FCC Takes Lead on VoIP Rules

Washington— In a sweeping decision, the Federal Communications Commission has elbowed the states aside and seized command in deciding the regulatory fate of voice-over-Internet protocol (VoIP) service, a novel technology that has the potential to rattle the phone market like never before.

The FCC ruling last Tuesday was a victory for Vonage Holdings Corp., which is waging a court battle against Minnesota regulators, after they attempted to treat the company, with 300,000 VoIP customers, like a traditional phone carrier.


In an unexpected move that rewarded last-minute lobbying by the cable industry, the FCC also held that cable VoIP — to the extent it shares characteristics similar with Vonage — would also be shielded from state regulation.

The FCC has yet to enumerate the characteristics that would qualify cable VoIP for equal treatment.

“The decision today decides who has to decide,” said FCC chairman Michael Powell, a big believer that VoIP has revolutionary consequences for the telecommunications industry.

The FCC vote was unanimous, but the many objections voiced by FCC Democrats Michael Copps and Jonathan Adelstein gave the ruling the same partisan feel as so many deregulatory actions advanced by Powell and his GOP allies at the FCC, Kevin Martin and Kathleen Abernathy.

The FCC ruling was a setback for many state regulators, who wanted to maintain their grip on VoIP to protect $1.9 billion in revenue used to subsidize affordable phone service for poor and rural customers.

Originally, FCC staffers proposed to limit the ruling to Vonage, but elements within the cable industry objected, arguing that the FCC should not hand Vonage an unwarranted regulatory advantage.

Over the past few weeks, the National Cable & Telecommunications Association, Cox Communications Inc. and Time Warner Inc. pressured the commission to broaden the scope of its ruling.


Abernathy and Martin, in particular, adopted cable’s cause and won the internal battle to broaden the staff’s recommendation to include not just cable VoIP but any player that shared Vonage’s characteristics, including Verizon Communications Inc. and SBC Communications Inc. No one at the FCC named an extant VoIP service that would fall outside the boundaries of the ruling.

Based in Edison, N.J., privately held Vonage is a VoIP pioneer. Its service rides on broadband connections provided to homes and offices by cable and phone companies.

Vonage and other VoIP providers that lack their own facilities control about two-thirds of the small-but-growing IP-telephony market.

But The Yankee Group has predicted that by the end of 2005, cable and phone companies will use their brands and financial muscle to put enormous pressure on non-facilities-based VoIP players.

In a recent report, Yankee analyst Kate Griffin estimated non-facilities VoIP providers would lose 47% of their market share.

“In the next several months, these early-market entrants will face tough competition from battle-tested telephone and cable MSOs ready to fight for local VoIP leadership,” Griffin wrote.

Yankee Group also estimated that VoIP companies would serve 1 million subscribers by the end of 2004 and 17 million by the end of 2008.

Nonetheless, in reaction to the FCC’s decision, Vonage CEO Jeffrey Citron said, “This forward-thinking decision from the FCC assures that competition from VoIP is here to stay.”


The FCC’s ruling pre-empted state action with regard to three requirements Minnesota tried to impose on Vonage: certification (the need to gain state permission to provide VoIP); tariffing (the need to post prices before launching service); and 911 service (the need to link VoIP users to police, fire and ambulance services.)

As a result of the ruling, cable companies that offer VoIP can bypass the certification process, establish and alter pricing plans freely; and roll out 911 services on their own timetable.

The FCC pulled the plug on the states by holding that VoIP service was inherently an interstate offering, and adding that the constitution assigned the regulation of interstate commerce to the federal government.

“To subject a global network to disparate local regulatory treatment by 51 different jurisdictions would be to destroy the very qualities that embody the technological marvel that is the Internet,” Powell said moments before the vote.


The states were not totally pushed aside. The FCC did nothing to interfere with their authority to enforce consumer-protection laws concerning, for example, fraud and false advertising. The agency also left the door open for state taxation of VoIP revenue.

Many cable companies — including Time Warner, Comcast Corp. and Cablevision Systems Corp. — have already received state permission to provide either circuit-switched or VoIP services. The real benefit from the FCC’s ruling derives from the knowledge that cable operators won’t have to cope with a patchwork of regulations varying from state to state.

“By establishing a national framework for the regulation of VoIP services, the FCC has taken a significant step toward promoting competition in enhanced voice services,” NCTA president Robert Sachs said in a prepared statement.

The FCC gave Vonage only half of what it wanted. Vonage also asked the FCC to rule that its Digital Voice service is an information service, not a telecommunications service, under federal communications law.

Without explanation, the FCC postponed a decision on classifying VoIP. If VoIP were dubbed an information service, it would function in the same deregulatory climate as e-mail and instant messaging.


But there is a potential downside: Information-service providers are not automatically accorded the same rights as telecommunications-service providers. Cable VoIP as an information service could mean higher pole-attachment fees; problems with securing access to new poles and conduits; and difficulties regarding interconnection with, and obtaining compensation from, other VoIP providers and traditional phone carriers.

The NCTA has asked the FCC to ensure that freedoms granted to information-service providers do not disable cable VoIP services from competing because they lack the legal protections granted telecommunications carriers.

The FCC’s ruling showed policy decisions can change from the time staff prepares a recommendation to when the votes are actually cast.

FCC staff once explained that Vonage was actually quite different from cable VoIP, because Vonage routes traffic over the public Internet (cable uses private networks) and offers a nomadic service, meaning consumers can plug into any broadband connection using the same phone number. Time Warner Cable’s “Digital Phone” VoIP offering, for example, does not share this nomadic quality now.

But those two characteristics were not the ones the agency relied upon in deciding that its pre-emption decision would cover both Vonage and cable VoIP, FCC sources said.

Instead, the FCC concluded that Vonage and cable VoIP were similar because both offered a comparable suite of features and functions; used a broadband connection; and used customer-premises equipment compatible with IP technology.


The FCC also relied on the fact that Vonage and cable VoIP route traffic over networks that do not oblige state boundaries.

“The order is very specific. It states that to the extent that these other entities are offering services that have similar characteristics [to Vonage], as we have defined those characteristics in the order, then, yes, there would be a similar pre-emptive effect,” said Jeff Carlisle, chief of the FCC’s Wireline Competition Bureau.

Copps and Adelstein concurred with the ruling, but voiced concerns that the agency was acting in a piecemeal fashion.

“There are, in fact, difficult and urgent questions flowing from our jurisdictional conclusion, and they are no closer to an answer after we act today than they were before we walked in here,” Copps said.