October 8, 2003 11:51 AM PDT

Court's call: Hands off VoIP

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Internet phone providers have won the first round in a clash with state regulators, providing needed momentum for the upstart industry.

In ruling from the bench late Tuesday, Minneapolis federal Judge Michael J. Davis permanently barred Minnesota from applying traditional telephone rules to Vonage, a pioneer in technology that lets consumers bypass the traditional phone network by making voice calls over a broadband connection. A written order that explains that the court's rationale is expected by Friday, according to the Minneapolis court clerk's office.

Minnesota Public Utilities Commission (PUC) analyst Stuart Mitchell said Wednesday that for now, the state plans to comply with the court decision and could conclude its proceedings against Vonage as early as Thursday, when the agency is next scheduled to meet.

"We've been told to stop, so we won't be enforcing our order," Mitchell said in an interview Wednesday. "I don't think the commission wants to violate a federal order."

Tuesday's ruling for now frees Vonage to sell its Internet phone service in Minnesota without obtaining a telephone operator's license or paying fees to support 911 services. More importantly, the order is the first to address the authority of a state to oversee so-called voice over Internet Protocol (VoIP) providers and could thus impact efforts by other states to regulate the Net telephony providers.

State regulators had threatened to stall VoIP's growth by forcing providers to follow the same rules as do traditional phone companies. As a result, the Minnesota suit was being closely watched by VoIP industry executives, consumers and traditional phone companies.

News.context

What's new:
A federal judge permanently barred Minnesota from applying traditional telephone rules to Vonage, a pioneer in Internet telephone calls.

Bottom line:
The ruling means Vonage can sell its Internet phone service in Minnesota without obtaining a telephone operator's license or paying fees to support 911 services.

For more info:
Track the players

Vonage filed suit against Minnesota's PUC after the agency in August became the first in the United States to claim authority over VoIP. Since Minnesota's order, Wisconsin and California have asserted authority over VoIP providers, and other states say they are reviewing their policies.

Six VoIP companies have until Oct. 22 to get a California telephone license or face disciplinary action.

"This ruling is a significant victory for Vonage and (VoIP) technology," Vonage said in a statement. "The ruling could also have a significant impact on other states across the country, including California."

A California PUC representative indicated on Tuesday that the state would continue its own efforts to regulate VoIP providers. "While the Minnesota (PUC's) decision was something we took notice of, our decision was based on California law," the representative said.

In addition to the state suit, at least two petitions have been filed with the Federal Communications Commission that seek to exempt VoIP and related services from traditional phone regulations, although the agency has yet to rule on those filings.

Voice networks vs. data networks
The decision highlights growing pressure on rules and definitions that have molded the telephone industry from its formation through an era of decades-long monopoly to the present. Congress and the FCC have drawn a strict division between voice networks and data networks, but with the rise of VoIP, that distinction is collapsing.

Unlike phone networks, data networks have been left largely unregulated and untaxed to help spur growth. This raises concerns for groups such as the Multistate Tax Commission that Internet-style services could jeopardize billions of dollars in state funding for programs, including universal telephone service, 911 emergency services and the e-rate school technology fund.

Federal regulators have recently dropped hints that they may be preparing to either exempt VoIP providers from the current rules or begin drafting new ones. In a recent interview with CNET News.com, Federal Communications Commission Chairman Michael Powell agreed that VoIP threatens to change not just the way people dial but also how regulators oversee phone companies in general. He said the FCC would look at the issue this fall.


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"What (VoIP) is going to do is start to weaken the foundation of the way we've done things for 100 years," Powell said.

Huw Rees, vice president at VoIP provider 8x8, said the FCC should issue a blanket stay on VoIP regulations. "That would be best for us and the industry," he said.

8x8 has until Oct. 22 to apply for a California phone license. Rees believes that the judicial caveat will soften the position of California regulators, making "dialog" rather than litigation a more appropriate tactic for now. But the possibility of filing a lawsuit is still being discussed, he adds.

"We're taking a softer approach than Vonage," he said.

In-Stat/MDR analyst Norm Bogen said Tuesday's decision won't sit well with traditional phone companies, which sometimes have to pay large sums to states in the form of taxes or fees. Bogen added, however, that the decision is "good for the consumer, good for IP communications and good for the industry in general...If it had gone the other way, you would have had a major inhibitor to growth in this new world."

An estimated 1 million people use VoIP in the United States, employing paid services such as Vonage, Net2Phone and Packet8. Others use free services such as Skype, those from major instant messaging providers, Free World Dial-Up or SIPphone to chat only between computers.

In addition, about 2.1 million cable subscribers now use a broadband connection to make phone calls that use non-VoIP technology. Cable providers are now deciding whether to upgrade those networks to VoIP systems, a more cost-effective method than the telephone switches they now use.

The main draw for consumers is the price of a phone call. Subscription services are either free or cheaper than traditional phone service by as much as $20 a month. VoIP calls are cheaper because they avoid the toll roads of the telephone companies' private networks.

Major telephone companies are also using VoIP to route calls at significantly lower costs. For now, about 10 percent of all telephone calls use the Internet in some way. But most analysts believe that in about a decade, nearly every call will use the Internet.

Long-distance carrier AT&T also believes that it's time for a new rulebook for VoIP, a company representative said before Tuesday's ruling. Among the biggest users of Internet telephony in its network, the carrier is now asking the FCC to exempt these calls from its rules.

"We're making investments in VoIP technology to allow phone-to-phone communications," the representative said. "Before we spend the money it takes to get the technology up and running, we want to understand what the rules are."

Qwest Communications International is another supporter of new VoIP-centric telephone rules. Qwest still wants Net telephony to be regulated but believes that the FCC should draft separate, lighter rules for the upstart services compared with what traditional telephone companies must follow.

In a recent FCC filing, the company argued that the agency should "balance the competing interests of fostering a nascent technology and creating a level playing field among all providers of voice transmission."

Looks like a phone call, sounds like a phone call
In the Vonage suit, Minnesota had sought to defend not just its regulations but also its decision to bring VoIP providers under the existing regulatory umbrella, Minnesota PUC analyst Mitchell said in an interview before the decision.

The state had argued that it sees no distinction between VoIP and regular telephones. They might operate on different networks, but they pass the "duck test," Mitchell said. They look and sound like traditional phone calls, so they should be considered as such, he said.

"You pick up a (VoIP) phone and dial someone," Mitchell said. "That looks like a phone service to me."

Vonage argued that this reasoning was flawed, since many of the assumptions used to oversee the old phone system are irrelevant or nonsensical for the Net, where information is exchanged differently than over the so-called public switched telephone network.

"We're not suggesting that broadband telephony should never be regulated, but it can't be squeezed into existing regulation," Vonage Chief Financial Officer John Rego said in a recent interview.

Among other things, the state rules reflect a time when all voice calls created a dedicated, end-to-end channel between two speakers and relied on geographic hints such as a telephone number area code to do so. As a result, geography now plays a central role in current telephone regulations. But on the Internet, geography doesn't exist.

The only address that matters is the IP address that devices need to go online using any broadband connection anywhere in the world.

"On the Net, you are dialing a person, not a location," VoIP service Free World Dialup founder Jeff Pulver said.

That creates a quandary for states that are trying to make even the most basic decisions about a VoIP service--for example, what constitutes a long-distance call. Under the current telephone rules, regulators could just track what telephone network switches the calls bounced between. But using VoIP, calls travel in anonymous data packets, leaving regulators in the dark about which of the trillions of bits on the Internet at any time are actually voice calls.

"It just typifies that you can't take rules that have applied to an industry that's been operating in the same way for hundreds of years and apply it to the Internet," said Ravi Sakarai, president of VoIP provider VoicePulse, one of the six VoIP providers in California regulators' crosshairs.

Vonage's Rego said VoIP is rapidly bringing in new players and changing the landscape of traditional voice services in unexpected ways. In such a situation, regulators should proceed cautiously, he said.

For example, Rego argued that the state rules that Vonage is fighting in court are so broad that they could be enforced against the likes of Microsoft, Yahoo and America Online, whose instant messaging applications allow subscribers to talk to each other using a microphone and speakers that are hooked up to a PC.

"Does that mean Microsoft and Yahoo need to be regulated like a telephone company?" Rego said.

 

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