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FEBRUARY 13, 2004
By Alex Salkever These Phone Calls Aren't Phone Calls The FCC's Feb. 12 ruling that computer-to-computer calls are exempt from telecom regs is the first blow in a new battle for the Bells If a phone call is sent digitally over the Internet, is it still a phone call? Or is it a voice e-mail? That question has loomed over the telecom sector for more than a year, as the industry awaited a ruling from the Federal Communications Commission. At issue: new technologies that allow cheap, easy phone calls over existing broadband Net connections. On Feb. 12, the FCC replied with an initial answer that should make the Baby Bells very nervous -- a voice call delivered digitally over the public Internet is the same as an e-mail, as far as the regulators are concerned. The decision came at the behest of Jeff Pulver, the founder of FreeWorldDialup, who had petitioned the FCC for a ruling that would allow him to run his free-of-charge voice over Internet protocol (VoIP) network without facing standard regulations that cover old-school telecoms. Pulver's case was special: His network allows only users who dial directly from one Net connection to another, bypassing completely the public phone networks. More controversial are calls that originate on the Internet and then move through public phone networks. That's the service now being offered by Vonage, Net2Phone, AT&T (T ), and numerous cable companies. That's a real threat to the Bells' services, since it allows customers to connect to anyone who has a phone. SET TO GO. More decisions defining VoIP will be coming later this year. But "the VoIP discussion is now officially under way," says Andrei Jezierski of telecom consultancy i2 Partners in New York. And the initial FCC ruling suggests that regulators may be inclined to leave VoIP alone. FCC Chairman Michael Powell has repeatedly expressed support for unregulated VoIP. Now, the FCC seems to concur. If the hands-off policy continues, Vonage and its ilk would be free to sell Internet phone service that ties into public networks. These sales have been accelerating and eroding the Bells' local-service customer base -- the regulated local-phone monopolies that have long been their revenue mainstay. Such changes could spark fierce competition to deliver local and long-distance services under one-price-fits-all plans costing less than $20 a month, a boon for consumers. While Internet telephony has been around for years, broadband penetration now seems to have reached the critical mass necessary for the technology to become a popular service. More than one-fifth of U.S. households are wired for broadband. On the business side, the cost of VoIP gear has plummeted, making what was once a risky phone-service gamble with dubious cost savings an attractive alternative to standard telecom options. Performance improvements in VoIP also have fueled a series of alliances between cable and long-distance companies to offer local-phone service and steal customers from the Bells. EMERGENCY CALLS. These linkups have made the Bells especially uneasy. Along with state regulators, they've argued that if something acts like a phone network, then it should be regulated like one. The Bells collect tariffs at the local level to pay for guaranteed universal access to phone networks, and they underwrite 911 emergency service. In providing such public services, the Bells have reaped steady profits with the blessing of state regulators. And states have long regarded local-phone service as their bailiwick, with the FCC generally stuck with regulating long-distance service and equal-access issues involving broadband. Yet, as ways for VoIP providers to delivery emergency services to subscribers have become better defined, concerns over 911 access have subsided. FCC Chairman Powell further argues that universal service could be beside the point if VoIP delivers on its promise of cheap and ubiquitous phone access, almost as an add-on service to a Net connection. Already, other big players are eyeing this business. Time Warner's (TWX ) America Online unit has talked about piggybacking phone capability onto its popular Instant Messenger program and linking up with cable companies, which are already offering local-phone service. Wireless providers such as T-Mobile could use new broadband-data technologies to create phone connections that offer higher quality and more reliability than cell phones. TOUGH TRANSITION? The Bells have also been offering basic versions of VoIP -- at more costly rates. But as competition mounts, they may have to speed their transition to state-of-the-art technologies to stem defections from circuit-switched local-phone facilities that could soon begin to look outdated. This could be a difficult economic transition. The Bells have more than 100,000 workers, and they pack an enormous lobbying clout. Some analysts think the battle inside the FCC isn't over yet. "The FCC has said nothing about the gray areas, such as when a call originates on an IP network and then goes onto a regular phone network. We'll see a decision on that in a few months," says independent telecom analyst Jeffrey Kagan, who adds: "In all likelihood, telcos will get fees proportionate to how much their network is used in making calls." The court of last resort may be Congress, which recently overrode the FCC on the issue of media consolidation. However, asking lawmakers to buttress a system that would likely preserve higher phone-service prices would be a tough sell. And AOL, Yahoo! (YHOO ), and Microsoft (MSFT ) have already built advanced voice-communications capabilities into their IM clients, blurring the line between data and voice even further. A new era of phone service over the Internet may soon be at hand -- if it isn't here already.  Olga Kharif also contributed to this article. Salkever is Technology Editor for BusinessWeek Online Edited by Douglas Harbrecht
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