http://www.btglobalservices.com/en/products/uk/voip/index_print.html

Internet Protocol (IP) Is The Method Or Protocol By Which Data Is Sent From One Computer To Another On The Internet.

Each Computer (Known As A Host) On The Internet Has At Least One IP Address That Uniquely Identifies It From All Other Computers On The Internet. When You Send Or Receive Data (For Example, An E-Mail Note Or A Web Page), The Message Gets Divided Into Little Chunks Called Packet. Each Of These Packets Contains Both The Sender'S Internet Address And The Receiver'S Address.

Any Packet Is Sent First To A Gateway Computer That Understands A Small Part Of The Internet. The Gateway Computer Reads The Destination Address And Forwards The Packet To An Adjacent Gateway That In Turn Reads The Destination Address And So Forth Across The Internet Until One Gateway Recognises The Packet As Belonging To A Computer Within Its Immediate Neighbourhood Or Domain. That Gateway Then Forwards The Packet Directly To The Computer Whose Address Is Specified.

Because A Message Is Divided Into A Number Of Packets, Each Packet Can, If Necessary, Be Sent By A Different Route Across The Internet. Packets Can Arrive In A Different Order Than The Order They Were Sent In. The Internet Protocol Just Delivers Them. It'S Up To Another Protocol, The Transmission Control Protocol (Transmission Control Protocol) To Put Them Back In The Right Order.

IP Is A Connectionless Protocol, Which Means That There Is No Established Connection Between The End Points That Are Communicating. Each Packet That Travels Through The Internet Is Treated As An Independent Unit Of Data Without Any Relation To Any Other Unit Of Data.

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1.2 How does an IP network function?The LO is for the student to understand what an IP Network is and how it is different form other networks

1.3 Explain various types or classifications of IP Telephony.

The LO is for studetns to understant that there are different types of IP telephony, the difference among them, and why the difference may be inportant for reulatory .

1.31 VoIP vs. Internet Telephony

1.32 PC to PC

1.33 PC to phone

1.34 phone to phone

8

IP Telephony

http://www.point-topic.com/content/bmm/profiles/IP+Telephony.htm12 January 2004

1 Overview Point Topic defines IP Telephony as a service which emulates the voice service provided by the ordinary telephone network as fully as possible over Internet protocol (IP) connections. This means that voice traffic is carried over IP networks (including the public Internet on occasion) rather than the circuit switched public switched telephone network (PSTN). Thus there is no dedicated one-to-one connection between the two callers. Instead, each voice call is split into small packets of data that are transported using IP and reassembled at their destination. The main selling point of IP Telephony at present is that it can be cheaper than conventional telephone services, especially for peak time or long distance calls, when provided as part of a bundle that also includes high-speed Internet. Long distance or international calls from IP Telephony customers to conventional phones can be charged at approximately local rates. Competition will reduce the cost advantage for calls in the longer term, but IP Telephony services will still be able to offer other benefits, such as being able to provide multiple telephone lines for little or no extra cost. IP Telephony is one of a whole range of services which use Voice-over-IP (VoIP) technology in some form. Basic voice over Internet technology has been available since the late 1990s. 'Internet Voice' software supports voice calls between Internet users, usually by pre-arrangement, and with only the best-efforts quality of service offered by the public Internet. On the other hand, Corporate VoIP offers high quality service for business customers, using IP to optimise the use of broadband connections and virtual private networks (VPNs). IP Telephony is primarily a consumer service which aims to provide customers with access to all types of telephones worldwide and with service quality and features close to that offered by the PSTN. Point Topic distinguishes IP Telephony from 'Internet Voice', which is covered in a separate profile, and which is concerned with providing essentially peer-to-peer service between Internet users. But the boundaries between the two types of service are not clear-cut. The differences between them, and the variety of other voice services, are set out in more detail in another paper, 'The Voice Services Maze' which is in the 'Overviews' area of Broadband Money Makers. By early 2003, there were small scale deployments of IP Telephony in North America, including initial deployments by cable companies. By the end of 2003, major telcos were announcing plans and products for the IP Telephony market. BT was the first major European telco to announce an IP service. But these lagged behind

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2. Packet switching versus Circuit switching and PSTN vs. IP networks. How IP networks differ from the PSTN? KW and Karl

The LO is for students to understand the difference between Circuit and Packet switching, PSTN vs IP (also LO in 1.2).

9

PSTNhttp://www.nortelnetworks.com/products/01/signaling/collateral/pstnip.pdf

Highly modernized ‘cans and string’Circuit switching is the modern-day equivalent of the 19th century ‘cans and strings’ solution. The Public Switched Telephone Network (PSTN) carries on the hard-wired, landline-based tradition of providing constant bandwidth streams of information flow between users. These media streams flow over dedicated connections, typically between two telephones. The circuit switched network was originally designed and optimized for voice traffic and calling patterns, but today a considerable amount of fax traffic is also carried over these same voice-quality conections. With the emergence of the Internet, a steadily growing volume of modem data traffic now occupies a significant portion of the circuit switched network as it makes its way to IP-based data networks.

One of the more wasteful characteristics of the circuit switched network is that connections occupy bandwidth even when no real information is flowing. Think of the pauses that occur between thewords in normal human conversation; bandwidth is consumed at the same rate throughout the connection,even when no words or sounds are being communicated. On the other hand, it’s evenmore wasteful to clog up the circuit switched network with data streams. Voice-quality connectionssimply aren’t necessary to move data traffic. One of the first and most important incentives forfinding alternative network technologies is the need to eliminate the inefficiencies that result fromusing the PSTN as a be-all, end-all solution.

Network elements in the PSTN tend to have a large degree of centralized functionality. They are highly reliable and statically configured. Circuit switched network topology is rigidly engineered, and, as a result, significant coordination is required to add or modify network elements. Because the PSTN is considered essential to economic and national defense infrastructures, it is regulated by governmental bodies. These regulatory agencies, not the network operators, set the industry’s rate structures and mandate its reliability standards. Another side effect is that, generally speaking, the rate of change in regulated industries is slower than in unregulated businesses. The telecommunications industry demonstrates a history of innovation, but inherent rules and procedures inevitably slow the process for testing, certification and implementation.

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Three main focal points here are:

System architecture

PSTN: inflexible, zero sum use: a single cuircut can onoy be used by a single userIP: flexible, multiple users can use the same cuicut

PSTN: inflexible, can only serve on use at a time—data or voiceIP: flexible, can serve more than one use at the saem time—data and voice

Fig XXX PSTN vs IP Network architecture

PSTN 64kbps line IP Network 64k kbps line or eight sub-lines 8k lines infinite number of sub-lines

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See diagrams at http://www.btglobalservices.com/en/products/uk/voip/

Pricing

PSTN: inflexible tarriff structure as a result of less flexibility of service offfereingsIP: flexible tarriff structure as a result of more flexibility of service offfereings

Numbering, Quality of Service, Reliability,

11

Internet/PSTN Integration: Eventually, the Internet and the Public Switched Telephone Network (PSTN) must be integrated—people making telephone calls can't be bothered with the nuances of the underlying network technologies. The problem, however, is that the Internet and the PSTN rely on very different infrastructures. For example, there are:

Significant differences between national and international versions of the "same" protocol.

Conceptual and procedural differences between circuit switching and packet switching.

Addressing and numbering differences between the PSTN and the Internet.

Operational differences between control structures—the PSTN's centralized, the Internet's distributed.

These differences will be resolved at the gateways and gatekeepers of the Internet and service platforms of the PSTN. Eventually, these various pieces will combine into single elements, providing a unified service architecture that supports integrated Internet and telephony services.

As the standards for interworking between H.323 and SS7 are defined, "true" Internet-to-PSTN solutions will evolve. In the meantime, proprietary solutions that map the procedures and messages between H.323 and SS7 have emerged. These solutions are very dependent on the interpretation of the equipment manufacturers, service providers and carriers. Again, resolution of the protocol issues will occur in the IETF and ITU, but as always this will take time.

http://www.bcr.com/bcrmag/1999/05/p24.asp

The Main Difference Between VoIP And IP Networks, And Circuit-Switched Networks Is The Method Of Getting Information From One Device To Another. With The Familiar Public Switched Telephone Network (PSTN), When You Make A Call A Connection Is Formed Between The Two Devices To Create A Physical Circuit.

With VoIP, There Is No Such Dedicated Connection Between Devices. Instead, The Information Is Encoded (Analogue Speech Is Converted To A Digital Signal) And Divided Into Packets. It Then Uses A 'Connectionless' Packet-Switched Network To Get Information From One Device To Another Via The Fastest Of Many Possible Routes Through The Network.

This Is The Same Method Used In Most Packet Data Networks, Including The Internet, To Transport Information. Data Of All Kinds Is Divided Into Packets And Sent Across The Network. As Packets Arrive At Their Destination They Are Reunited And Reassembled As The Complete Original

http://www.btglobalservices.com/en/products/uk/voip/index_print.html

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.2

http://icwww.epfl.ch/publications/documents/IC_TECH_REPORT_199834.pdf

http://www.cs.columbia.edu/~coms6181/slides/10/voip.pdf

2

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3. How is VoIP being adopted and used?

LO here is for students to understand different uses of VoIP

3.1 Current and potential applications. KW

CURRENTprivate network: inter and intro office (banks, MNCs) two party traffic: person to personthree party traffic:call centerstelecenterspirates

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http://biz.yahoo.com/prnews/040127/lntu005_1.html

DENVER, Jan. 27 /PRNewswire-FirstCall/ -- IP telephony is steadily replacing legacy PSTN systems in medium-to-large companies, but the split between the two is still fairly even. Call quality, management, and applications that merge voice and data are also important factors in migrating to IPT from a legacy system.

These are just some of the findings of a recent global survey conducted by PROGNOSIS systems and network management software developer Integrated Research. The survey polled over 2800 senior IT and telecoms managers, evenly distributed across medium to large enterprises. Approximately 80% of respondents were from North America, with the remainder distributed evenly between Europe and Asia.

IR's director of IP telephony products Graham Jones says that call quality is the key challenge in convincing companies to switch from their old analogue and digital systems to IP handsets.

"End users are accustomed to PSTN quality and will not settle for less, even with added functionality," says Jones. "For an end-user, picking up a phone implies getting an instant dial tone, and continued cut-offs or audio quality problems will have users running back to their old phones."

The survey suggests that most organizations are moving to IP telephony. With 56% of respondents already using an IP telephony system, 26% indicated a trial within 12 months, with a further 18% pointing to a two-year trial date. Key external factors driving IP telephony sales in the next two years appear to be stronger IT spending (strengthening economy), and a perception that IP telephony has come of age (and is now a lower risk).

The survey responses indicated the highest priority business driver for IP telephony is increased value through IP applications (66% response), followed by lower infrastructure costs (64%) and open standards (50%). As expected, Cisco was named the most popular IP telephony platform, with over 52% of respondents currently using -- or intending to invest in -- a Cisco-based solution. Avaya and Nortel follow suit with 10% and 9% respectively.

Time for real-time

The vast majority (83%) of respondents see real-time management as a critical component of an IP telephony implementation.

"As enterprises deploy IP telephony and integrate voice and data traffic, the new real-time nature of the network infrastructure requires management that is more active," says Jones. "From initial network readiness assessment through to the first days of testing IP telephony in the lab and on to full deployment to thousands of users, effective real-time management needs to be at the forefront of the evaluation and deployment cycles."

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3.2 Why does everyone want it? (e.g., can carry voice and data on the same IP network, etc.) KW

cost saving

II. ECONOMIC AND FINANCIAL ASPECTS OF IP TELEPHONY

4. Introduction – What is the current and future market for VoIP?

4.1.Players & Providers

4.11 Equipment providers, i.e. Cisco, Lucent, Juniper, Ericsson and Alcatel.

4.12 Wholesale carriers (e.g., iBasis, ITXC)

4.13 New service providers (e.g. Vonage, Net2Phone)

4.14 Telcos

4.15 Pirates

4.2 Users

4.21 End-users (e.g., large consumers of international and national long distance voice traffic, such as big business, small business, governments and consumers.)

4.22 Telcos

5. Advantages – Cost Savings: The increasing popularity of IP Telephony is driven largely by two types of economic and financial advantages.

5.1 Infrastructure related cost savings.

How do infrastructure-related components of IP networks create cost savings and incentives to service providers and various classes of users?

Lower infrastructure costs leads to fewer financial barriers of entry for VoIP service providers.

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5.11Cheaper equipment

5.111 Equipment is standards based, not proprietary – and therefore costs less.

5.112 Need only a VoIP gateway and an IP router (can get equipment on eBay for a few thousand dollars).

5.12 Cheaper transport costs, etc.

5.121 better bandwidth utilization;(An important issue for consideration given the more limited availability and higher cost of international bandwidth in Africa.)

5.2 Savings in Regulatory Fees and Costs.

Fees and taxes imposed on traditional telephony carriers are avoided by IP providers. (e.g., IP carriers can avoid accounting rates/international settlements on international calls.) This section examines the economic incentives for VoIP and other forms of bypass.

5.21 Termination Rates ( See http://www.ipcb.net/sales/az.php3)

5.22 Universal Service obligations

5.23 Special numbers emergency and information

5.24 Offshore accounts, money laundering

6. Overview of the current telecommunications markets in Africa and how these markets compare to, and differ from, other parts of the developed and developing world.

6.1 Historical context – [Telecom in Africa?]

6.2 Technology – VoIP in Africa

6.3 Subsidy and Business Models for Traditional telephony –Pricing/etc.:

6.31 Traditional local and long distance – The need for tariff rebalancing creates opportunities for arbitrage.

6.32 Termination and origination rates

6.33 International call revenues / Settlement rates – High international tariffs create the opportunity for arbitrage.

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7. How the conditions described in Section 6 create economic incentives for VoIP and other forms of Bypass and undermine traditional business models for telecom.

7.1 What is bypass?

Telephone calls that are transported over the Internet can avoid the international accounting rate system that is imposed on circuit switched networks.

7.2 Who benefits from telco bypass and why?

7.3 Development of VoIP “pirates” who provide illegal or grey market VoIP.

8. Economic Risks of VoIP- Impact of IP Telephony on Incumbent Telecommunications Operators

8.1 What effect does VoIP have on incumbent telcos and how are they responding?

8.2 Many telcos are responding by adopting VoIP to lower costs and recapture traffic lost to the “pirates.”

(See e.g., agreements that ITXC and iBasis have announced with numerous PTOs in Africa.)

8.3 How do you beat the “pirates”?

8.31 Technical Responses

8.32 Legal & Regulatory Responses

8.33 Competition

9. Other Economic Benefits of VoIP- Additional potential economic and social benefits of VoIP that may be relevant to policymakers?

9.1 Providing cheaper and more accessible telephone service to rural areas.

(e.g., South Africa is using IP telephony increase the availability of telephone service. Reports indicate that the government intends to license small, medium and micro enterprises to offer VoIP services for local access in under-serviced areas of under 5% teledensity.) [Can Albert/NUR provide further details on this project?]

9.2 Other examples.

III REGULATORY ASPECTS OF IP TELEPHONY

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10. Overview of Effective Regulation / General Principles of Internet Regulation

Internet-based applications, such as IP Telephony, offer a variety of new communications capabilities. These emerging technologies and applications may facilitate creative solutions to some of the unique developmental challenges facing developing countries. For example, innovative policy makers in a variety of countries are already beginning to explore ways to use IP Telephony to increase rural telephone access.

The Internet and related communications technologies present a range of new technical resources for developing nations. Policy makers seeking to harness these new resources must be cognizant, however, that the Internet and IP-based applications, do not proliferate randomly. They are most likely to flourish in policy environments that encourage their growth. Numerous commentators have suggested that Internet penetration in African is as low as it is, in part, because of policy environments that discourage investment and flexible growth of new technologies.3

Accordingly, before delving into the specifics of regulating IP telephony, it is important to establish a few general principles and best practices both for Internet development, and for regulatory proceedings. This section briefly seeks to identify the elements of a regulatory environment that are most effective in fostering the overall growth of Internet applications within a market.

These recommended reforms, concepts and procedural practices provide a basic foundation for Internet development and effective regulation, and should be carefully considered by regulators.

10.1 Market Reforms

The first recommendations focus on market reforms. Commentators have identified a variety of desirable market reforms. Two of the key principles are discussed below.4

10.11 Encourage competition and liberalization in the provision of services.

Liberalizing the telecommunications sector to permit competition is important because the Internet rides upon the telecommunications infrastructure. As these underlying telecommunications services become more available, more affordable and more accessible, Internet services should also. Competition at all levels of telecommunications service (local, long distance and international) and for all technologies (wireline and wireless) should be encouraged as it tends to attract investment that

3 A recent ITU sponsored article states that one person in two goes online in North America and Europe. By contrast, in most parts of Africa, “it is more like one person in 400.” See Sarah Parkes, Internet In Africa: Time for Action, ITU On-line News Service (October 30, 2003), available at:http://itudaily.com/onlinenews/printarticle.asp?articleid=3103002. 4 See, for example, the ITU article mentioned in note 1 for a discussion of other relevant market barriers.

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spurs infrastructure development and modernization.5 Competition among service providers also improves service quality and innovation, and tends to drive prices down, making communications services more affordable and available.

10.12 Establish an independent regulatory body.

A great deal of literature already has been written extolling the virtues of independent regulators. Many countries have heeded this advice. Ten years ago, few developed or developing countries had telecommunications regulatory authorities. In 1990, for example, there were only thirteen such regulatory entities. By 2003, the FCC staff reported that no less than 119 regulatory agencies had been established worldwide.

The issue of which government entity will create and enforce policies on new communications services is a crucial one. Assigning this authority to the wrong entity can undermine the quality, effectiveness and uniformity of any policies that are ultimately adopted. Policy decisions that are made within a ministry, for example, may be heavily influenced by short-term political and financial considerations. The practical effect may be decision-making that unduly favors incumbent service providers. This outcome is especially likely if the state maintains an ownership interest in the incumbent.

Resolving policy disputes within courts creates a significant risk that judges with a very limited understanding of the technology and its application will be tasked with decision making. Furthermore, court procedures can be extremely time consuming, and judicial decisions seek only to resolve specific disputes, rather than creating long-term strategies to build infrastructure and encourage the use of innovative technologies.

A balanced evaluation of the facts and policy implications is more likely if decision making is assigned to a trained and independent staff that has an understanding of the relevant technical, economic and regulatory policy issues raised by a new service or application. An independent agency that reports to a national congress or a similar elected body is most likely to have the higher level of independence needed to develop policies designed to satisfy long-term national goals.

10.2 Regulatory Approaches and Techniques

It is also important to recognize several regulatory approaches, and procedural standards and practices that are relevant for efficient and effective rulemaking. The recommendations described below are designed to refine and improve decision-making, the enforcement of rules and the protection of consumers and licensees.

5 Liberalization can foster the growth of a variety of technical platforms that can be developed and used for Internet applications. This may include: cable, 3G wireless, WiFi, satellites, broadband over power lines and other new technologies.

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10.21 Understand Differences Between the Internet and Other Modes of Communication, Such as Telephony.

Development of Internet services requires a mixture of regulatory and non-regulatory policies. In countries where the Internet has flourished the most, the Internet has been a relatively unregulated medium that operates over a regulated medium – the telephone network. Effective regulations must recognize important technical differences between these two networks.

10.22 Consider a “Light” Regulatory Touch or Non-Regulation for Internet Applications.

Regulators can and should limit the extent to which their actions interfere with the functioning of the market for Internet services. Whenever possible, market forces should be allowed to take the place of direct regulatory intervention. Governments should encourage competitive markets that allow companies and users to be innovative.

Regulations should be imposed on Internet applications only where necessary. There should be an affirmative reason to impose a regulation.

Telephony regulations have traditionally been justified by the need to control monopoly firms in a market, to encourage competition, and to achieve important public interest goals. Due to the unique nature of the Internet, these needs do not arise in the Internet world as often as they do in the world of traditional telephony. Regulators should bear these differences in mind and ensure that Internet-related regulations are adopted only to address specific social needs or market failures.

10.23 Where Regulations are Desired, They Must Be Purposefully Drafted.

Regulations should not be imposed unless the desired purpose and effect of the proposed rule have been clearly identified.

Once the purpose and effect of the rule have been clearly articulated, regulators should be able to demonstrate that the proposed rule actually furthers the specified policy goals.

10.24 Transparency

The regulatory and legislative processes should be transparent and open. Written drafts of proposed rules should be made available to the public. Drafts also can be posted on the Internet.

The public should be able to review and provide comment upon any proposed rules or laws.6

Members of the public, including regulated entities, must have access to all laws, judicial rulings, decrees and regulations.6 For example, the Federal Communications Commission is currently considering policy options for regulating IP-based services, such as IP Telephony. The written policy proposal was announced and made available in February of 2004. The public was invited to submit written and oral comments. The FCC, by law, must consider these public and industry comments when determining its final policy.

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Regulated parties should not be subject to any rules that are not published.

10.25 Acknowledge Enforcement Limitations.

Before adopting a rule or a prohibition, regulators should carefully consider their ability to enforce any such rule. The FCC has noted that some countries have sought to tightly regulate certain services, such as callback and Internet telephony, only to discover that enforcement of their prohibitions was difficult, or impossible, and would require enormous amounts of time from an already limited number of available staff people.7

Regulation of IP Telephony could require regulators, for example, to make decisions regarding the types of software that can and cannot be used, which Internet content is permissible, etc. Regulators should bear in mind that it may not always be feasible or desirable to enforce such regulations.

11. Regulatory Treatment of IP Telephony

11.1 Overview

The possibility of transmitting voice over IP-based networks reflects a convergence of two network types that have emerged under very different policy and regulatory regimes. Traditional telephony, which is based on circuit-switched networks, has been heavily regulated by most countries. By contrast, data networks, which are based on packet-switched technology, have developed, in many countries, free of most regulations.

The blurring of the traditional distinction between these two networks has created regulatory and legal questions that regulators in various countries of the world are now attempting to resolve. These policy inquiries are often complicated by the fact that the regulatory regimes in most countries were adopted before the advent of the Internet and the various developing IP-based applications.

As regulators wrestle with these issues, they are not choosing a single approach to deal with this complex Internet application. Instead, a variety of regulatory options are emerging. This paper will seek to introduce some of the most significant trends and issues facing policymakers who wish to “regulate” IP Telephony.

7 Irene Wu, Roxanne McElvane, Anita Dey, Kiran Duwadi, Current International Issues in Communications Regulation: Refining Regulatory Techniques, Impact of Wireless Popularity on Regulation, and the Growing Significance of Cable Television, prepared for Policy Research Conference on Communication, Information and Internet Policy, September 19-21, 2003, Arlington, Virginia, at 7.

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11.2 What is IP Telephony?

11.21 Definition

As of yet, there is no standard definition of Internet Protocol Telephony. The ITU generally defines Internet Protocol Telephony, or “IP Telephony”, as the transmission of voice, fax and related services over packet-switched IP-based networks. IP telephony enables real-time voice transmission over a network that uses Internet protocols (“IP”).

11.22 Technical Issues

11.221 Packet-Switching versus Circuit Switching

Networks based on the Internet Protocol (“IP”) are both technically and administratively different from the public switched telephone network (“PSTN”).8 Traditional telephony delivers voice calls via the PSTN, which is a circuit switched network. The PSTN was developed for one primary purpose – the transmission of voice telephony.

Placing a call on the PSTN establishes a temporary “circuit”, which is dedicated to that particular phone call for the duration of the conversation. No other traffic can pass over that channel until the call has been terminated. The network transmits all information associated with the call, including silences and pauses in speech, and therefore consumes a fixed amount of bandwidth for the duration of the call. Since a PSTN circuit is temporarily dedicated during the entire duration of any particular call, there is a limit on the total number of users who can use the system at any one time.

IP networks, by contrast, transmit information in the form of data “packets” that contain a portion of the user’s data, as well as information needed to guide the delivery of the data packet (e.g., addressing and source information). IP Telephony applications digitize voice communication into data packets that are routed over managed IP networks and/or over the public Internet to the desired location using IP addressing.

IP networks offer important technical advantages. Unlike circuit switched networks, which were designed solely to transmit voice communications, IP networks can be used to digitize and deliver any kind of content, including voice, data and video. The networks therefore can be used to provide a range of applications for data (e.g., e-mail, file transfer, database searching) and telephony, as well as integrated voice/data (messaging) and integrated voice/video applications, and merged World Wide Web and voice services. Furthermore, data packets can be transmitted over a variety of platforms, including copper wires, cable, fiber and wireless networks.

IP-based networks also are more efficient than circuit switched networks because they do not use dedicated circuits. Instead, these networks multiplex, or combine multiple sets of data, over the same

8 The PSTN includes local exchange networks and long distance, or inter-exchange, networks within a country. The various national PSTNs are then connected to each other by wire, undersea cable, or other means.

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physical path. In other words, multiple conversations and/or data can be sent over the same channel in separate streams of data packets. This feature conserves bandwidth, which can be a valuable and expensive commodity within developing countries.

IP networks also offer important cost benefits, as they require fewer capital expenditures for infrastructure than circuit-switched networks. The ITU reports that several studies have found that IP networks are significantly less expensive to build and use than circuit-switched networks.

These various benefits and features account, at least in part, for the increasing shift within the industry from circuit-switched to IP-based networks. These technological characteristics also offer significant opportunities to developing nations. Therefore, before adopting prohibitions or restrictive policies on IP Telephony or other IP-based applications, policymakers should become familiar with the myriad of economic and technological advantages presented by IP-networks, and how these applications can be incorporated into national development strategies.9 [10]

11.222 Modes of Internet Transmission

Internet Telephony and Voice over IP (VoIP) are specific subsets of IP Telephony. The terms are distinguished by the type of IP networks used for transmission.

Internet Telephony: IP Telephony in which the principal transmission network is the public Internet.

Voice-over-Internet Protocol (VoIP): IP Telephony in which the principal transmission network or networks are private, managed IP-based networks, which allows improved quality of service and performance.

This paper uses the term IP Telephony to generally encompass both methods of transmission.

11.223 Growth and Development of IP Telephony Applications

There are three main types of IP Telephony: PC-to-PC; PC-to-phone; and phone-to-phone. These forms of IP Telephony are differentiated by the type of terminal used, the physical location of the gateway, 11 and the underlying means of transmission. 9 For example, regulators should consider the potential for IP networks to offer a flexible and cost-effective option for building communications infrastructure within countries with low teledensity. An ITU study notes that IP telephony has the potential to provide access to communications infrastructure at an investment cost of five to eight times less than a PSTN line. See ITU Case Study on Thailand: IP Telephony and the Internet, available at: http://www.itu.int/iptel.10 ITU-D Study Group 2 has a Rural Application Focus Group that is studying the development of wireless IP-based technologies for rural areas. See http://www7.itu.int/itudfg7/.11 IP telephone service can be provided in either of two ways: (1) through software and hardware at the customer premises; or (2) through gateways that enable applications originating and/or terminating on the PSTN. Gateways are computers that transform the circuit-switched voice signal into IP packets, and vice versa. They also perform associated signaling, control and address translation functions. The gateway on the originating end of a call can be located in the users’ terminal device, at an ISP or IP Telephony Providers, or in the central or end office of a PTO. If a gateway is not deployed, premises-based equipment must be available as an alternative.

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11.2231 PC-to-PC

The first generation of IP Telephony, computer-to-computer calling, was introduced around 1994. With PC-to-PC telephony, both the calling and called party require a PC equipped with audio capabilities, the same software12 and an Internet connection. Both callers had to be online at the same time. Since there was no way to notify users who were not online of incoming calls, callers usually had to prearrange calling sessions.

On the technical side, PC-to-PC calls do not require a connection, or gateway, to the PSTN because they are not switched by the PSTN. Instead, the public Internet is often the means of data transmission. [Aside from Internet access fees, there is usually no charge for this type of service.]

11.2232 PC-to-Phone

Computer-to-phone voice applications, the second generation of IP Telephony, became available around 1996.

As with PC-to-PC applications, the originating user’s PC had to have special software, a microphone, speakers and a sound card. Unlike PC-to-PC applications, the called party can receive the call on an ordinary telephone.

In terms of technical operations, the calling party accesses the Internet using his PC. The caller’s voice is converted to packets on the originating user’s PC, and the voice signal then is transmitted over the Internet to a gateway. The call data is converted from packets at a gateway server, which then routes the call to the appropriate telephone on the PSTN.13 The called party receives the phone call on a regular telephone.

Since calls are terminated on the PSTN, this type of telephony is more administratively complex than the PC-to-PC format. Calls must be billed and routing arrangements must be negotiated, including interconnection payments in distant locations where applicable.14 For this reason, many service providers sometimes restrict the service offering to a limited range of countries.

11.2233 Phone-to-Phone

The third generation of IP Telephony is phone-to-phone service, which became commercially available around 1997. For consumers, this form of IP Telephony most closely approximates traditional telephone service. Since phone-to-phone IP calls both originate and terminate on the PSTN, both the calling and called party use regular telephone handsets.

12 This type of IP Telephony often uses free or low cost software that can be downloaded from the Internet.13 See discussion in International Telecommunications Union, IP Telephony Workshop, Background Issues Paper, June 2000 (“ITU Workshop”) at 2.1.2.14 Id.

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Although these calls begin and end on the PSTN, at some point during the transmission, they are converted to packets and travel over an IP network. The public Internet can be used as a means of transmitting these calls, however, it is more likely that the services will be provided on closed, managed IP networks with formal billing arrangements among gateways and carriers.15

Since most current commercial IP Telephony services are phone-to-phone applications, this is the most important and controversial segment of the market. Retail phone-to-phone voice services are commonly provided via pre-paid calling cards, and mobile networks often use VoIP to transport pre-selected long-distance and international routes for outgoing long distance and international calls.16 An increasing number of carriers are also transporting calls in part on internal IP networks. In most cases, the motivation for using this service is toll bypass to achieve lower costs.

11.3 Regulatory Frameworks for IP Telephony

11.31 Which regulatory and legal classification applies to IP Telephony – voice telephony or data?

Over the years, analysts have suggested that the various forms of electronic communications will merge. This process is already well underway as cable companies have begun to offer telephony and data services, Internet service providers offer telephony, telephone companies can provide video services, and broadcasters can use their spectrum to offer certain wireless services. Policymakers are struggling to develop regulatory regimes that facilitate this convergence and regulate services in a “technologically neutral” manner. In other words, policymakers are recognizing the need to develop rules that will apply to all providers of a particular service, regardless of the communications platform (e.g., cable, wireless, PSTN, IP) on which the service is delivered.

The rise of IP Telephony, which merges telecommunications and information features, has placed the issue of convergence squarely in front of many regulators around the world. Policymakers must decide whether their particular national goals are best achieved through the application of: traditional voice telephony rules; information or data services rules; or perhaps, by the creation of a new set of rules that acknowledges the unique hybrid nature of IP Telephony?

Countries have reached different conclusions in making this evaluation. Several years ago, both the U.S. and the E.U. launched preliminary inquiries into the regulatory status of IP Telephony. The conclusions of these inquiries, which currently govern the classification of services in these two regions, are briefly summarized below.

11.311 United States

11.3111 The U.S. Has Adopted a Voice/Data Test to Classify IP Telephony Services.

15 Id. at 2.1.16 ITU Workshop at 2.1.

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The U.S. has adopted a complex regulatory framework that generally distinguishes “telecommunications” services, like telephony, from “information” services, which include Internet applications. Telecommunications services are subject to a rather burdensome array of FCC regulations that include interconnection requirements, universal service contributions, consumer protection standards and security obligations. Information services, on the other hand, are subject to an FCC policy of “non-regulation”, and therefore, escape the various requirements imposed on traditional telephony carriers.

In the U.S., “telecommunications” is defined as:

“the transmission, between or among points specified by the user, of information of the user’s choosing, without change in the form or content of the information as sent and received.”17

“Telecommunications service” is the “offering of telecommunications for a fee directly to the public, or to such classes of users as to be effectively available to the public, regardless of the facilities used.” These definitions generally encompass traditional telephone services offered over the PSTN.

By contrast, Internet-based applications, termed “enhanced services” (also now known as “information services”), have been distinguished from “telecommunications services” since the 1970s18

and left free of regulation.19 Basic telecommunications services were defined to include standard voice transmission offerings. Enhanced services were then defined to encompass “any offering over the telecommunications network that is more than a basic transmission service.” More specifically, “enhanced services” include:

“services, offered over common carrier transmission facilities used in interstate communications, which employ computer processing applications that act on the format, content, code, protocol or similar aspects of the subscriber’s transmitted information; provide the subscriber additional, different, or restructured information; or involve subscriber interaction with stored information.20

Internet access has always been treated as an “enhanced” service since ISPs engage innumerous information processing functions, such as authentication, e-mail storage and retrieval, web page hosting, and domain name server lookups, which provide more than basic transmission services. Many ISPs also offer access to local content through databases, message boards and chat areas. These functions offer substantial computer processing and interaction with customer-supplied information, and therefore fall squarely within the definition of enhanced services. Accordingly, ISPs have not been subject to traditional telecommunications regulation.

17 47 USC Section 153(43).18 See Computer II Final Order, 77 FCC2d 384 (1980).19 The FCC’s existing framework for regulating the Internet is embodied in the “Computer II” proceedings, which establishes the FCC’s policy towards “enhanced services” provided through the telephone network. Computer II states that although the FCC has authority to regulate these services, direct regulation would not serve the public interest. 20 Special enhanced services include protocol processing, alarm monitoring, voice messaging, and electronic publishing, as well as the provision of access to data networks such as commercial online services and the Internet. For a more detailed discussion of what types of services are “enhanced”, see discussion on this subject in the U.S. case study.

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11.3112 Applying the Voice/Data Classification to IP Telephony

The FCC initially applied this voice / data regulatory distinction to the converged technology of IP Telephony in a 1998 report to the U.S. Congress. The FCC observed that IP Telephony often blurred the line between “telecommunications” and “information” services. The FCC decided that its categorization of this hybrid service would depend on “the functional nature of the end-user offering.” The FCC’s factual inquiry therefore examined whether IP telephony offers a service that provides pure “telecommunications” or pure transmission capacity, as does traditional telephony.

In applying its analysis, the FCC distinguished three types of IP Telephony: PC-to-PC; PC-to-phone; and phone-to-phone. In a non-binding evaluation, the FCC suggested that PC-to-PC IP Telephony does not appear to qualify as “telecommunications” because it does not provide basic transmission capabilities to users.

The Commission observed, for example, in the case of PC-to-PC IP Telephony, “individuals use software and hardware at their premises to place calls between two computers connected to the Internet.” The IP Telephony software is an Internet application that subscribers run using Internet access provided by their ISP. The Internet service provider does not appear to be “providing” telecommunications, and in fact, may not even be aware that its customers are using IP Telephony software because IP packets carrying voice communications are indistinguishable from other types of data packets.

The FCC also observed that companies that provide only software and hardware installed at the customer premises do not qualify as “telecommunications” since they do not transmit information.21 The FCC concluded that PC-to-PC and PC-to-phone IP Telephony products appeared not to constitute “telecommunications service” under the Act’s definition of that term.22 Non-regulation therefore was found to be appropriate for PC-to-PC and PC-to-phone IP Telephony because these products, on a functional and technical level, were easily distinguished from traditional telephone service.

However, the FCC also indicated in its 1998 report that phone-to-phone IP telephony closely resembled “telecommunications services.” It stated “phone-to-phone IP Telephony services that rely on “dial-up or dedicated circuits … to originate or terminate Internet-based calls” appeared to “bear the characteristics of ‘telecommunications services’” where the service met four criteria:23

(1) it holds itself out as providing voice telephony service;

(2) it does not require the customer to use customer premises equipment (“CPE”) different from that CPE necessary to place an ordinary touch-tone phone over the public switched network;

(3) it allows the customer to call telephone numbers assigned in accordance with the North American Numbering Plan, and associated international agreements; and

(4) it transmits customer information without net change in form or content.21 See Federal-State Joint Board on Universal Service, CC Docket No. 96-45, Report to Congress, 13 FCC Rcd 11501 (1998) (“Stevens Report”) at paragraphs 86 –87.22 IP NPRM at paragraph 29.23 Id, citing Stevens Report.

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The FCC’s analysis in this instance, however, was non-binding and did not impose regulations on phone-to-phone IP services. The FCC expressed an intent to reexamine the issue as well as specific IP Telephony services in the future, and it reserved the right to subject these services to regulation at that time.

Pursuant to this regulatory distinction between telecommunications (i.e., basic services) and information services (enhanced services), and the FCC’s initial analysis of IP Telephony, regulators in the U.S. have, to date, let IP Telephony develop free from federal regulation.

11.3113 The FCC is Currently Reevaluating the Regulatory Classification of IP Telephony but has Promised a “Light-Regulatory Touch”

IP Telephony services have improved technologically and achieved more commercial success since the FCC first reviewed them in 1998. As traditional carriers increasingly view these services as commercial threats, the FCC has been asked to make a formal ruling on various aspects of the regulatory treatment of IP Telephony.

In early 2004, the FCC issued a ruling that formally classifies certain PC-to-PC telephony applications as “information” services that are to remain unregulated.24 The Commission also issued a separate ruling that showed its willingness to subject phone-to-phone IP Telephony applications to certain targeted telephone regulations, in this case access charges.25

Most importantly, however, in early 2004, the FCC also initiated a broad rulemaking proceeding to examine the appropriate regulatory classification for the range of IP-enabled services, including IP Telephony. The difficulty posed in this policy inquiry is that IP Telephony, and other IP-based applications, are hybrid services that do not fit neatly into a regulatory classification scheme that requires services to be treated as either a “telecommunications” or an “information” service.

The Commission acknowledges this regulatory dilemma. Although it believes that certain IP Telephony applications, such as phone-to-phone IP Telephony, may appear to be functionally equivalent to traditional telephony services, it hesitates to fully regulate them as such. The Commission has expressed its reluctance to apply telephony regulations to this application because IP networks are both technically and administratively different from the PSTN. 26 The FCC also believes “traditional economic regulation designed for legacy networks should not apply outside the context of the PSTN”27, and should not be imposed on IP Telephony.

Rather than forcing new IP-based technology into old regulatory classifications, a variety of commentators are arguing that a more sophisticated regulatory framework must be developed to

24 See the U.S. Case Study for a more thorough discussion of this issue and the details of the Pulver.com ruling.25 See the U.S. Case Study for a discussion of the FCC decision on AT&T and access charges.26 IP NPRM at paragraph 4.27 Telecommunications regulation of telephone providers was an effort to control the historic monopoly ownership of the PSTN. Since the market for IP-enabled services in the U.S. is not generally characterized by monopoly conditions, key policy makers within the FCC “doubt that there is a compelling justification” to impose traditional telephony regulations on providers of IP-based services.

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address the trend towards convergence of telecommunications and computer services. The shape and content of the appropriate new framework is far from clear, however, and is the current subject of vigorous debate within the industry. 28

11.312 European Union – Are IP Telephony Communications “Real-Time”?

The European Union developed a four-part test to determine whether an Internet voice communication qualifies as “voice telephony.”29 The criteria are:

1. Is the service the subject of a commercial offer, e.g., has the service been advertised? (If the service is offered free of charge, it cannot be telephony.)

2. Is the communications provided for the public? (Networks that are not offered for use by the general public, such as office LANs or private user groups, are not engaged in telephony.)

3. Does the communication connect service to and from public switched network termination points on the fixed telephone network? (If Internet access does not use the PSTN, for example, if leased circuits are used for transmission, then it is not telephony. In addition, there is no telephony, if the user can only call other Internet subscribers whose computers are connected via a modem and who are using similar software.)

4. Does the communication involve direct transport and switching of speech in “real time”30?

The first three criteria generally mirror those examined by the FCC. However, the fourth criterion introduces a test for “real-time” transmissions. This criterion is important as it differentiates the categorization tests imposed in the U.S. and the E.U.

28 MCI’s Richard Whitt has developed a white paper which argues that policymakers can best deal with technological convergence by adopting a new legal framework that regulates along “horizontal network layers” rather than along vertical industry segments (i.e., broadcast, telephony, wireless, etc.). This is an interesting concept paper that is available on MCI’s website, at: _________. Also see the National Cable & Telecommunications Associations’ Policy Paper entitled Balancing Responsibilities and Rights: A Regulatory Model for Facilities-Based VoIP Competition, February 2004, available at: www.ncta.org. 29 See EU Directive 90/388/EEC.30 Voice transmissions over the Internet are subject to delay due to the packetization, compression and transmission processes. PSTN voice quality usually does not exhibit delays of more than 150 milliseconds. Delays associated with IP Telephony often exceed this length of time, and therefore are not always considered to meet technical standards for “real-time” communication. Regulators that use time delay to distinguish between IP Telephony and traditional telephony usually use delays of 250 milliseconds as the boundary. ITU-T Recommendation G.114 states that delays of 0-115 milliseconds are acceptable for most user applications. Delays of 150-400 milliseconds will degrade some user applications. Delays that exceed 400 milliseconds are generally unacceptable.

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No form of IP Telephony currently meets all four of the E.U. criteria. As a result, the EU does not currently regulate any forms of IP Telephony as voice telephony.31 This could change in the future as the technology, especially data transmission times, improve.32

11.313 ITU

The ITU also has recommended an informal set of criteria to determine the functional equivalence of IP Telephony and PSTN voice services. This analysis is designed to determine which IP telephony services most closely resemble traditional PSTN voice service.

The ITU’s recommended criteria reflect those used in the U.S. and the E.U., and are listed below:33

Is the service available for use by the public? If not, this eliminates closed user group services, such as enterprise voice

networks.

Is voice the dominant or only communication service provided? If not, this eliminates integrated voice/data, voice/video (real-time and

messaging), and all fax services.

Is the service priced for a fee (pre-paid or post paid)? If not, this eliminates “free” PC-to-PC and PC-to-phone service.

Is the PSTN used on the originating end, other than in the course of a dial-up Internet session? If not, this eliminates calls originating on private networks with dedicated IP

data lines.

Is the originating PSTN gateway physically located outside the premises or equipment of the caller but within the same regulatory jurisdiction as the caller?

If not, this eliminates all PC-to-PC, PC-to-phone, and PC-to-fax services.

Is an ordinary phone (or variant) used as the originating terminal device? If not, this eliminates PC-to-PC and PC-to-phone services.

Is the service “real-time” (i.e., transmitted without significant average delays (of example, more than 250 milliseconds), which makes conversation awkward?

If not, this eliminated medium to high delay services.

Is conversational speech transmitted instantaneously (i.e., perceived to be natural by both callers)?

31 The EU does not, therefore, currently subject any forms of IP Telephony to universal service contributions.32 Interestingly, in 2004, regulators in Jordan found that VoIP technologies were “real-time” because delay times had been reduced to levels consistent with services offered by circuit-switched voice operators. Regulators, however, prohibited competitive provision of most VoIP applications, finding that they encroached on the incumbent licensees exclusive right to provide voice services. See ____ at _.33 See [ITU Bkgrd document] at 31.

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If not, eliminates even slight delay services.

If the answer to these questions is yes, then the ITU suggests that the service appears to be functionally equivalent to traditional PSTN voice service.

11.32 How are regulatory frameworks applied to IP Telephony services?

Individual countries have adopted a wide variety of domestic regulatory frameworks for IP Telephony. These regulatory approaches generally fall into four categories, each of which is discussed below.

11.321 IP Telephony Is Permitted

As previously discussed, many developed and industrialized countries, including the U.S. and Europe, have made regulatory distinctions between Internet-based applications, such as IP Telephony, and traditional telephony. IP Telephony currently is permitted without restriction and is not regulated as telephony. To date, these nations have avoided treating IP Telephony as a basic voice service and have instead allowed these applications to develop unfettered. In the U.S., this approach has created a vibrant and rapidly growing market for IP Telephony services.

The reasons given to justify this liberal and non-regulatory approach include:

Encouraging emerging technologies; Encouraging migration to IP-based networks; Giving users more freedom of choice; Benefiting consumers by reducing long distance prices; Encouraging trade; and Uncertainty regarding how to properly regulate this evolving technology.

Although the U.S. is currently rethinking its regulatory framework for IP Telephony and other Internet-based services, the FCC has indicated that any federal regulations that are adopted will be “narrowly tailored.”

11.322 IP Telephony Is Prohibited or Restricted

A fair number of countries have taken a restrictive approach to IP Telephony and opted to prohibit the provision of this Internet application. ITU data released in March of 2001, indicated that approximately 35 countries prohibited IP Telephony. The reason for the prohibition varies by country, but many commentators have observed that these restrictions often stem from short-term governmental concerns with incumbent revenues, and do not generally reflect independent efforts to fully evaluate the technology. These limitations also run counter to trends in industrialized countries that are seeking to develop forward-looking policies that accommodate the shifting technological paradigms in the communications industry.

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11.3221 Regulatory Restrictions Often Seek to Preserve Monopoly Control of Voice Services

Explicit prohibitions on IP Telephony occur primarily in countries where the fixed telephony system is still a state-owned monopoly. The prohibitions imposed by these countries generally seek to prevent government-owned telcos from losing revenues due to competition with the monopoly provider.

Prohibitions also are frequently imposed in markets where the government has sold its interest in the national telco, but has granted a private company monopoly rights over certain voice services, for a limited period of time, to ensure a return on this private investment. In this instance, there is not always an explicit regulation prohibiting IP Telephony. Instead, the regulatory limitation results indirectly from pre-existing legislation that limits competition by restricting the provision of voice service to those with a license. Voice telephony is, in these cases, often defined broadly to include IP Telephony applications. In many countries, therefore only the incumbent carrier or carriers with exclusive licenses can provide such voice services.34

Not surprisingly, there also is a marked difference in the attitude of incumbent operators in open and closed markets. In emerging markets, where competition in basic telephony is either not allowed or is limited in scope, incumbents often attempt to block the rise of IP telephony.35 Incumbents in many countries have been reluctant to embrace or support the emergence of IP telephony or other Internet applications for fear that it will undercut their existing services.

For the reasons described above, restrictions on IP Telephony appear frequently in countries where the interests of the government and the incumbent carrier are aligned.36 Commentators suggest, however, that consumer welfare is improved under a more liberal approach towards IP Telephony.37

11.3222 Prohibitions Also Seek to Preserve Revenues from International Settlements.

34 Regulators in Jordan have prohibited ISPs from providing VoIP service. It believes these services would encroach on the incumbent’s exclusive license to provide voice service. Regulators have interpreted this exclusivity clause broadly and use it to also prohibit ISPs from marketing voice services to users by selling software, prepaid cards and hardware with payment processing capabilities or functionality that would enable the use of VoIP on their data networks. Notably, the incumbent provider stated that it lost more than 7.5 million dinar during 2001 due to unauthorized VoIP activity. See TRC, Final VoIP Statement, Explanatory Text available at: http:// www.trc.gov.jo/static_Arabic/New%20Stuff/Final%20VoIP%Statement%20Final.doc (visited May 31, 2004 (“TRC Final VoIP Statement”).35 For example, in Panama, the regulator blocked the deployment of VoIP at the request of the incumbent voice carrier. The restriction was widely viewed as an attempt to uphold an exclusivity contract that Panama signed with Cable & Wireless. The trade press also reported a similar regulatory battle in Guyana. VoIP and the Internet would provide a boost to economic development and consumer welfare in Guyana by allowing cheaper and easier communications between local and international residents. However, the incumbent operator reportedly worked to block an IADB project to expand Internet access in order to preserve a 40-year exclusivity contract that it signed with the government in 1991—before the Internet had been really developed. [cite]. 36 Independent decision-making is more likely in markets where the government has created an independent regulatory agency, and divested its ownership interest in communications service providers.37 See IP Telephony Workshop at 4.1. The main consumer benefit offered by IP Telephony is that it is cheaper than traditional telephony.

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Regulators also prohibit IP Telephony in an effort to protect revenues earned from international settlements. International settlement rates are part of a complex accounting system established to compensate carriers for terminating international telephone traffic. The system generally functions in this manner:

[a]ccounting rates are the “price a U.S. facilities based carrier negotiates with a foreign carrier for handling one minute of international phone service. The settlement rate is usually half of the accounting rate - one half goes to each of the two carriers. [Payment of these rates is based on the fact that a nation’s international calling service carrier can collect the so-called termination costs associated with terminating a call on that nation’s PSTN] Each carrier tallies the net minutes of service that it originated for a certain period of time. If these amounts are equal, the carriers pay each other nothing. However, when one carrier originates more calls than the other, that carrier must make a settlement payment to the other, determined by multiplying the rate times the number of excess minutes of service.”38

Accounting rates in many developing countries far exceed cost. As a result, carriers in developed nations often reluctantly, and in their view unnecessarily, make large international settlement payments pursuant to this accounting regime. Since many industrialized nations are unhappy with this regime, several practices have developed to effectively bypass this system. IP Telephony is one such bypass technique.

Since the settlement rate regime applies only to the PSTN, calls routed through IP networks avoid this regulatory system and the associated inflated fees. As many carriers have discovered, avoidance of these fees can create crucial cost savings in extremely competitive telephone markets. IP Telephony, therefore, provides a mechanism for carriers to conduct regulatory arbitrage. It allows carriers to deliver high-quality calls while avoiding the PSTN and the associated accounting rate system, thereby reducing the level of settlements due to partner countries. Regulators and carriers in some developing countries, therefore, have embraced IP Telephony as a valid mechanism to move international fees closer to cost.

For these same reasons, developing countries with high international tariffs often seek to limit the use of IP Telephony to terminate voice traffic within their borders. Many of the calls routed over phone-to-phone IP Telephone services (via privately managed IP networks) are calls that would have otherwise been sent over the PSTN. As a result, incumbent carriers often view IP Telephony as a threat to their market share. This trend is especially worrisome to governments that maintain an ownership interest in the national carrier, often a monopoly, since a loss in market share would cause a direct reduction in government revenues.

Many developing nations, therefore, believe they have a vested interest in blocking technologies, such as IP Telephony, that would undermine the current system of international settlements. For example, when regulators in Jordan recently considered the regulatory treatment of IP Telephony, one of the main issues under discussion and consideration was the effect the application would have on

38 Shaun P. Montana, An Approach to the International Regulatory Issues of IP Telephony, at 697, available at http://www.bromsun.com/pub/professional/IP_Telephony%20Article_SPM.PDF (“Montana”).

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international settlement payments. Jordanian regulators observed, in fact, that international settlement payments constituted “the bulk of revenues for developing-world providers.”39

Clearly a potential revenue loss of this magnitude can create political pressures and incentives within some developing countries that are difficult to ignore. Commentators suggest, however, that these governments and PTOs should not view IP Telephony as the main threat against revenues of incumbent carriers. They note that countries with “more monopolistic telephone systems have maintained high accounting rates, while those with more competitive systems have not”40, and that this market and pricing structure will remain under constant pressure to reform – with or without IP Telephony.

As the Jordanian regulators noted, revenues “are under threat from many bypass technologies and techniques.”41 IP Telephony is simply one of the newer techniques. Various international actors have sought to reform or replace the accounting rate system, eliminate price distortions and move carrier charges to reflect actual costs.42 For example, the World Trade Organization’s 1997 Agreement on Basic Telecommunications, the U.S. Federal Communications Commission and general market forces are all actively working to decrease international accounting rates. With or without IP Telephony, foreign carriers must recognize that international trends, including other forms of bypass, will eventually force them to change their current business models.43 IP Telephony is but one of these techniques.

11.323 Some Forms of IP Telephony Permitted

It is important to note that the total number of countries that ban IP Telephony is decreasing.44 A variety of governments are seeking a middle road by imposing partial bans that allow some forms of IP Telephony.

For example, regulators in Jordan recently held that voice services provided using VoIP technology were “the functional equivalent of voice service provided using circuit switched voice technology.” Therefore, Jordan Telecom, the incumbent carrier, was found to have the exclusive right to provide public switched voice using VoIP technologies. The regulator issued rules prohibiting any other commercial provider from using phone-to-phone VoIP technologies to provide voice service to the public until Jordan Telecom’s exclusivity period ends in 2005.

The regulator also prohibited any other commercial provider from using VoIP technologies to terminate international calls on Jordan’s PSTN, including its mobile networks. However, under the new rules, individual private users are granted some limited rights to use IP Telephony. They are

39 [See Ministry of Information and Communications Technology Policy Consultation, Draft VoIP Guidelines, ___________ at 7.] 40 IP Telephony & Its Various Aspects at 3-4.41 Id.42 Id.43 IP Telephony & Its Various Aspects at 3-4, available at radcal2.vsnl.net.in/rakesh/ipdraft.htm44 According to the Global Internet Policy Initiative, between 1999 and 2001, eight countries that prohibited IP Telephony began to allow it within limits. [See www.internetpolicy.net___].

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permitted to make PC-to-PC or PC-to-phone IP Telephony calls, provided these calls do not involve a “service provider in Jordan competing with Jordan Telecom in offering voice service.”45

The ITU notes that some countries have developed mechanisms to bypass the voice licensee and allow limited forms of IP Telephony. For example, in 2002, the Hungarian government allowed private companies to offer VoIP, provided it was of lower quality than that offered by the telephone operator.46

Similarly, Poland reportedly viewed IP Telephony as illegally encroaching on the government’s exclusive international service provider licensee. Nonetheless, it allowed a mobile operator to route international calls over the Internet.47 [check] As of 2003, the Czech Republic reportedly allowed certain classes of operators to offer IP telephony services, although only the exclusive government licensee was permitted to offer phone-to-phone IP Telephony through the PSTN.48

In addition, a number of African countries have permitted VoIP. A recent report by Bridges.org notes that Algeria, Mauritius, Mali, Nigeria and Kenya have all legalized VoIP.49 Bridges.org notes that Algeria recently permitted several ISPs to use VoIP to legally compete oninternational calls. Previously, only the incumbent telecommunications operator was allowed to offer international call services. According to Bridges.org, VoIP calls in Algeria now cost six times less than what the incumbent charged.50

Botswana reportedly allows VoIP in private networks, but not over the public Internet. This distinction is reportedly made to “protect consumers from privacy issues and low quality telecom service.”51 South Africa allows the provision of VoIP services only in areas where less than five percent of the population has access to a telephone.52

11.324 No Policy on IP Telephony

A fourth group of nations have simply not yet addressed this complex issue. These nations may benefit from observing on-going proceedings in the U.S., the U.K., Canada and other markets.

It is clear that, at this point in time, there is no single or consensus policy approach for IP telephony, and that the policy issues will continue to evolve, change and become more complex as the technology

45 See TRC Final VoIP Statement at _.46 Regulators believed this was the only way they could bypass concession agreements with other licensed operators. Notably, at least one international IP Telephony provider, ITXC, spoke out against this approach arguing that regulating quality of service serves to further protect the national incumbent operator. ITXC argued that consumers should be allowed to decide what quality of service works best for them, and that this determination should be made by users without government intervention.47 Shaun P. Montana, An Approach to the International Regulatory Issues of IP Telephony, available at http://www.bromsun.com/pub/professional/IP_Telephony%20Article_SPM.PDF (“Montana”).48 Id .49 Bridges.org, Restricting VoIP and WiFi Costs South Africa its Position as a Technology Leader in Africa (visited on May 31, 2004)(“Restricting VoIP”), available at: http://www.bridges.org/e-policy/comments/voip_wifi/index.html.50 Id.51 Some regulators, including those in the U.S. and U.K, have declined to impose quality of service standards on IP Telephony providers, noting that there may be consumer demand for cheaper services that are of a lower quality. 52 See Restricting VoIP.

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develops. For these reasons, policymakers must be especially strategic in establishing rules to govern the uses of this technology. Before adopting regulations, policymakers should carefully define the rationale behind their regulatory frameworks and the desired social and economic effects of their policies. They must determine, for example, whether their regulatory goals are:

to preserve monopoly power or to encourage competition? to maximize incumbent profits or lower prices? To maintain the status quo or encourage new technologies that can provide citizens with

expanded access to communications services?

Once the goals are defined, policymakers will need to determine the purpose (and effects) of their proposed rules, and whether those rules are likely achieve the national interests.

11.4 Policy Issues for IP Telephony

Allowing IP Telephony applications will raise a variety of linked policy issues that regulators will need to consider. A brief introduction to several of the main regulatory issues associated with this Internet application appears below.

11.41 Market Entry Requirements

Countries that do not explicitly ban IP Telephony may still effectively, and perhaps unknowingly, block or slow the entry of IP Telephony providers by imposing unduly burdensome and inappropriate market entry requirements.

Regulators seeking to encourage the growth of IP Telephony, or other Internet services, should carefully consider the scope and nature of licensing, or other entry requirements that are imposed on service providers.

11.411 Individual Licensing versus General Authorizations

Regulators in some countries begin from the premise that voice service providers should obtain regulatory approval before offering service to the public. In many countries, telephony operators must file for and obtain a carrier license or a concession from the appropriate regulatory authority. This process is often expensive and time consuming. It also may have the effect of imposing specific service obligations (e.g., interconnection, equal access, proportionate return, etc.), or trigger the payment of certain franchise fees or royalty payments.

Some regulators argue that certain IP Telephony applications, such as phone-to-phone services, are functionally equivalent to traditional telephony and should be subject to similar market-entry requirements.53 However, imposing equivalent entry requirements on IP Telephone providers may not

53 Id. For example, in the U.S. some state regulatory commissions are seeking to impose entry regulations on phone-to-phone IP Telephony services.

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be appropriate or justified given the nature of the technology and the economic structure of this Internet application.

Regulators must be cognizant that an inefficient licensing policy can create a significant market entry barrier. Best practices on licensing policy suggest that individual licensing requirements are appropriate only in circumstances where a scarce resource, such as spectrum, is being allocated among competing applicants, or where a specific obligation is imposed upon a provider. These conditions are not met in the case of IP Telephony.

Given these circumstances, there may be no need for regulators to issue individual licenses to IP Telephony providers. Regulators in many countries have exempted Internet services from the more restrictive and burdensome licensing and market entry requirements applied to telephony or other regulated communications services.54 Applying this lesser regulatory burden significantly reduces the administrative and financial burdens associated with providing an Internet service and facilitates the entry and operation of these beneficial services.

Instead of automatically imposing entry requirements similar to those used for traditional telephony service, regulators should consider which, if any, market entry requirements are appropriate for IP Telephony service. The Office of Communications (“Ofcom”), the regulator for the United Kingdom, has indicated, for example, it does not require companies to apply for permission before providing VoIP services in the U.K. Pursuant to the Communications Act of 2003, the U.K. has abolished licensing requirements for companies that provide electronic communications networks and services.55 A set of general and specific conditions has been adopted instead to govern all persons operating certain types of electronic communications networks and services.56 Prior regulatory authorization or permission for IP Telephony services is therefore not required under this new regime.

On the other hand, there is an argument that, in some circumstances, in favor of licensing IP Telephony services. Being a licensed provider may ensure certain legal right for new entrants, such as interconnection rights, numbering resources and access to essential facilities.57 Legal rights, which can be enforced in court, are often important for new entrants that must compete against an entrenched incumbent that controls the underlying telephony networks.58

54 See e.g., IP Telephony & Its Various Aspects at 4.2. The Global Internet Policy Initiative reports that Polish regulators determined in 2000 that VoIP is not “telephony” so those services do not need a phone license. Instead, they are to register their service offering as “data transmission”, which requires no license or authorization. See Communications Regulatory Agency Symposium, Influence of Liberalization of IP Telephony on the Telecommunications Market in Bosnia & Herzegovina, power point presentation by Robert Horvitz, Global Internet Policy Initiative, October 31, 2002, available at: http://_______________. 55See Ofcom, Questions and Answers on Voice over IP and Voice over Broadband Services (visited on May 31, 2004), available at: http://ofcom.org.uk/ind_groups/telecommunications/vob/vobqa/section5/. This UK law implements a new EU framework for the regulation of electronic communications networks and service providers. The framework establishes a harmonized and technology neutral regime for the regulation of communications services across the EU. The most significant change for communications networks is the ending of the licensing regime. Before the adoption of this law, any company operating in the UK had to do so under the appropriate telecommunications license. The licensing regime has now been replaced by a general authorization regime, which established general conditions that apply to all providers. 56 Id.57 See Are VoIP Services Telecommunications Services? Business and Regulatory Considerations for VoIP Service Providers and Connecting Carriers, Cherie R. Kiser, Angela F. Collins, October 2003, posted at:__________.58 In the U.S., for example, new entrants in the VoIP markets argue that they lack market power and are forced to compete with incumbent carriers who are increasingly entering the VoIP market. These incumbents control local exchange services

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A viable solution may lie in creating a middle regulatory ground for IP Telephony services. Requiring general authorizations or registrations instead of imposing a full licensing requirement, as for example in the U.K., may be a legitimate compromise that does not impose too onerous of an administrative burden on IP Telephony providers. This approach lessens the burden on both the regulators and the service providers, yet can be used to define rights and obligations applied to all such providers.

11.412 Any Market Entry Requirements Should Be Predictable, Transparent and Narrow in ScopeRegulators must ensure that any market entry requirements are predictable and consistent. The procedures should not impede competition. If a licensing regime is adopted, it must be clear, simple and practical; and it should minimize the administrative requirements imposed on new services and applications.

Regulators should avoid imposing exorbitant licensing fees or build out obligations, and should allow providers to determine what types of services they will provide and which technology they will use. Companies should remain free to determine their optimal network architecture.59

Establishing fair and appropriate market entry requirements is clearly an area of importance to new entrants and established carriers. These policies must be discussed and considered as part of any country’s broader policy on IP Telephony.

11.42 Universal Service

Many regulatory regimes require telecommunications service providers to contribute to universal service funds.60 One of the main regulatory challenges facing communications regulators is deciding whether, and if so how, new or hybrid technologies, such IP Telephony, should be required to contribute to universal service funding schemes.

To finance universal service goals, many countries charge some providers and end users a fee, which is deposited into the universal service fund and used to help carriers extend basic telephone service to underserved areas at affordable prices. The policy challenge is that universal service regimes often collect fees only from certain types of service providers, usually telecommunications services that are provided on certain technological platforms (i.e., the PSTN). Therefore, funding regimes that base contributions on regulatory distinctions between “telecommunications” services and non-

and critical bottleneck facilities, and may attempt to use this power to their competitive advantage. 59 See, for example, Letter from CompTel/Ascent to Secretary , Telecom Regulatory Authority of India, May 11, 2004, re: Consultation Paper of Unified Licensing Regime, available at: www.comptel.org[ ].60 Universal service programs provide funding to extend communications services to underserved areas. Historically, many countries have subsidized the provision of costly local and domestic telephony services by charging long-distance and international customers excessive fees. More specifically, many developing countries have charged above-cost rates for long-distance service and outgoing international telephone calls, and then used these revenues to subsidize domestic network development and basic local access. In recent years, there has been a shift away from these types of broad cross- subsidization policies towards more targeted and formal “universal service” or “universal access” subsidy programs. These programs are designed to ensure that consumers have at least minimal levels of access to basic telephone service.

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telecommunication or information services can create a strain on universal service funds as more voice services migrate from the PSTN to cable or IP-based platforms. Furthermore, disparate regulatory treatment of voice and data services under universal service mechanisms may create an incentive for regulatory arbitrage that actually speed the shift of voice services from the PSTN.

Regulators are trying to avoid this situation in the U.S. In the U.S., all “telecommunications carriers” that provide “interstate telecommunications services” must contribute to the universal service program. Certain Internet services, such as access services, have been exempted from universal service contributions.61 Although the FCC has suggested that phone-to-phone IP telephony appears to be functionally equivalent to PSTN voice telephony, it has not required universal service contributions from these service providers. Therefore, for now, information and enhanced service providers are not required to contribute to the universal service funding mechanism.62

There are growing concerns in the U.S. that continuing to treat all IP voice services, including phone-to-phone IP Telephony, as “information services” rather that “telecommunications services” will erode the revenue base for universal service contributions. The current system also may create incentives for operators to switch to alternative delivery platforms, thereby further reducing the volume of traffic on which payments are due.

Other countries are taking a variety of approaches to incorporate data services into their domestic universal service goals. The ITU notes, for example, that Uganda and Nepal require ISPs to be licensed prior to providing service.63 Once licensed to operate, they must contribute 1 to 2 percent of their revenues to national universal service funds.64 This approach circumvents the regulatory issue of whether IP Telephony should be considered as a “telecommunications” or an “information” service.65

Canada has followed a third path by explicitly incorporating certain types of IP Telephony into its funding base for universal service. As early as 1997, the national regulator, the Canadian Radiotelevision and Telecommunications Commission (“CRTC”), held that phone-to-phone voice telephony service providers who use the Internet as an underlying transmission facility must contribute to universal service just like any other form of voice telephony.66 According to an ITU report, the CRTC requires universal service contributions to be paid per minute on any Internet access line that allows PSTN voice calls to be originated or terminated.67 However, IP Telephony service providers who offer pure PC-based voice service (i.e., PC-to-PC and PC-to-Phone) are exempt from Canadian universal service contributions.68

61 In 1997, the FCC held that Internet access services do not fall within the definition of “telecommunications services” and therefore ISPs were not required to make contributions to the universal service fund. 62 See Stevens Report at 398 Paragraphs 790-91.63 See ITU IP Telephony Workshop at 28, and IP Telephony & Its Various Aspects at 4.2.64 Id.65 The ITU notes in fact that IP Telephony is prohibited in Nepal. 66 See discussion in International Telecommunications Union, IP Telephony Workshop, Background Issues Paper, June 2000, at 28. See also Explanatory Memorandum to Recommendations of the TRAI on Opening Up of Internet Telephony, 20th February, 2002 in Section 1.7.5, available at http://www.trai.gov.in/Explanatory_Memorandum(20-02-2002).htm. Canada affirmed this policy in 1998 and released a detailed decision in Order CRTC 98-929. Further detail is available in http://www.itu.int/osg/sec/spu/ni/iptel/countries/canada/index.html67 Id. at 28.68 To determine eligibility for USO contributions, the CRTC reportedly seeks to identify the point where the gateway function is located, i.e., the point where the conversion from TDM to IP format takes place. If the conversion or gateway

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The CRTC recently initiated a rulemaking proceeding to examine the regulatory framework and requirements to be applied to IP Telephony, including universal service obligations.69

South Africa has adopted still another approach. It has directly incorporated IP Telephony into its universal service strategy by encouraging the development of these services in areas where less than five percent of the population has access to a telephone.70 Actively incorporating IP technologies into universal access strategies may provide faster and cheaper ways to spread communications access in developing nations.71

There is more than one way to fit IP Telephony into a universal service regime. What is important is that regulators recognize that the regulatory classification of IP Telephony services may reduce available funding for national universal service plans. Regulators should anticipate and consider this issue as they develop their broad approach to IP-based services, such as IP Telephony.

11.43 Numbering

Another policy issue raised by IP Telephony is numbering and addressing.

11.431 IP Addressing

In the PSTN, which is a circuit-based network, telephones are identified through the telephone lines to which they are attached.72 The numbering system is quite different for IP networks, however, and requires that numbers be assigned to IP terminals, such as PCs or IP phones.73 Most calls currently are terminated on the PSTN rather than on IP networks. As IP networks continue to develop, however, a new global numbering scheme will be needed to facilitate calls that terminate on IP networks rather than on the PSTN.

function is performed in the CPE, the call is considered PC voice. If the conversion takes place in the Internet gateway/server of an ISP or IP Telephony calling card service provider, the call is treated as PSTN voice. Those offering this second category of services must register with CRTC as resellers and make USO contributions. The contribution is not applicable when the call starts in a packet switched network and it is not converted to circuit switched network at any point, i.e., if it is a “pure IP call.” Id. 69 See CRTC, News Release, CRTC Initiates Proceeding on VoIP Services; Issues Preliminary Views (April 7, 2004), available at: http://www.crtc.gc.ca/eng/NEWS/RELEASES/2004/r040407.htm. See Telecom Public Notice CDTC 2004-2 for information regarding this new proceeding. 70 See Restricting VoIP. 71 IP networks offer flexible and cost-effective options for building communications infrastructure. These networks also can be creatively combined with wireless technologies to develop new and cost-effective ways to serve rural areas. ITU-D Study Group 2 has a Rural Application Focus Group that is studying the development of wireless IP-based technologies for rural areas. See http://www7.itu.int/itudfg7/.

72 The PSTN uses a specific numbering scheme that complies with ITU recommendations. 73 Unlike the PSTN, the IP addresses are not fixed and are valid only for the duration of the connection. Since these addresses are not permanent, engineers are working to develop standards that will more permanently connect individuals to their IP phones and terminals.

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Policymakers therefore should be aware of international efforts to develop a numbering regime for IP Telephony and consider whether they should become involved with these international planning efforts.74 This work is being undertaken by several organizations including, ITU-T Study Group 2 and the IETF ENUM project.75

11.432 Numbering Resources

Regulators should be aware that IP Telephony also has the potential to affect national numbering resources.

In the U.S. for example, some businesses argue that IP Telephony will affect the availability and efficient use of telephone numbers. Traditional telephone carriers have begun to argue that VoIP providers threaten to exhaust the pool of available numbers. Local/regional phone providers have warned the North American Numbering Council (NANC), which is charged with developing policies for distribution of phone numbers within this geographical region, that VoIP providers are causing difficulties in the way the telephone industry allocates and tracks numbers.76 The traditional telephony providers argue that this trend might lead to a scarcity of numbers and other assignment problems.77

Businesses in the U.S. are beginning to ask policymakers to develop policies to address the increased demand for national numbers, and to begin to consider how numbers are distributed to VoIP providers. Regulators may need to evaluate how IP Telephony applications will affect the national availability and efficient use of telephone numbers. [This aspect of the numbering issue may be less pressing, however, within the African continent given the relatively lower teledensity.]

11.44 Security / Surveillance

Due to the terrorist attacks in the U.S. on September 11, 2001, security and law enforcement needs are becoming an increasingly important area of concern within IP Telephony policy discussions.

Federal law requires phone companies in the U.S. to build surveillance capabilities into their network infrastructure. Federal authorities are concerned that classifying IP Telephony as an “information” service rather than a “telecommunications” services will exempt providers from these network requirements. This result would make it difficult, if not impossible, for law enforcement authorities to conduct wiretaps or other surveillance on communications transmitted via IP Telephony.

A variety of IP Telephony providers are voluntarily complying with law enforcement surveillance requests. However, the FCC is actively working with a variety of federal agencies, privacy experts and

74 One such approach would create a special country code for IP phones and devices.75 See ITU Workshop at 15. 76 Verizon, Qwest and BellSouth submitted a White Paper in 2002 to the North American Numbering Council discussing how IP Telephony affects the FCC’s numbering policies. The paper is available at http://www.nanc-chair.org/docs/Nov02_VoIP_White_Paper.doc.77 VoIP providers have responded that cellular phones are in fact a bigger user of numbers.

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others to determine whether explicit legal obligations should be imposed to ensure that national security requirements and wiretap capabilities are embedded in IP Telephony services.78

Each country’s national law establishes the relevant surveillance and security requirements. If domestic law imposes such requirements, policymakers may need to consider whether these requirements are relevant for IP Telephony.

12. CASE STUDIES

How is VoIP being regulated in different parts of the world? Provide a brief comparative review of market conditions and VoIP related regulations in the following countries:

12.1 CASE STUDY – United States

12.11 Who is using IP Telephony ?

12.111 Telephone Carriers

Several major carriers have incorporated IP-based technology into their backbone networks. According to many, the technology is of a high enough quality that users cannot tell whether their telephone conversations are being transported over a traditional, circuit-switched network or over a packet-based, IP network.

12.112 Consumers

Residential consumers who opt for VoIP phone service can enjoy cost savings of up to 30 percent over fees charged by traditional telephone companies. Deployment of this technology for consumer markets creates a significant competitive concern for traditional telephone carriers since it allows new entrants to make comparatively small investments in infrastructure and equipment, and offer high-quality, low-cost voice services.

12.113 Businesses

The FCC has noted that an increasing number of businesses are “moving to VoIP solutions in lieu of PBXs and other traditional facilities to manage their communications.” 79 IP based networks allow businesses to merge their voice and data service needs onto a single network. The cost savings offered by IP-based voice services are most significant for international and inter-office calling. For example, in the late 1990s, officials at Net2Phone noted “the average Fortune 1000 company spends $37 million dollars per year on phone calls, half of which is for inter-office communications.” Based on this, they

78 General information and resources on this topic are available at: www.epic.org, www.cdt.org. Industry comments on this issue are also available in the FCC’s database. Relevant proceedings include: CC Docket Nos. 02-33, 95-20 & 98-10; CS Docket No. 02-52, WC Docket Nos. 03-45, 03-211 & 02-361. 79 IP-Enabled Services, WC Docket No. 04-36, Notice of Proposed Rulemaking, note 6 (2004)(“IP NPRM”).

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estimated that “over $18 billion worth of interoffice calls – or more than seven percent of today’s entire market – may be moving off of the public network and inside private enterprise networks.”80

12.12 Who is providing IP Telephony services?

An array of providers either are offering, or have announced plans to offer, IP Telephony services. Many of the emerging providers are communications companies that own various types of transmission facilities. Cable operators, for example, have begun to offer broadband Internet and IP telephony to residential consumers over their cable plant.81 Since cable operators are using their own private digital networks to interconnect with the PSTN, many of these services do not rely upon the public Internet to transmit voice services.82 All of the major wireline telephone carriers also have announced plans to offer retail VoIP services.83 In addition to providing retail services, telephone companies also often incorporate IP networks into their backbone networks. Wireless service providers also have begun to offer IP telephony services.84

It is important to note, however, that IP Telephony is not being provided solely by companies that own and operate communication platforms. Companies that do not own transmission facilities also are providing VoIP applications to consumers. For example, computer-to-computer voice services, such as Free World Dialup (“FWD”) and Skype, use peer-to-peer technologies85 to allow users to transmit calls to one another. A FWD member can use either a Session Initiated Protocol (SIP) phone or a personal computer to make a “call” to another FWD member. The application is a PC-to-PC service that does not connect with the PSTN, and does not charge a fee to users. Similarly, Skype offers free software and free service that allows PC users to call one another over the Internet using a microphone connected to their computer. The voice quality is reportedly excellent, but Skype is a PC-to-PC application, which may limits its utility.

80 Sean Dalton, How the Emerging Internet Telephone Service Providers (ITSPs) Are Revolutionizing the Telecommunications Industry, a Harvard Business School Field Study in Information Technology, Second International Harvard Conference of Internet & Society, May 26-29, 1998.81 IP NPRM at paragraph 12.82 Time Warner, a major cable operator, has stated that its VoIP calls travel on a private managed network, not the public Internet. Calls to customers not served by Time Warner must traverse the PSTN and the company completes these calls through its relationships with competitive local exchange carriers. Time Warner entered into an agreement to use the Sprint and MCI networks to provide IP telephony to its cable subscribers, and to interconnect the calls with the PSTN. See IP NPRM at paragraph 12.83 For example, AT&T, a long distance carrier, has announced plans to provide VoIP service in 100 markets in 2004. The regional telephone companies also intend to offer IP telephony services. SBC and Bell South have announced plans to offer IP telephony to small and medium sized enterprises in multiple states. Qwest announced plans to offer IP telephony to residential subscribers, and small and medium sized businesses in the State of Minnesota. Verizon will offer the service to DSL subscribers and to businesses. 84 Verizon Wireless and Sprint PCS have recently launched push-to-talk services that use VoIP technology. Voice services also will be provided by service providers using WiFi technology. 85 Peer-to-peer technology is a communications model in which each party has the same capabilities and either party can initiate a communications session. Peer-to-peer has come to describe applications in which users can use the Internet to exchange files with each other directly or through a mediating server. See Petition for Declaratory Ruling that pulver.com’s Free World Dialup Is Neither Telecommunications Nor a Telecommunications Service, WC Docket No. 03-45, Memorandum Opinion and Order, FCC 04-27 (rel. Feb. 19, 2004)(“FWD Order”) at note 13.

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Another popular IP Telephony application is provided by Vonage. Unlike FWD and Skype, the service provided by Vonage is sold for a fee and connects with the PSTN. This service utilizes the public Internet and a customer’s preexisting broadband connection. Vonage does not supply the broadband access.86 It supplies only software and a multimedia terminal adapter (MTA) that allows its customers to use a regular telephone to make calls over their preexisting broadband Internet connection.87 Subscribers can then call other broadband Internet users, as well as people using traditional telephone service. Although the service connects with the PSTN, the company does not view itself as a “phone company” 88 and believes that its VoIP service is an Internet application – or “just a computer program.”89

One of the major selling points for the Vonage service is that its prices are significantly cheaper than those charged for traditional telephone service. In addition to price, the company believes that the features it provides, including the ability to retrieve voice mail messages on the PC or to maintain different phone numbers in different area codes – regardless of geographic location, are also strong selling points. In early 2004, the company had approximately 100,000 customers.

12.13 Which government entities are responsible for establishing regulatory policies on IP Telephony?

12.131 Congress

The U.S. Congress has primary responsibility for establishing national policies governing interstate and foreign communications. As such, Congress has established a broad policy to encourage the development of the Internet.

Over the last several decades, as computers developed and began to merge with communications facilities, U.S. policymakers were faced with an increasing number of questions regarding how to regulate these melding technologies. In 1996, Congress adopted a new telecommunications law that answered this question by defining two types of services: “telecommunications” services and “information” services.90 Under this 1996 Act, traditional telecommunications services are regulated. However, “information services”, which include the Internet, are not regulated.

The 1996 Communications Act also explicitly establishes a policy goal of promoting the continued development of the Internet and other interactive computer services, and preserving the vibrant and

86 Since Vonage does not offer broadband transmission services, customers must obtain a broadband connection from a third party in order to use the service. 87 Customers use regular telephone numbers and therefore can be reached by PSTN subscribers. If two Vonage customers are connected, the transmission does not use the PSTN. In that case, the Vonage servers use SIP to direct the call to the users computer or MTA. See IP NPRM at paragraph 15. 88 See Vonage’s Citron: We’re Not a Phone Company (February 9, 2004), available at: http://www.vonage.com/corporate/press_news.php?PR=2004_02_09_5.89 There is an ongoing legal debate regarding whether Vonage is a telecommunications or information service. The issue has not yet been resolved by regulators. 90 The distinction between “telecommunications” and “information” services is discussed in Section III of the course.

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competitive free market of these services “unfettered by Federal or State regulation.”91 In other words, Congress has directed that the Internet should not be burdened with unnecessary or burdensome regulation and should instead be treated with a “light” regulatory touch.

Congressional interest in the growth of the Internet continues due to the range of developing Internet applications, such as VoIP, and emerging questions regarding the commercial and social benefits and obligations that should be associated with these new applications. Congress has held a series of hearings on various policy issues associated with the increasing growth of VoIP services although no specific legislation on this technology has been adopted. For the moment, most of the governmental activity on VoIP is taking place within the Federal Communications Commission, which is the federal agency that has been tasked with developing specific regulations to implement the communications policies adopted by Congress.

12.132 Federal Communications Commission (“FCC”)

The Federal Communications Commission has regulatory jurisdiction over the Internet in the United States.92 This agency is responsible for adopting regulations to implement the broad policies outlined by Congress. The FCC is an independent agency of the federal government, and is directly responsible to Congress.

The FCC established an informal policy of non-regulation of IP Telephony applications in a 1998 report to Congress.93 This policy statement was not definitive, however, and left many open questions that the FCC knew would need to be resolved as the technology and commercial markets grew and matured. The Commission has acknowledged that it now time to examine these issues due to the growing use and variety of VoIP applications.

In the fall of 2003, therefore, the FCC launched a proceeding to gather information from the industry on the range of policy questions presented by VoIP services. This “policy summit” was a response to an increasing number of disputes between service providers regarding the regulatory classification of various VoIP services, and an increasing number of attempts by state regulatory commissions and courts to actively regulate these Internet applications.

In February of 2004, the FCC announced a formal rulemaking proceeding to examine issues relating to the services and applications that use Internet Protocol (IP) including, but not limited to, IP Telephony. The proceeding seeks comments “from all interested parties, including industry, consumers, unions, financiers and policy makers in the U.S. and abroad, on how IP applications are changing our communications networks and the assumptions on which we base our current regulatory regimes.”94

91 See 47 U.S.C. Section 230(b)(2)(2004).92 The Federal Trade Commission, another federal agency, also has some regulatory jurisdiction over certain issues of Internet content, such as advertising and privacy. 93 See Federal-State Joint Board on Universal Service, CC Docket No. 96-45, Report to Congress, 13 FCC Rcd 11501 (1998)(“Stevens Report”). 94 See Remarks of Donald Abelson, Chief of the International Bureau, Federal Communications Commission, March 2004, “Regulatory Treatment of the Internet in the United States”, APEC TEL Regulatory Roundtable on Next Generation Networks, available at: http://www.fcc.gov [add]

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When concluded, this proceeding will establish the definition, regulatory classification and proper scope of economic and social regulation for various types of IP Telephony services within the U.S.

12.133 States

Utility commissions within the fifty states also have jurisdiction over discrete areas of “telecommunications” regulation (i.e., intrastate, but not interstate, services). Despite this shared jurisdiction on “telecommunications” issues, federal, rather than state authority, is preeminent in the area of “information services, particularly in areas of the Internet and other interactive computer services.”95

There is currently ambiguity regarding the federal regulatory classification of various VoIP services (i.e., “telecommunications” or “information” service). Several state utility commissions therefore have initiated proceedings to examine the issue of regulating VoIP services. This additional layer of jurisdiction is important because if a state were to conclude that IP telephony is a “telecommunications service”, a variety of state regulations could then be imposed on providers.96

The FCC has observed that states remain free to make their own determinations regarding the level of regulation applicable to Internet telephony services until the FCC issues a definitive ruling on the classification of VoIP services. Once the FCC adopts formal rules clarifying this issue, however, state utility commissions must accept this regulatory classification and any state regulations interfering with the FCC’s exercise of its authority can be preempted. For example, in February 2004, the FCC held that it has exclusive jurisdiction over information services such as the VoIP service, Free World Dialup. States, therefore, are now prohibited from treating such PC-to-PC telephony applications as “telecommunications” services or otherwise subjecting these applications to public-utility type regulation.97

12.14 Does the government have an ownership interest in any telecommunications service provider?

No.

95 IP NPRM at paragraph 38. The U.S. Congress has adopted a national policy of “non-regulation” of Internet services. When state regulations would negate national policy, the FCC may preempt state regulations. The FCC has determined that certain state regulation of information services would conflict with the national policy of non-regulation of the Internet. Consequently, states have generally played a “very limited role” with regard to information services. See FWD Order at paragraph 17.96 For example, in 2003, the Minnesota Public Utilities Commission found that Vonage was offering two-way communication that is functionally no different than any other telephone service. It classified the VoIP application as a “telephone service” and ordered Vonage to comply with state laws governing providers of telephone service (e.g., certification and 911 requirements). Vonage argued that it provides an information service and, therefore, is not subject to such regulatory obligations. It also argued that state regulation of its service should be preempted because it is impossible to separate the Internet into intrastate and interstate components. Vonage has filed a petition for a declaratory ruling asking the FCC to resolve this dispute. The petition is still pending. 97 See FWD Order at paragraph 15.

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12.15 What is the current regulatory status of IP Telephony? Is there an explicit policy?

To date, the FCC has generally treated IP telephony as an “information” service rather than a “telecommunications” service, and therefore, it has not regulated these IP-based applications. As a result, companies that provide IP Telephony services have remained free from many of the burdensome regulations that are imposed on providers of traditional telephone service. In particular, the FCC imposes no licensing or registration requirement on IP Telephony providers seeking to commence service. VoIP also remains free from many regulatory fees or taxes, including universal service contributions and access charges,98 as well as from many requirements imposed to achieve various social goals, such as E911 obligations, law enforcement access and disabled access requirements.

12.151 Why has the FCC become so active on IP Telephony issues?

IP Telephony has been largely unregulated pursuant to an informal FCC policy announced in 1998. However, the FCC is now considering the adoption of specific rules to govern the treatment of various types of VoIP services.

In 1998, IP Telephony applications were of lower quality and were not widely used. The quality of the technology has now improved significantly, which has facilitated more widespread adoption and use of these applications. The FCC decided to develop explicit rules on this subject once it was clear that specific rules were needed to encourage further growth and investment in this sector. Uncertainty regarding the regulatory treatment of IP Telephony had begun to cause investors to hesitate in funding various VoIP ventures. In addition, the business community increasingly felt that a clear national policy should be established to ensure a uniform investment and operational environment for this emerging market.

Furthermore, in the past few years, several state utility commissions and courts have begun their own independent proceeding regarding various aspects of VoIP regulation. In the absence of FCC action, these state activities create the likelihood that similar services will be treated differently depending on the state in which they are operating. To avoid this type of disparate regulatory environment and provide regulatory greater certainty for the industry, the FCC is seeking to develop a uniform national policy. It has already begun the process of establishing an explicit regulatory framework that deals with the various types of VoIP.

12.152 What are the FCC’s policy goals in adopting rules for IP Telephony?

The FCC has consistently acted to preserve the Internet as a free and open platform for innovation, and sought to keep the Internet free from unnecessary government regulation. It is, therefore, seeking to establish a “comprehensive, yet minimal, regulatory environment for Internet voice application services.” The Commission has said that it intends to apply a “light regulatory touch” to IP Telephony. In practical terms, this means that any rules adopted must be substantial enough to provide guidance to

98 But see discussion in section [__ ]of access charges being imposed on certain VoIP services provided by AT&T.

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investors and providers, yet should not impose undue financial or regulatory burdens on service providers.

The FCC has identified several components of an effective policy for IP Telephony applications. First, the Commission seeks to avoid imposing conflicting or inappropriate economic regulations and taxes. Specifically, the FCC strongly believes that the regulatory regime developed for monopoly wireline providers should not be automatically or broadly imposed on VoIP applications. Regulations should be applied only when there is a specific need or purpose. A second FCC goal, therefore, is to identify any necessary consumer/safety/social policy regulations for VoIP applications. This type of inquiry will examine whether, and how, regulations applied to traditional telephony, such as universal service, emergency service or disability access obligations, also should be applied to VoIP applications. Another important issue is whether VoIP applications should be required to comply with the law enforcement surveillance requirements99 that are imposed on traditional telephony providers. Third, the FCC seeks to foster a free market environment that allows the creation of innovative technologies and products.

12.153 What has been the regulatory framework for IP Telephony to date?

The Congress and the FCC distinguish between “telecommunications” services and “information” services. “Telecommunications” services are subject to an array of burdensome economic regulations as well as interconnection, universal service and security obligations. Information services, on the other hand, are subject to a policy of “non-regulation.”

The FCC began to consider the regulatory classification of VoIP in a 1998 report to Congress, the “Stevens Report”, which noted that IP telephony often blurred the line between telecommunications and information services. Accordingly, the FCC identified three distinct “types” of IP Telephony: (1) PC-to-PC; (2) PC-to-phone; and (3) phone-to-phone. The FCC observed that PC-to-PC VoIP does not appear to qualify as telecommunications because it does not provide users with basic “transmission” capabilities.100 The FCC suggested, however, that phone-to-phone VoIP appears to resemble traditional telephony service. The agency suggested that it might be more appropriate to treat this particular type of VoIP not as an information service, but as a regulated “telecommunications” service.

The FCC tentatively defined “phone-to-phone IP telephony” to include services where the provider:

(1) held itself out as providing voice telephony or facsimile service; (2) allowed customers to use the same customer premises equipment (i.e., telephone handsets)

that were used to make voice calls over the PSTN;(3) permitted calls to regular (PSTN) telephone numbers; and

99 The Communications Assistance for Law Enforcement Act (“CALEA”) ensures that law enforcement officials, with proper authorization, have the technical ability to conduct electronic surveillance effectively in relevant communications technology platforms (e.g., wireline and mobile services). CALEA applies only to “telecommunications carriers” so it will need to be determined whether this power needs to be expanded to encompass VoIP applications that are deemed to be information services rather than telecommunications.100 For more information on the relevance of this criteria, see the discussion in Section III regarding “basic” versus “enhanced” services, and “telecommunications” versus “information services.”

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(4) transmitted calls without making any net changes in form or content.101

The FCC stated that VoIP services that met these four criteria most resembled traditional telecommunications service.

While the FCC outlined its policy leanings with regard to IP Telephony in this 1998 report, the FCC did not actually establish a formal or binding policy. It stated that it would be inappropriate “to make any definitive pronouncements in the absence of a more complete record focused on individual service offerings.”102 The FCC opted to delay the adoption of a formal policy until such time as it chose to evaluate individual service offerings. The 1998 informal policy has guided IP Telephony applications since that time.

As was mentioned previously, however, a formal regulatory framework for VoIP is currently under consideration.

12.154 The FCC has been actively reevaluating its policy on VoIP since the fall of 2003. What has the FCC accomplished on VoIP since that time?

The FCC recently issued two rulings on VoIP. In the first decision, the FCC determined that PC-to-PC telephony applications, such as those provided by Free World Dial Up, are information services and should remain unregulated. In the second decision, the FCC held that a telephone carrier cannot avoid access fees on traditional long distance telephone calls simply by routing a portion of the call over IP networks. Since these are the FCC’s first formal rulings on this subject, the details of both cases are discussed below.

12.155 PC-to-PC Telephony Communications:

In 2003, Pulver.com filed a petition with the FCC requesting a ruling that its IP telephony application, Free World Dial-Up (“FWD”), was not a “telecommunications” service and therefore was not subject to regulation as a traditional telephone provider.

The specifics of the FWD service, as described in Pulver.com’s petition, are as follows:

Uses Peer-to-Peer Technology . FWD uses Session Initiation Protocol (“SIP”) based peer-to-peer service. SIP telephones purchased and owed by users establish voice communications directly with each other via Internet protocol.

Separate Broadband Access Needed . FWD operates with ANY type of broadband connection: cable, wireline, satellite or wireless. But users must have a minimum 64 kbps connection.

Equipment Must Be Obtained from Third Parties . Users must purchase equipment from third parties. FWD works with personal computers (PCs), but Pulver.com

101 See Stevens Report at paragraph 88.102 Id. at paragraph 90.

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encourages the use of dedicated IP phones to improve service quality. Pulver.com certifies IP phones for use with FWD but it does not sell such phones.103

FWD Membership Required . To access the service, users must register with FWD. They then register on the pulver.com website and obtain an FWD number and password. Using this number and password, they can register their SIP phones with the FWD network and configure the SIP device to work with the service. Once the phone has been configured, members can contact any other registered FWD member and establish a two-way conversation as long as the intended recipient of the call is also on-line. To initiate a call, calls enter the FWD number and press “#”.

No Transmission Capacity Provided by Pulver.com . FWD does NOT provide a broadband connection.

Service is Free . FWD membership and the calls themselves are free. There are no connection fees, hardware or software fees, monthly subscription fees or per call charges.

Pulver.com sought to distinguish its FWD service from traditional telephone service by noting:

FWD does not connect to PSTN . FWD does not provide users with connectivity to the public switched telephone network (“PSTN”) or cellular networks. It facilitates connectivity only to other FWD members who are on-line when a call is made.

Numbering is Specific to FWD . Members are not assigned telephone numbers in accordance with the North American Numbering Plan and associated international agreements. Instead users receive a five or six digit number assigned by FWD.

Service Does Not Work with an Ordinary Telephone or Ordinary CPE . Members cannot use regular CPE. They must use customer premises equipment that is different from that used to place an ordinary touch-tone call over the PSTN.

No broadband connectivity provided by Pulver.com . FWD provides no transmission capacity. The member must obtain and use a separate broadband connection.

In February of 2004, the FCC held that FWD is not “telecommunications” because Pulver.com does not provide transmission capacity to its members. 104 The FCC found that FWD is instead an “information service.”105 In other words, rather than offering transmission capabilities to users as a “telecommunications” service, FWD provides computing capabilities, which is characteristic of an information service.

103 For example, Pulver.com has certified certain Cisco and Mitel phones. It has also certified several “soft phones” for members that prefer to use PCs, including Windows Messenger, Siphoned, Phone and stare.104 FWD does not meet the legal standard for a “telecommunications” because it does not provide transmission capacity to its members. FWD members instead bring their own broadband capacity to interact with the FWD server. Since pulver.com does not provide “telecommunications”, and does not charge a fee for its service, it is not providing “telecommunications service.”105 FWD is an information service because it “offers a capability for generating, acquiring, storing, transforming, processing, retrieving, utilizing, or making available information via telecommunications.” These processes distinguish this product from a telecommunications service, which offers mere transmission capacity. For a more complete discussion of these criteria, see paragraph 11 of the FWD Order.

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Specifically, the FCC observed that FWD functions as a directory or translation service that facilitates peer-to-peer communications. For example, FWD informs its members when other members are online or present, and therefore available to receive a call. The service also informs members of the Internet address needed to reach other members during their online presence.106 Based on these and related criteria,107 the FCC found FWD to be “an Internet application that provides its members information that those members use to communicate with other members.” As an Internet application, similar to e-mail or Instant messaging, this VoIP service should remain free of regulation.108 The FCC therefore held that FWD is an unregulated information services and is to remain insulated from “unnecessary and harmful economic regulation at both the federal and state levels.”

The Commission was careful to note that it’s finding is based on the specific features of the FWD service.109 As a result, the regulatory classification covers only this narrow type of IP Telephony, and does not affect communications that originate or terminate on the PSTN.110

12.156 VoIP and Access Charges:

In the U.S., long distance carriers pay fees, termed “access charges”, to the local exchange carriers that originate and terminate their long distance calls. Internet service providers are exempt from paying access charges.111 To date, however, the FCC has not definitively established whether, or how, long distance IP Telephony providers should be required to compensate other carriers for the exchange of traffic. The FCC initiated a broad examination of this complex subject in its IP Notice of Proposed Rulemaking.

As a generally matter, the FCC has suggested that “any service provider that sends traffic to the PSTN should be subject to similar compensation obligations, irrespective of whether the traffic originates on

106 See FWD Order at paragraph 11.107The FCC found that FWD enabled its members to “acquire” information about other members’ online presence at any particular time (similar to an instant messaging service). It “stores” member information (e.g., assigned numbers) and voice mail messages on its server. Pulver provides members with certain information (i.e., identifying numbers and passwords) that are “utilized” to register for the FWD service and then to contact other members who are online. The FWD service “processes” the “SIP invite” (i.e., the information an initiating member sends to the FWD server indicating it wishes to communicate with a recipient member) by determining both the recipient members Internet address and online availability. Finally, if a member’s equipment generates a private Internet address that interferes with the ability of the user’s CPE to determine public Internet addresses, FWD will “transform” or repair the addressing information and will relay the “signaling and media stream via a protocol conversion solution to facilitate delivery.” For these reasons, FWD provides more than a basic telecommunications service. It is an enhanced information service. See FWD Order at paragraph 11. 108 See FWD Order, Powell comment at 20.109 The characteristics that appear to be most important in the FCC’s analysis are: membership requirements (i.e., a defined user group); use of SIP software and phones; use of FWD specific numbers rather than NANP numbers; and no broadband access is provided. The FCC noted that all FWD numbers were completely portable to any broadband connection anywhere in the world. In addition, the FCC observed that FWD acts as a directory or translation service that informs its members when other members are online or present, and therefore available to receive a call. The service also informed members of the Internet address needed to reach other members during their online presence. Based on these criteria, the FCC found FWD to be “merely an Internet application that provides its members information that those members use to communicate with other members.”110 See FWD Order at note 3.111 See discussion in IP NPRM at note 179.

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the PSTN, on an IP network or on a cable network”, 112 noting that “the cost of the PSTN should be borne equitably among those that use it in similar ways.”113 The FCC has previously hinted it may be appropriate to subject long distance phone-to-phone IP Telephony calls to access charges in the future.114 However, most VoIP providers have interpreted these various FCC statements and the exemption provided to ISPs to mean that IP Telephony calls are not currently subject to access charges.115

The absence of a clear FCC policy governing the imposition of access charges on VoIP has created a large area of regulatory ambiguity that affects billions of dollars in potential fees. Local exchange carriers have argued that certain carriers are increasingly routing calls onto IP networks “to change the jurisdictional nature of their traffic in an effort to avoid access charges.”116 Attempts by traditional carriers to take advantage of the lighter regulation and lower fees accorded to VoIP calls, has led several companies to ask the FCC to make a definitive ruling in this area. The FCC recently issued a ruling that provides some limited guidance on this issue.

In a recent case the FCC determined that one long distance carrier had gone too far in its attempts to use VoIP and regulatory arbitrage to avoid access charges. In this decision, which involves the long distance carrier AT&T, the FCC drew a bright line to identify one type of IP telephony that should not be exempted from the access charges applied to traditional telephony.

In 2002, AT&T filed a petition asking the FCC to rule that its phone-to-phone IP telephony services are exempt from the access charges that are applicable to circuit switched interexchange calls. Typically, a long distance call made from one traditional telephone to another is charged a more expensive access fee for connecting to the local network. Internet based calls that are terminated as local calls pay a less expensive fee. AT&T argued that this less expensive termination fee should apply to calls that traverse its IP backbone.

The VoIP service at issue in AT&T’s request was a portion of its interexchange traffic that was routed over its Internet backbone. The Order describes the service in this manner:

The service at issue in AT&T’s petition consists of an interexchange call that is initiated in the same manner as traditional interexchange calls – by an end user who dials “1” + the called number from a regular telephone. When the call reaches AT&T’s network, AT&T converts it from its existing format into an IP format and transports it over AT&T’s Internet backbone. AT&T then converts the call back from the IP format and delivers it to the called party through local exchange carrier (LEC) local business lines.117

112 Id at paragraph 61.113 Id.114 Cherie Kiser and Angela Collins, Are VoIP Services Telecommunications Services? Business and Regulatory Considerations for VoIP Service Providers and Connecting Carriers, October 2003, at page 21, available at: ___________ (“Kiser Article”).115 Id. at 22.116 Kiser Article at 23.117 See Petition for Declaratory Ruling that AT&T’s Phone to Phone IP Telephony Services are Exempt from Access Charges, WC Docket No. 02-361, Order, (rel. April 21, 2004)(“AT&T Order”) at paragraph 1.

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In other words, the calls at issue did not travel entirely over an IP network. Instead, they were originated and terminated on the PSTN and traveled in an IP format only briefly over AT&T’s backbone network.

The FCC rejected AT&T’s argument finding that this type of phone-to-phone IP telephony service is a “telecommunications service.” In reaching this conclusion the FCC found that AT&T’s IP telephony service: (1) uses ordinary customer premises equipment (CPE) with no enhanced functionality; (2) originates and terminates on the public switched telephone network (PSTN); and (3) undergoes not net protocol conversion.118 It also observed that AT&T’s use of IP technology provides no enhanced functionality to end-users.

The Commission also noted that end users “do not order a different service, pay different rates, or place and receive calls any differently than they do through AT&T’s traditional circuit-switched long distance service; the decision to use an Internet backbone to route certain calls is made internally by AT&T.” To the extent that protocol conversions associated with AT&T’s specific service take place within the network, they appear to be “internetworking” conversions, which the Commission has found to be telecommunications services.119 In other words, as FCC Chairman Michael Powell concluded, even though the calls in question use Internet technology, from consumers’ perspective they are “the same old telephone service.”120

The FCC has always required that interexchange carriers that use local exchange switching facilities to provide interstate or foreign telecommunications services must pay access charges.121 The Commission found “it is reasonable that AT&T pay the same interstate access charges as other interexchange carriers for the same termination of calls over the PSTN.” To rule otherwise would allow a carrier to avoid regulatory obligations “simply by dropping a little IP in the network.”122 This approach would then sanction regulatory arbitrage that would undermine the financial legs of the traditional telephone regulatory system.123

12.157 Broad Rulemaking Proceedings:

In addition to the two specific rulings described above, the FCC has initiated a broad rulemaking inquiry into IP-based services, including IP Telephony.

118 Id. 119 AT&T Order at paragraph 12.120 AT&T Loses Fee Fight Over Some Web Calls, Reuters, April 21, 2004, available at: http://www.reuters.com/newsArticle.jhtml;jsessionid=FJEATROMBL4FUCRBAELCFFA? 121 The FCC has previously held that Internet Service Providers (ISPs) are not subject to the existing access charge system because an ISPs use of the local telephone network is more closely resembles the way in which the typical phone customer or end user makes use of the local telephone network, rather than the manner in which a long distance provider uses the network. 122 AT&T Order at Powell Statement.123 For example, FCC Chairman Michael Powell observed that permitting the type of regulatory arbitrage advocated by AT&T would “collapse the universal service system virtually overnight.” See AT&T Order at Powell Statement.

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In December of 2003, the FCC held a policy forum to gather information on the range of issues raised by the increasing prevalence of VoIP.124 This day-long forum gathered testimony from numerous VoIP providers, users, investors, state regulators, academics, engineers, economists and lawyers. The FCC then named an internal working group of staff that has taken the lead in developing regulatory proposals on these policy issues. The FCC also has held subsequent summit meetings to gather more detailed information on policy issues relating to public safety and consumer protection responsibilities of VoIP services (e.g., 911, security (i.e., whether wiretapping capabilities must be enabled for VoIP calls), and whether the disability provisions that exist on traditional phones also be applied to certain VoIP applications).

Based on the information generated in these forums, the FCC initiated a broad rulemaking proceeding125 in February of 2004, to examine the issues related to IP enabled services, such as VoIP. This proceeding invites and relies upon broad public participation and is expected to establish the appropriate classification and regulatory treatment for the various types of VoIP.

12.158 Are there penalties for providing IP Telephony service? (e.g., fines, license revocation, jail).

There are no penalties for providing any type of IP Telephony service.

It is possible, however, that some state utility commissions could classify certain VoIP services as “telecommunications” services that then trigger certification, tariffing and other regulatory requirements for VoIP providers. If a company provided VoIP service without complying with such regulatory requirements, they presumably could be subject to penalties for failing to meet the state requirements. No federal or state penalties are imposed, however, merely for providing VoIP service.

12.16 What have been the costs and benefits of IP Telephony within the country?

FCC Chairman Michael Powell has stated that Internet applications are benefiting residential and business consumers by “ushering in an era of innovation, competition, lower prices and high quality services.” Businesses, especially small and medium sized companies, are increasingly using broadband technologies to lower the cost of doing business. The use of VoIP, for example, can dramatically reduce a company’s yearly phone bill.

These technological developments also are benefiting the nation’s economy.126 According to testimony before Congress, IP enabled services, such as VoIP, have increased economic productivity and growth by creating more technology focused jobs in the economy. Finally, these services have bolstered network redundancy and resiliency.127 Cable operators and traditional local and long distance telephony providers are moving to IP based products as a cheaper, more efficient way to deliver local and long distance voice services to the public. This shift has created a greater level of competition

124 Information regarding this forum is available at: http://www.fcc.gov/voip125 This rulemaking proceeding solicits comments from the public regarding the FCC’s various regulatory proposals. The FCC must evaluate and consider these comments in making its final rules. 126 See The Testimony of The Honorable Michael Powell, Chairman of the FCC before the U.S. Senate Committee on Commerce, Science & Transportation, hearing on VoIP on February 24, 2004.127 IP NPRM at paragraph 5.

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among service providers and choice for consumers in the residential voice market,128 and has led to lower prices and greater innovation.

The FCC has deemed the potential impact of IP enabled communications to be “revolutionary.”

12.17. Economic Incentives for VoIP Bypass: International settlement rates versus VoIP termination rates.

The FCC has defined its goals in regulating U.S. international telecommunications markets to be: (1) promoting competition in the global market; (2) preventing anticompetitive conduct in the provision of U.S. international services and facilities; and (3) encouraging foreign governments to open their markets, where competitive market pressures exist. The Commission has consistently maintained that effective competition in the global market will bring the greatest benefits to U.S. consumers, including lower international calling prices, and better service quality and options.129

Since termination rates are a major component of consumer calling prices, the FCC’s accounting rate policy goal is to achieve more cost-based termination rates for U.S.-international traffic.130 The FCC has recognized that a wide variety of factors, including technological advances such as VoIP, may play a beneficial role in lowering settlement rates.131 It acknowledged as early as 1998 that “IP telephony serves the public interest by placing significant downward pressure on international settlement rates and consumer prices.” It also has suggested that this mechanism may introduce “an alternative calling option in foreign markets that would otherwise face little or no competition.”

In a rulemaking proceeding on reform of the FCC’s international settlement policy, one U.S. telephone company observed that:

“there has been explosive growth in non-traditional international telecommunications services such as Internet Protocol Telephony and Voice-Over-IP that bypass the settlement process altogether. A growing volume of traditional international long-distance calls is being transported over the Internet, particularly in Asia. In 2001, 9.9 billion minutes of international traffic – nearly six percent of the world’s international traffic – was carried over IP links. Although it is difficult to measure its growth precisely, some estimate VoIP grew 68% in 2002 to 18 billion minutes of use and project that VoIP may reach 123 billion minutes of use in 2007. These competitive services will continue to place downward pressure on U.S. international settlement rates….”132

Thus, the FCC and individual U.S. companies have acknowledged that VoIP bypass may be an important factor in pushing international termination rates closer to their actual cost.

128 See prepared testimony of Chairman Michael Powell before the Senate Commerce Committee on February 24, 2004. Available at http://commerce.senate.gov/hearings/testimony/cfm?id=1065&wit_id=2153129See International Settlement Policy Reform/International Settlement Rates, IB Docket Nos. 02-324 & 96-261, First Report & Order (released March 30, 2004)(“ISP Order”) at paragraph 9.130 ISP Order at paragraph 5.131 Id at paragraph 23.132 See comments filed by Verizon in ISP Order proceeding, at p. 3 – 4.

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The FCC has suggested that it “may not be appropriate to apply the international accounting rate regime to IP telephony.”133

12.2 Morocco (closed regulatory regime) Karl

12.21 Who are the current VoIP users (e.g., cyber cafes? Universities? Businesses? Etc)

12.22. Who are the current VoIP providers

12.23. Which government entity is responsible for making regulatory policies on VoIP?

12.24 Does the government have an ownership interest in any telecommunications service provider?

12.25 What is the current status of VoIP regulation?

12.251 Is there an explicit policy?

12.252 If so, what are the penalties for providing VoIP service? (e.g., fines, license revocation, jail).

12.26. What have been the costs and benefits of VoIP services within the country?

12.27. Economic Incentives for VoIP Bypass: International settlement rates versus VoIP termination rates.

12.3 Rwanda Albert

12.31 Who are the current VoIP users (e.g., cyber cafes? Universities? Businesses? Etc)

12.32. Who are the current VoIP providers

12.33. Which government entity is responsible for making regulatory policies on VoIP?

12.34 Does the government have an ownership interest in any telecommunications service provider?

133 See Stevens Report at paragraph __.

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12.35 What is the current status of VoIP regulation?

12.351 Is there an explicit policy?

12.352 If so, what are the penalties for providing VoIP service? (e.g., fines, license revocation, jail).

12.36. What have been the costs and benefits of VoIP services within the country?

12.37. Economic Incentives for VoIP Bypass: International settlement rates versus VoIP termination rates.

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