VoIP: A Discussion Paper

For the Greenlining Institute

March 10, 2004

Alex Gault
Small World Ventures

“If the Consumer stands to benefit
significantly from Internet Voice we
should let it blossom. The burden
should be placed squarely on the
government to demonstrate why
regulation is needed, rather than on
innovators to explain why it is not. I
think the potential benefits are very
substantial.”
„ Michael Powell, Chairman, FCC
75% of adults of have of VoIP.
66% have heard of DSL.
14% have heard of WiFi.
„ Ipsos-Insight Express Study
Summary
(VoIP) is an emerging disruptive technology that has the potential to dramatically
improve the quality and cost of phone service for consumers. VoIP has been
commercially available for at least eight years, but only now is the technology being
deployed to deliver services that are competitive alternatives to the traditional
phone service. The cost for most commercial grade VoIP services are minimal –
some are free.
VoIP is native to the Internet. VoIP calls traverse the Internet in data format, akin
to the way email travels from one computer to another. 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. 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.
Presently, the FCC and state bodies which oversee telecommunications policy are
considering overhauling the regulatory environment for consumer phone services,
in order to address the benefits and risks of VoIP. Incumbent industry stakeholders
which have built commercial services atop the PSTN are also maneuvering to
protect their short term interests, while investing aggressively into Internet
infrastructure in expectation of a VoIP future.

Internet Protocol (IP):
A data-oriented protocol used by
source and destination hosts for
communicating data across a
packet-switched network.
IP by itself is something like the
postal system. It allows one to
address a package and drop it in
the system, but there’s no direct
link between the sender and the
recipient.
TCP/IP, which supports real-time
communication between clients on a
network, establishes a connection
between two hosts so that they can
send messages back and forth for a
period of time.
What is VoIP?
VoIP is a generic term that refers to all types of voice communications which use
the Internet as a transmission medium, whereby calls are powered by Internet
protocols (IP) rather than traditional circuit switched technology. 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.
Many VoIP services are transmitted via the public Internet, thus bypassing part or
all of the public switched telephone network (PSTN). Because the vast majority of
telephone subscribers are served by incumbent local exchange carriers (ILECs) on
the PSTN, presently most VoIP calls do traverse the PSTN. However, as VoIP
services become prevalent the technology may eliminate the need for both the
PSTN and circuit switching.
VoIP can occur between computers, between a computer and a phone, and
between phones. Commercial services exist to serve each method.
For users who already have broadband Internet access, some VoIP software now
provides for free telephone calling from anywhere-to-anywhere in the world.
How VoIP Works
Because all transmissions must be digital, the caller’s voice is first digitized. This
can be done by the telephone company, by an Internet service provider, a cable
company, or by the caller’s computer. Next, the digital voice is compressed and
separated into packets, using complex algorithms. The packets are then sent across
the network using IP addressing, and reassembled in the proper order at the
destination. Again, this reassembly can be done by a carrier, ISP, cable company,
or client computer.
VoIP network environments:
• Public switched telephone
network.
• Private managed networks.
• The public Internet.
 The Economics of VoIP
The networks used and owned by all telecommunication carriers currently make
intensive use of IP, because it provides the following economic benefits:
”… 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. 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. In many
respects it all really comes down to
an issue of educating people.”
„ Robert Pepper, Chief of
Policy Development, FCC
Efficient use of Infrastructure. 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, regardless of the amount of information transmitted. In
contrast, on IP networks all content – whether voice, text, video, or
computer programs – travels over the network in packets that are
directed to their destination by diverse routes, sharing the same
facilities most efficiently.
Almost Free. IP systems offer a more cost effective means for
providing communication connections. In particular, Internet
technology makes available to anyone with a personal computer and
modem the ability to bypass the long distance PSTN.
Resilient. Over the long term, 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.
Open Source Architecture. IP is a nonproprietary standard agreed
upon by hardware and software developers, and is free to be used by
anyone. Thus the barriers to entry for entrepreneurial firms developing
new hardware and software are very low. In contrast, the PSTN
operates as a closed system.

Industry Associations
Voice on the Net (VON) Coalition
• www.von.org
• Lobby group opposed to
VoIP regulation
National Cable &
Telecommunications Association
• www.ncta.com
National Exchange Carriers
Association
• www.neca.org
• Lobbying group for rural
exchange carriers
International Multimedia
Telecommunications Consortium
• www.imtc.org
• Exchange for negotiating
and sharing information
about standards and
compliance
International Telecommunications
Union
• www.itu.it
• International organization
where governments and the
private sector coordinate
global telecom networks
and services
Incumbent Local Carriers vs. Dedicated VoIP Vendors
Incumbent Local Exchange Carriers (ILECs) stand to benefit from VoIP. Faced with
an uncertain landscape and increased competition, ILECs must retain customers. By
offering VoIP, in and of itself, carrier’s can retain customers and increase traffic.
Moreover, introduction of IP allows carriers to offer integrated premium services
(voice, text, audio, and video) over a single connection, thereby further enhancing
value and expanding their porfolio of services.
In the short term, ILECs are marketing VoIP services principally to large
enterprises. Over the long term, most will likely commit to consumers and
households, as they will realize substantial savings as IP infrastructure is far less
costly to maintain and upgrade than the PSTN.
Small entrepreneurial companies are driving the acceleration of VoIP use in the
consumer market, and they enjoy tremendous cost advantages over ILECs.
Because they use the Internet as the backbone for VoIP calls, they don’t have to
rent or build expensive switching facilities, and thus have limited existing costs to
amortize.
VoIP will force the commoditization of the enhanced services – like call waiting,
caller ID and voicemail – that ILECs currently offer. Enterprise network vendors like
Seimens, Cisco and Avaya already bundle those services into their real-time
collaboration suites at no additional cost. Skype’s free VoIP service for consumers
(computer-to-computer) supports conference calls, and will soon provide instant
messaging. As enhanced services deliver high margins for ILECs, a competitive
environment where they are available for free will exert further pressure to evolve
existing service offerings to VoIP.

Projections for cable VoIP
subscribers by the end of 2004:
• Comcast: 1.3 million
• Cox: 976,173
• Mediacom: 55,000
• Charter: 24,533
• TimeWarner: 2,000
• Cablevision: 5,006
• Others: 1,250
• Total: 2.4 milllion
„ Source: MRG
Key Trends and Wild Cards
Universal standards. It is still far from certain that VoIP will become instantaneous
and transferable over all sorts of devices (computers, cell phones, PDAs and
telephones) and over all kinds of networks (circuit-switching, public Internet, cable,
private managed networks.)
Convergence of voice, text and video. Collaboration software suites which provide
integrated platforms for voice, email, instant messaging and video conferencing are
already in use within large enterprises. Cable vendors Comcast and TimeWarner are
piloting comparable services for consumers and households. Consumers will soon
be able to use the Internet from any location and instruct a home phone to forward
calls to another phone number -- or listen to voicemail via the Internet from any
location. FCC Chairman Michael Powell envisions many practical benefits for
consumers, including the following: “… you make an Internet call to a doctor’s office
to make an appointment. The doctor’s system calls up your medical records, your
medications, and your last visit and instantly displays them. It also brings up the
appointment times available, allows you to select one and then calls you back, or
sends a text message to your cell phone, the day before the appointment to remind
you.”
VoIP & WiFi. VoIP over WiFi offers many benefits to corporate users, such as
eliminating the need to use valuable cellular airtime within a campus network. 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, universities, and municipally subsidized WiFi antennas.
Nearly every U.S. cellular carrier has either expressed an interest in selling Wi-Fi
access. T-Mobile is the only one with a service available now, which gives its
customers access to Wi-Fi networks inside about 2,000 Starbucks and other cafes
for a fee.

Chronology of Key Events
1982:
FCC framework for subsidizing
universal phone service.
1996:
The Telecommunications Act made
universal phone service costs
explicit and removed them from
access charges.
1998:
The FCC published the Stevene
Report, which classified VoIP into
categories distinct from traditional
phone service.
VoIP: Emerging Regulatory Environment
ILECs (ex. Verizon, SBC, BellSouth) have various degrees of interest in VoIP, but
are resistant to embracing it quickly or completely, because doing so means
admitting to shareholders, regulators, customers that both monopoly control and
artificially high voice revenues may disappear. As a delay tactic, 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,
while delaying their own offerings.
Baseline Standards
For VoIP to meet the quality and public service standards typically of existing phone
services, it will have satisfy the follow:
• Use North American Numbering Plan (NANP) resources.
• Be able to receive calls from or terminating at the PSTN at one or both ends
of the call.
• Represents a secure and reliable replacement for ILEC services.
• Use IP transmission between the serviced provider and the end user
customer, including use of an IP terminal adapter and/or IP-based telephone
set.

Chronology Continued:
2000:
FCC studies by DeGraba and
Atkinson concluded that the existing
intercarrier compensation regime
distorted competition.
2003:
CPUC gave six VoIP providers three
weeks to apply for the same license
that incumbent carriers require to
operate. At the last minute, the
CPUC delayed the requirement
indefinitely.
2004:
US Court of Appeals overturns year-
old FCC decision to force incumbent
carriers to share their networks with
distance rivals at disounted prices.
Existing Regulatory Benchmarks
• Communications Assistance to Law Enforcement Act (CALEA)
ƒ Emergency services
ƒ Universal phone service
ƒ Access charges
Access Charges
The Telecommunications Act of 1996 called for making universal service costs
explicit and removing them from access charges. Since, 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. Yet those charges still add up to a
hefty subsidy, with AT&T, MCI, Sprint and other long-distance providers paying
approximately $15 billion a year in rent to ILECs.
Even penny per minute rates could add as much as $5 to $10 to the monthly bills of
customers subscribing to dedicated VoIP providers. 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.
VoIP holds great promise for saving consumers billions of dollars and further giving
a boost to national productivity by providing new communication services. 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.
Key Public Officials, Analysts and Industry Spokespeople

Analysts

Kevin Werbach (www.werbach.com)

• Technology analyst
• Former counsel for new technology policy, FCC
• Former editor, Release 1.0

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, FCC
• Robert.pepper@fcc.gov
• (202) 418-1500
Kathleen Abernathy
• Commissioner, FCC

Kevin Martin
• Commissioner, FCC

Sen. Ted Stevens (R-AL)

• Chair, Senate Appropriations Committee

Sen. Lamar Alexander (R-TN)

Industry Spokepeople

John K. Billock
• Vice Chairman & COO, Time Warner Cable

Peter Pitsch
• Communications Policy Director, Intel Corporation

Tom Evslin
• Chairman and CEO, ITXC

Marilyn Cade
• Director, Law and Government Affairs, at AT&T

Dave McClure
• President, U.S. Internet Industry Association
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.com

Dedicated VOIP providers (enterprise)

• Cisco
• Avaya
• Nortel
• Seimens
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