VoIP: A Discussion Paper

For the Greenlining Institute

March 10, 2004 Alex Gault Small World Ventures

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. 14% have heard of WiFi. akin to the way email travels from one computer to another. VoIP is native to the Internet. Ipsos-Insight Express Study . 66% have heard of DSL. Incumbent industry stakeholders which have built commercial services atop the PSTN are also maneuvering to protect their short term interests. Chairman. “If the Consumer stands to benefit significantly from Internet Voice we should let it blossom. Presently. FCC 75% of adults of have of VoIP. in order to address the benefits and risks of VoIP. but only now is the technology being deployed to deliver services that are competitive alternatives to the traditional phone service.Summary (VoIP) is an emerging disruptive technology that has the potential to dramatically improve the quality and cost of phone service for consumers. The cost for most commercial grade VoIP services are minimal – some are free. 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. the FCC and state bodies which oversee telecommunications policy are considering overhauling the regulatory environment for consumer phone services. The burden should be placed squarely on the government to demonstrate why regulation is needed. VoIP has been commercially available for at least eight years. I think the potential benefits are very substantial.” Michael Powell. VoIP calls traverse the Internet in data format. rather than on innovators to explain why it is not. while investing aggressively into Internet infrastructure in expectation of a VoIP future.

For users who already have broadband Internet access. Internet Protocol (IP): A data-oriented protocol used by source and destination hosts for communicating data across a packet-switched network. How VoIP Works Because all transmissions must be digital. . Again. establishes a connection between two hosts so that they can send messages back and forth for a period of time. between a computer and a phone. 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. some VoIP software now provides for free telephone calling from anywhere-to-anywhere in the world. cable company. IP by itself is something like the postal system. which supports real-time communication between clients on a network. This can be done by the telephone company. TCP/IP. this reassembly can be done by a carrier. or by the caller’s computer. ISP. Next. or client computer. whereby calls are powered by Internet protocols (IP) rather than traditional circuit switched technology. and reassembled in the proper order at the destination. a cable company. However. Because the vast majority of telephone subscribers are served by incumbent local exchange carriers (ILECs) on the PSTN. by an Internet service provider. presently most VoIP calls do traverse the PSTN. as VoIP services become prevalent the technology may eliminate the need for both the PSTN and circuit switching. the digital voice is compressed and separated into packets. Many VoIP services are transmitted via the public Internet. the caller’s voice is first digitized. but there’s no direct link between the sender and the recipient. Commercial services exist to serve each method. The packets are then sent across the network using IP addressing. and between phones. It allows one to address a package and drop it in the system. using complex algorithms. VoIP can occur between computers. thus bypassing part or all of the public switched telephone network (PSTN).What is VoIP? VoIP is a generic term that refers to all types of voice communications which use the Internet as a transmission medium.

Private managed networks. .VoIP network environments: • • • Public switched telephone network. The public Internet.

Thus the barriers to entry for entrepreneurial firms developing new hardware and software are very low. 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. text. IP is a nonproprietary standard agreed upon by hardware and software developers. ”… 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. In many respects it all really comes down to an issue of educating people. Chief of Policy Development.” Robert Pepper.The Economics of VoIP The networks used and owned by all telecommunication carriers currently make intensive use of IP. 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. In contrast. Resilient. on IP networks all content – whether voice. because it provides the following economic benefits: Efficient use of Infrastructure. regardless of the amount of information transmitted. Internet technology makes available to anyone with a personal computer and modem the ability to bypass the long distance PSTN. and is free to be used by anyone. Almost Free. Over the long term. In particular. In contrast. FCC . 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. IP systems offer a more cost effective means for providing communication connections. sharing the same facilities most efficiently. the PSTN operates as a closed system. Open Source Architecture. or computer programs – travels over the network in packets that are directed to their destination by diverse routes. video.

org • Lobbying group for rural exchange carriers International Multimedia Telecommunications Consortium • www.it • International organization where governments and the private sector coordinate global telecom networks and services Incumbent Local Exchange Carriers (ILECs) stand to benefit from VoIP. and video) over a single connection.org • Exchange for negotiating and sharing information about standards and compliance International Telecommunications Union • www.neca.com National Exchange Carriers Association • www. and they enjoy tremendous cost advantages over ILECs. In the short term. Because they use the Internet as the backbone for VoIP calls. Faced with an uncertain landscape and increased competition. they don’t have to rent or build expensive switching facilities.imtc. VoIP will force the commoditization of the enhanced services – like call waiting. audio. ILECs are marketing VoIP services principally to large enterprises.Incumbent Local Carriers vs. as they will realize substantial savings as IP infrastructure is far less costly to maintain and upgrade than the PSTN. and will soon provide instant messaging. Enterprise network vendors like Seimens.itu.von. carrier’s can retain customers and increase traffic. most will likely commit to consumers and households. By offering VoIP. Dedicated VoIP Vendors Industry Associations Voice on the Net (VON) Coalition • www. text. and thus have limited existing costs to amortize. a competitive environment where they are available for free will exert further pressure to evolve existing service offerings to VoIP. Moreover. Skype’s free VoIP service for consumers (computer-to-computer) supports conference calls. caller ID and voicemail – that ILECs currently offer. in and of itself. As enhanced services deliver high margins for ILECs. .ncta. thereby further enhancing value and expanding their porfolio of services. ILECs must retain customers. Over the long term.org • Lobby group opposed to VoIP regulation National Cable & Telecommunications Association • www. Cisco and Avaya already bundle those services into their real-time collaboration suites at no additional cost. introduction of IP allows carriers to offer integrated premium services (voice. Small entrepreneurial companies are driving the acceleration of VoIP use in the consumer market.

It is still far from certain that VoIP will become instantaneous and transferable over all sorts of devices (computers. which gives its customers access to Wi-Fi networks inside about 2. or sends a text message to your cell phone. Nearly every U. cell phones. Projections for cable VoIP subscribers by the end of 2004: • • • • • • • • Comcast: 1. It also brings up the appointment times available.3 million Cox: 976. instant messaging and video conferencing are already in use within large enterprises. your medications. universities. text and video. the day before the appointment to remind you.Key Trends and Wild Cards Universal standards. and municipally subsidized WiFi antennas. T-Mobile is the only one with a service available now. The doctor’s system calls up your medical records. PDAs and telephones) and over all kinds of networks (circuit-switching.000 Charter: 24.S.) Convergence of voice. Collaboration software suites which provide integrated platforms for voice.006 Others: 1. 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. private managed networks.4 milllion Source: MRG . cable.533 TimeWarner: 2. such as eliminating the need to use valuable cellular airtime within a campus network. FCC Chairman Michael Powell envisions many practical benefits for consumers. and your last visit and instantly displays them.173 Mediacom: 55.or listen to voicemail via the Internet from any location.250 Total: 2. allows you to select one and then calls you back.000 Starbucks and other cafes for a fee. including the following: “… you make an Internet call to a doctor’s office to make an appointment.000 Cablevision: 5.” VoIP & WiFi. Consumers will soon be able to use the Internet from any location and instruct a home phone to forward calls to another phone number -. email. VoIP over WiFi offers many benefits to corporate users. Cable vendors Comcast and TimeWarner are piloting comparable services for consumers and households. public Internet. cellular carrier has either expressed an interest in selling Wi-Fi access.

BellSouth) have various degrees of interest in VoIP. As a delay tactic. • • • . but are resistant to embracing it quickly or completely. Be able to receive calls from or terminating at the PSTN at one or both ends of the call. including use of an IP terminal adapter and/or IP-based telephone set. 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. because doing so means admitting to shareholders. while delaying their own offerings. which classified VoIP into categories distinct from traditional phone service. Use IP transmission between the serviced provider and the end user customer. customers that both monopoly control and artificially high voice revenues may disappear. 1996: The Telecommunications Act made universal phone service costs explicit and removed them from access charges.VoIP: Emerging Regulatory Environment ILECs (ex. it will have satisfy the follow: • Use North American Numbering Plan (NANP) resources. Baseline Standards For VoIP to meet the quality and public service standards typically of existing phone services. SBC. Verizon. regulators. 1998: The FCC published the Stevene Report. Chronology of Key Events 1982: FCC framework for subsidizing universal phone service. Represents a secure and reliable replacement for ILEC services.

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. with AT&T. 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. VoIP holds great promise for saving consumers billions of dollars and further giving a boost to national productivity by providing new communication services. Access Charges The Telecommunications Act of 1996 called for making universal service costs explicit and removing them from access charges. the CPUC delayed the requirement indefinitely. Since. MCI. 2003: CPUC gave six VoIP providers three weeks to apply for the same license that incumbent carriers require to operate. At the last minute. Even penny per minute rates could add as much as $5 to $10 to the monthly bills of customers subscribing to dedicated VoIP providers. 2004: US Court of Appeals overturns yearold FCC decision to force incumbent carriers to share their networks with distance rivals at disounted prices. . Yet those charges still add up to a hefty subsidy. 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. Sprint and other long-distance providers paying approximately $15 billion a year in rent to ILECs.Existing Regulatory Benchmarks • Chronology Continued: Communications Assistance to Law Enforcement Act (CALEA) Emergency services Universal phone service Access charges 2000: FCC studies by DeGraba and Atkinson concluded that the existing intercarrier compensation regime distorted competition.

FCC • Robert.Key Public Officials.gov • (202) 418-1500 .werbach. Release 1.pepper@fcc. FCC Former editor.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. Analysts and Industry Spokespeople Analysts Kevin • • • Werbach (www.com) Technology analyst Former counsel for new technology policy.

Ted Stevens (R-AL) • Chair. Billock • Vice Chairman & COO. Lamar Alexander (R-TN) Industry Spokepeople John K. Intel Corporation Tom Evslin • Chairman and CEO. U. ITXC Marilyn Cade • Director. at AT&T Dave McClure • President. FCC Sen.S. Time Warner Cable Peter Pitsch • Communications Policy Director. FCC Kevin Martin • Commissioner. Internet Industry Association . Senate Appropriations Committee Sen. Law and Government Affairs.Kathleen Abernathy • Commissioner.

com Dedicated VOIP providers (enterprise) • Cisco • Avaya • Nortel • Seimens .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.

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 .

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