VoIP: A Discussion Paper

For the Greenlining Institute March 10, 2004 Alex Gault Small World Ventures

“If the Consumer stands to benefit

significantly from Internet Voice we

should let it blossom. The burden

should be placed squarely on the

government to demonstrate why

regulation is needed, rather than on

innovators to explain why it is not. I

think the potential benefits are very

substantial.”

Michael Powell, Chairman, FCC

75% of adults of have of VoIP.

66% have heard of DSL.

14% have heard of WiFi.

Ipsos-Insight Express Study

Summary (VoIP) is an emerging disruptive technology that has the potential to dramatically improve the quality and cost of phone service for consumers. VoIP has been commercially available for at least eight years, but only now is the technology being deployed to deliver services that are competitive alternatives to the traditional phone service. The cost for most commercial grade VoIP services are minimal – some are free. VoIP is native to the Internet. VoIP calls traverse the Internet in data format, akin to the way email travels from one computer to another. Although VoIP calls can transmit friction-free from the Internet to the Public Switched Telephone Network (PSTN) and vice versa – and often do – they do not necessarily require PSTN authenication to work. Because the existing federal and state regulations that govern consumer phone services apply exclusively to the use of the PSTN (which are powered by circuit-switched technology are not dependent upon Internet protocols) they provide an inadequate framework for protecting the rights and interests of VoIP consumers.

Presently, the FCC and state bodies which oversee telecommunications policy are considering overhauling the regulatory environment for consumer phone services, in order to address the benefits and risks of VoIP. Incumbent industry stakeholders which have built commercial services atop the PSTN are also maneuvering to protect their short term interests, while investing aggressively into Internet infrastructure in expectation of a VoIP future.

Internet Protocol (IP):

A data-oriented protocol used by

source and destination hosts for

communicating data across a

packet-switched network.

IP by itself is something like the

postal system. It allows one to

address a package and drop it in

the system, but there’s no direct

link between the sender and the

recipient.

TCP/IP, which supports real-time

communication between clients on a

network, establishes a connection

between two hosts so that they can

send messages back and forth for a

period of time.

What is VoIP? VoIP is a generic term that refers to all types of voice communications which use the Internet as a transmission medium, whereby calls are powered by Internet protocols (IP) rather than traditional circuit switched technology. This includes use of packet technologies by telecommunications companies to carry voice at the core of their networks in ways that are not controlled by and not apparent to end users.

Many VoIP services are transmitted via the public Internet, thus bypassing part or all of the public switched telephone network (PSTN). Because the vast majority of telephone subscribers are served by incumbent local exchange carriers (ILECs) on the PSTN, presently most VoIP calls do traverse the PSTN. However, as VoIP services become prevalent the technology may eliminate the need for both the PSTN and circuit switching. VoIP can occur between computers, between a computer and a phone, and between phones. Commercial services exist to serve each method. For users who already have broadband Internet access, some VoIP software now provides for free telephone calling from anywhere-to-anywhere in the world. How VoIP Works Because all transmissions must be digital, the caller’s voice is first digitized. This can be done by the telephone company, by an Internet service provider, a cable company, or by the caller’s computer. Next, the digital voice is compressed and separated into packets, using complex algorithms. The packets are then sent across the network using IP addressing, and reassembled in the proper order at the destination. Again, this reassembly can be done by a carrier, ISP, cable company, or client computer.

VoIP network environments:

• Public switched telephone

network.

• Private managed networks.

• The public Internet.

”… There are people in Washington

who don’t understand a great deal

about [VoIP] or even the concept of

the layered approach to

communications networks and

services. The idea that you could

have a transport link that is

independent of sound or analog

waves is new to them … It’s a

completely different way of thinking

about our networks. In many

respects it all really comes down to

an issue of educating people.”

Robert Pepper, Chief of

Policy Development, FCC

The Economics of VoIP The networks used and owned by all telecommunication carriers currently make intensive use of IP, because it provides the following economic benefits:

Efficient use of Infrastructure. The PSTN circuit-switched technology requires a circuit between the telephone company’s switch and the customer’s premise to be open and occupied for the entire duration of the call, regardless of the amount of information transmitted. In contrast, on IP networks all content – whether voice, text, video, or computer programs – travels over the network in packets that are directed to their destination by diverse routes, sharing the same facilities most efficiently. Almost Free. IP systems offer a more cost effective means for providing communication connections. In particular, Internet technology makes available to anyone with a personal computer and modem the ability to bypass the long distance PSTN. Resilient. Over the long term, IP networks will deliver higher reliability than the circuit-switched network because IP networks automatically re-route packets around problems such as malfunctioning routers or damaged lines. Open Source Architecture. IP is a nonproprietary standard agreed upon by hardware and software developers, and is free to be used by anyone. Thus the barriers to entry for entrepreneurial firms developing new hardware and software are very low. In contrast, the PSTN operates as a closed system.

Industry Associations Voice on the Net (VON) Coalition

• www.von.org • Lobby group opposed to

VoIP regulation

National Cable & Telecommunications Association

• www.ncta.com National Exchange Carriers Association

• www.neca.org • Lobbying group for rural

exchange carriers International Multimedia Telecommunications Consortium

• www.imtc.org • Exchange for negotiating

and sharing information about standards and compliance

International Telecommunications Union

• www.itu.it • International organization

where governments and the private sector coordinate global telecom networks and services

Incumbent Local Carriers vs. Dedicated VoIP Vendors Incumbent Local Exchange Carriers (ILECs) stand to benefit from VoIP. Faced with an uncertain landscape and increased competition, ILECs must retain customers. By offering VoIP, in and of itself, carrier’s can retain customers and increase traffic. Moreover, introduction of IP allows carriers to offer integrated premium services (voice, text, audio, and video) over a single connection, thereby further enhancing value and expanding their porfolio of services. In the short term, ILECs are marketing VoIP services principally to large enterprises. Over the long term, most will likely commit to consumers and households, as they will realize substantial savings as IP infrastructure is far less costly to maintain and upgrade than the PSTN. Small entrepreneurial companies are driving the acceleration of VoIP use in the consumer market, and they enjoy tremendous cost advantages over ILECs. Because they use the Internet as the backbone for VoIP calls, they don’t have to rent or build expensive switching facilities, and thus have limited existing costs to amortize. VoIP will force the commoditization of the enhanced services – like call waiting, caller ID and voicemail – that ILECs currently offer. Enterprise network vendors like Seimens, Cisco and Avaya already bundle those services into their real-time collaboration suites at no additional cost. Skype’s free VoIP service for consumers (computer-to-computer) supports conference calls, and will soon provide instant messaging. As enhanced services deliver high margins for ILECs, a competitive environment where they are available for free will exert further pressure to evolve existing service offerings to VoIP.

Projections for cable VoIP

subscribers by the end of 2004:

• Comcast: 1.3 million

• Cox: 976,173

• Mediacom: 55,000

• Charter: 24,533

• TimeWarner: 2,000

• Cablevision: 5,006

• Others: 1,250

• Total: 2.4 milllion

Source: MRG

Key Trends and Wild Cards Universal standards. It is still far from certain that VoIP will become instantaneous and transferable over all sorts of devices (computers, cell phones, PDAs and telephones) and over all kinds of networks (circuit-switching, public Internet, cable, private managed networks.) Convergence of voice, text and video. Collaboration software suites which provide integrated platforms for voice, email, instant messaging and video conferencing are already in use within large enterprises. Cable vendors Comcast and TimeWarner are piloting comparable services for consumers and households. Consumers will soon be able to use the Internet from any location and instruct a home phone to forward calls to another phone number -- or listen to voicemail via the Internet from any location. FCC Chairman Michael Powell envisions many practical benefits for consumers, including the following: “… you make an Internet call to a doctor’s office to make an appointment. The doctor’s system calls up your medical records, your medications, and your last visit and instantly displays them. It also brings up the appointment times available, allows you to select one and then calls you back, or sends a text message to your cell phone, the day before the appointment to remind you.” VoIP & WiFi. VoIP over WiFi offers many benefits to corporate users, such as eliminating the need to use valuable cellular airtime within a campus network. Local VoIP cell phones will soon be able to bypass cellular phones networks in locations where they can access the internet via commercial hotspots in public areas – like coffees shops, universities, and municipally subsidized WiFi antennas. Nearly every U.S. cellular carrier has either expressed an interest in selling Wi-Fi access. T-Mobile is the only one with a service available now, which gives its customers access to Wi-Fi networks inside about 2,000 Starbucks and other cafes for a fee.

Chronology of Key Events

1982:

FCC framework for subsidizing

universal phone service.

1996: The Telecommunications Act made

universal phone service costs

explicit and removed them from

access charges.

1998:

The FCC published the Stevene

Report, which classified VoIP into

categories distinct from traditional

phone service.

VoIP: Emerging Regulatory Environment

ILECs (ex. Verizon, SBC, BellSouth) have various degrees of interest in VoIP, but are resistant to embracing it quickly or completely, because doing so means admitting to shareholders, regulators, customers that both monopoly control and artificially high voice revenues may disappear. As a delay tactic, they have mobilized their considerable lobbying skills in favor of preemptive regulation that would burden competitive VoIP firms like Vonage with additional costs and rules, while delaying their own offerings. Baseline Standards For VoIP to meet the quality and public service standards typically of existing phone services, it will have satisfy the follow:

• Use North American Numbering Plan (NANP) resources. • Be able to receive calls from or terminating at the PSTN at one or both ends

of the call.

• Represents a secure and reliable replacement for ILEC services.

• Use IP transmission between the serviced provider and the end user customer, including use of an IP terminal adapter and/or IP-based telephone set.

Chronology Continued:

2000:

FCC studies by DeGraba and

Atkinson concluded that the existing

intercarrier compensation regime

distorted competition.

2003:

CPUC gave six VoIP providers three

weeks to apply for the same license

that incumbent carriers require to

operate. At the last minute, the

CPUC delayed the requirement

indefinitely.

2004:

US Court of Appeals overturns year-

old FCC decision to force incumbent

carriers to share their networks with

distance rivals at disounted prices.

Existing Regulatory Benchmarks

• Communications Assistance to Law Enforcement Act (CALEA) Emergency services Universal phone service Access charges

Access Charges The Telecommunications Act of 1996 called for making universal service costs explicit and removing them from access charges. Since, the FCC has lowered access charges substantially – from more than a dime a minute for both ends of a call to an average of about a penny a minute today. Yet those charges still add up to a hefty subsidy, with AT&T, MCI, Sprint and other long-distance providers paying approximately $15 billion a year in rent to ILECs.

Even penny per minute rates could add as much as $5 to $10 to the monthly bills of customers subscribing to dedicated VoIP providers. That's enough to make VoIP service uncompetitive, especially as a customer needs to pay both $40 for broadband and roughly $30 for unlimited long distance.

VoIP holds great promise for saving consumers billions of dollars and further giving a boost to national productivity by providing new communication services. But that won't happen if those making VoIP a reality are burdened with either subsidizing the old local telephone monopolies or meeting impossible regulatory demands.

Key Public Officials, Analysts and Industry Spokespeople Analysts Kevin Werbach (www.werbach.com)

• Technology analyst • Former counsel for new technology policy, FCC • Former editor, Release 1.0

John Hodulik

• Wireless telecommunications analyst, UBS Warburg David Isenberg

• Technology Analyst • Formerly researcher (for 12 years) with Bell Labs

Bob Frankston

• IP Expert • Technology Analyst

Public Officials Michael Powell

• Chairman, FCC

Robert Pepper • Chief of Policy Development, FCC • Robert.pepper@fcc.gov • (202) 418-1500

Kathleen Abernathy • Commissioner, FCC

Kevin Martin • Commissioner, FCC

Sen. Ted Stevens (R-AL) • Chair, Senate Appropriations Committee

Sen. Lamar Alexander (R-TN) Industry Spokepeople John K. Billock

• Vice Chairman & COO, Time Warner Cable Peter Pitsch

• Communications Policy Director, Intel Corporation Tom Evslin

• Chairman and CEO, ITXC Marilyn Cade

• Director, Law and Government Affairs, at AT&T Dave McClure

• President, U.S. Internet Industry Association

Vendors Incumbent local exchange carriers (ILECS)

• SBC • Qwest • GTE • AT&T • Verizon • BellSouth

Cable telephone providers

• Comcast • AOL Time Warner • Cox • Cablevision • Mediacom

Dedicated VOIP providers (consumer)

• Skype • Vonage • Net2Phone • Pulver.com

Dedicated VOIP providers (enterprise)

• Cisco • Avaya • Nortel • Seimens

Wifi providers (ferrying VOIP over 802.11 wireless networks)

• Telesym • Vocera

Wireless carriers • Nextel (combining VOIP with push-to-talk service)

Gaming Vendors

• Xbox (Microsoft) Resellers

• Primus Telecommunications • Voiceglo