April 23, 2004 12:37 PM PDT

The real fight begins for AT&T, Baby Bells

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Feds ding AT&T over Internet calls

April 21, 2004
AT&T has lost a key round in a bid to shave the cost of providing its long-distance service, and now the fight begins over the money it owes.

The battle promises to be a bruising one, played out in court, that could affect other carriers besides AT&T, said executives familiar with the situation.

Several months ago, AT&T stopped paying local phone companies what are known as access charges for completing long-distance calls placed by its customers. Instead, the company waited for the Federal Communications Commission to make a ruling on whether the company's use of Internet Protocol to deliver long-distance calls meant it was exempt from these fees.

On Wednesday, though, the FCC issued a ruling that said AT&T is not exempt, that calls such as AT&T's that begin and end on a traditional phone systems, but use "IP in the middle" just for transport purposes, are to be treated like all other long-distance calls.

AT&T Chief Executive David Dorman now says the company owes just tens of millions of dollars in deferred fees to local phone companies as a result of the decision.

"In our case, it's not significant," Dorman told financial analysts during a recent conference call to discuss first-quarter earnings.


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But Verizon Communications disagrees with AT&T's math, estimating that the long-distance provider owes Verizon and other local phone companies "hundreds of millions of dollars," according to Eric Rabe, Verizon's vice president of media relations.

It's likely a court will end up deciding the final figure. AT&T has not made any moves to pay up, and the FCC won't make a ruling on how much AT&T owes. Instead, the FCC expects Verizon Communications and other local telephone companies to "file any claims for recovery of unpaid access charges in state or federal courts."

The tussle over how much AT&T owes may have an effect on other telephone service providers that rely on voice over Internet Protocol (VoIP), a technology for making cheaper phone calls using Internet Protocol, the world's most popular method for sending data between computers. Carriers are already embracing VoIP as a way to cut traffic costs on international and long-distance calls, and it is expected to eventually replace the public-switched telephone network, as big phone companies convert to IP-based fiber-optic networks.

So who's really affected?
One issue that's still unclear, as legal and telephone regulation experts pore over the minutae of the Wednesday ruling, is whether companies besides AT&T might be affected.

AT&T's Dorman suggested a more expansive effect for what was supposed to be a narrow ruling during his recent conference call. "The issue goes beyond AT&T, and I think it's significantly more meaningful for those others who use IP for traffic delivery," he said.

A source familiar with Dorman's suggestion says cell phone companies have been using the same kind of setup as AT&T. But representatives for several top U.S. cell phone service providers said this week that the practice does not take place.

"There was nobody else doing what they were doing."
-- an executive
with an IP phone
service provider

Should the FCC ruling indeed snare other providers, it wouldn't be the first time that an exploration of Net phone rules ended up involving other applications that use IP. For example, the FBI recently made a far-reaching proposal that would require all broadband Internet providers, including cable modem and DSL companies, to rewire their networks to support easy wiretapping by police. The FBI was expected to ask only that its wiretapping rules apply to VoIP providers.

Walkie-talkie style cell phone conversations known as "push-to-talk," as well as cell phone picture messaging, are also on the federal wiretap wish list.

But Dorman appears to be in the minority opinion. Executives from five Net phone service providers interviewed during the last two days believe the ruling affects only AT&T. "There was nobody else doing what they were doing," said an executive with an IP phone service provider.

More to come
This week's decision is the second major FCC action affecting Net phone users and service providers.

Earlier this year, the agency said Net phone conversations that flow entirely over the Internet are not subject to its rules and regulations.

Perhaps the most important ruling is left for last. The FCC has yet to decide whether access charges apply to commercial Net phone service providers whose calls begin on a broadband connection and end on a traditional home or office phone.

Net phone provider Vonage has also asked the FCC to decide whether states can regulate providers of VoIP services.

But in October, a U.S. district judge in Minnesota barred the state from regulating VoIP providers. Vonage filed its petition before that ruling was issued.

"We don't see any real impact right now," said Vonage Vice President Brooke Schulz.

 

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