Vonage to Uncle Sam: Hands off VoIP
Last modified:February 12, 2004, 11:00 AM PST
By Evan Hansen
Staff Writer, CNET News.com
In the marketing din surrounding Internet telephony, few companies have made more noise than Vonage Holdings.
The three-year-old Edison, N.J., upstart has grabbed headlines as the biggest little company in its class, recently clearing 100,000 subscribers for its voice over Internet Protocol (VoIP)service. It's also been in the frontline in a burgeoning regulatory battle that promises to reshape more than a century's worth of assumptions over telecommunications service.
The fight came to a head in Minnesota last year, when Vonage took on local officials and ultimately won a federal court decision, finding that its service was not subject to traditional phone regulations in the state. That ruling was bolstered Thursday, when the Federal Communications Commission ruled that traditional phone regulations don't apply to voice calls that travel entirely over the Internet.
All of the signs point to validation for VoIP pioneers like Vonage, after years of skepticism. But with success has come new dangers. Vonage and other VoIP pioneers such as Net2Phone and VoicePulse are now bracing for competition, as cable companies, the Baby Bells and AT&T all begin to roll out similar services.
CNET News.com recently spoke with Vonage CEO Jeffrey Citron, before the FCC's ruling on Thursday, to discuss the reasons for VoIP's sudden success, the regulatory climate and the prospects for his company in an increasingly crowded field.
Q: Is VoIP the new bubble?
A: I do not want to comment on any kind of bubble or not. But as an industry, people are realizing VoIP can transform a lot of companies in the way in which we communicate, not tomorrow, but over the next five years. There will be a lot of players that are going to come, and a lot of players are going to go.
A lot of players are going to remain at the end of that, and the technology is going to change. The way we do business today is not going to be the way doing the business in the future. I think what (Lindows.com CEO) Michael Robertson is doing, which I could qualify as an interesting project is just that, it is interesting. Customers will choose the winners and losers. Capital markets are going to vote on the winners or losers.
What are the biggest obstacles that you face from a customer perspective? What is it that you hear when customers say, yeah, a $15 phone service sounds mighty good, but what are the bugs?
Well, I think there is an awesome numbers of bugs. I think there are large educational processes where people are not sure whether it is going to be as good as (standard phone service) or whether it is going to be as reliable. That is an educational process and that takes time. Telephony service is a carefully considered purchase. You just don't walk out and change phone companies overnight because you saw some ad on TV. They do a lot of research about the services; they ask a lot of questions; they want to talk to a real person.
VoIP services have been around for a long time. Why is the regulation issue heating up now?
PC telephony, IP telephony has been around a long time but there were Net-to-phone or PC-to-phone applications when AOL had their free phone calling from their computer.
Microsoft had their free calling programs back in late '90s. No one came out and said we have to regulate these things. Obviously once someone was able to offer a product that some people view as very threatening to the established industry, that's when the regulatory machines start to move. All we did was to shrink (the PC) into a little tiny box you plug the phone into...and that was a big change in the progress of IP telephony.
Minnesota got the ball rolling, with a federal court decision last year finding the state public utilities commission couldn't regulate Vonage. How is this ruling going to influence other states and the FCC?
Even prior to the Minnesota decision, there was a dichotomy between how states viewed VoIP. The state of Florida actually ruled VoIP to be not a telecommunications service, but rather an information service for the purposes of (the 1996 Telecommunications Act). And all of a sudden the state of California steps in to say that "If Minnesota is going to treat you as a phone company then so are we."
What is interesting is a couple of things that are going to sort of act as boundaries around what occurs. I think the first boundary is what the (FCC) believes will be the first turf battle: that's whether (VoIP) is an intrastate or interstate service. I think they have been pretty clear to state that it is going to be interstate in nature. ...
That's probably one of the easiest parts (to decide) because you have sort of some universal agreement among many of the players. You really can't tell what jurisdiction exists for VoIP phone calls. Now, the states probably won't like that because once it is deemed to be interstate, then any powers that might ever be granted to the states in the area of regulation will have to be granted through the FCC process, and they may choose to fight back.
There seem to be some legitimate grey areas in the law, particularly when you get to interconnecting the VoIP network to the traditional telephone network. Some FCC commissioners have openly suggested that if someone is connecting and making use of the traditional telephone system that some of the old schemes should apply.
That's really interesting, but you know that's the whole computer-to-telephony decision, which goes back to the formation of the basis of the Internet itself. Obviously, every single thing in the computer world connects in the telecommunication network.
The telecommunication network is defined by physical wires on the ground that communicates signals from one point to another point and back, so it is the basis of the Internet. Obviously, Congress had to carve out what was considered basic service. Merely connecting to the network by no means defines you as a telecom service. ...The question that everyone must ask themselves about regulation, is it regulation for the purpose of taxation?
Is it an economic policy decision? Or is it a decision of protection of people and delivering service and quality? Once you turn into economic arguments, the states have to lose.
They can't say we need to regulate you because we need to tax you. It is an unfair argument. It is not proper and it is not just. ...Now, there are some very valid points around a number of areas that you raise: Servicing rural markets; emergency services or 911; wire tapping law enforcement; consumer protection; interconnection fees; and people with disabilities.
Does Vonage support 911 service?
Yes, but a limited form of 911 today, and that is basically what we call speed-dial 911. You dial 911, and we will then send the call to your local PSAP (Public Safety Answering Point) over the public networks close to the dedicated 911 networks.
Subsidies are meant to ensure service in areas where companies wouldn't normally choose to lay miles of wires because the markets are too small to earn a profit.
I am not going to disagree with that particular statement, but the bottom line is that Vonage has customers in rural markets that are not subsidized, only because the service is cheaper and we don't draw on the system--and we could.
We have to put circuits in rural markets in order to go ahead and interconnect those markets to our IP networks to deliver service to customers. Cable companies deliver cable phones or cable TV service to a large number of rural markets over which a company can run IP phone service, and they don't get any subsidy for delivering that particular service. People have to question what the USF (universal service fund) is for.
Now I don't want to get into the debate of USF...But I do want to highlight one particular fact, Vonage pays USF. I have issued the paper to the FCC that basically shows...Vonage's method of contribution. We pay a dollar per user into USF every single month to subsidize the phone system. The subsidy is still there, and you don't need any form of regulation in order to have subsidy as a matter of fact.
Do you think there will ever be a time when it will become appropriate to regulate VoIP services?
It's a great question. If there were to be a monopolistic company 10 years down the road that dominates the whole world, then you absolutely need regulation to protect consumers. But where the consumer can sit down or walk in and say, 'Right now I can choose from 100 different phone companies,' how much regulation is required? The wireless industry is actually a pretty good model for this. Therefore, it is a regulatory approach using a very light touch and very little state regulatory items at all.
To what extent is cable a sleeping giant in this business? How can Vonage hope to compete once the big guys get in the game in a serious way?
Vonage has a set of services that are extremely different (from what cable can offer) and, quite frankly, very compelling for users. The great thing about this is the customers have choice, and they can choose whatever makes sense, so obviously additional customer choice is large. Probably more people voluntarily have chosen Cablevision in its service area, and we think that is a good example of what might happen. Time Warner has a great service and an important name. This is great; customers have a choice, and choice is good.
What happens when the Bells get into the market?
In the end, I think it is great to see a lot of players come to the marketplace. I think there is a lot of innovation. I think it will cause a lot of equipment to come down in price dramatically as more and more people are buying this gear
Do you see the timeline for convergence of wireless and VoIP
It is already happening, I mean, push-to-talk in a lot of ways is really nothing more than an IP application. I think over time we will see it, but probably it won't happen until 3G gets here when the networks really become truly IP. |
