Introduction

This paper will focus on Voice Over Internet Protocol (VoIP) and the deregulation versus anti-competitive conduct. In Section I we will discuss the history of VoIP and how it has developed into a standard communication device using traditional telephone lines and tech savvy software. This will be an overview of what the primary intentions for inventing the software and who the pioneers were that patented and launched this successful tangible apparatus, which is used by over 6 million in the United States and an undefined number throughout the world.

Section II is a thorough analysis of economic implications for two popular VoIP services companies in the United States: Skype, Internet based software free to users who have a personal computer and Comcast, a telecommunications corporation that has become the leader in offering bundled services that includes VoIP. The discussion will revolve around the issue of regulation and deregulation of the service and the economic impact that it has on consumers and today’s market. Sections III & IV are a detailed comparison and contrast of the regulation and deregulation for the United States versus India, Canada and the Philippines and the affects of VoIP from an economic standpoint. This will be an analysis of the proponents and oppositions of regulation competitive value and how regulation is allowing states to make decisions and maintain control over VoIP. Section V is the conclusion that will answer the question as to whether or not it is better to regulate or let competition run its course. We take a stance on how the 1996 Telecommunications Acts is not the ideal prototype for regulating VoIP and why we feel that regulation and/or deregulation should be in the public interest.

I. The History of Voice over Internet Protocol

The first Voice over IP Protocol’s used to carry voice signals over the IP network took place in 1973 with the experimental Network Voice Protocol invented for the ARPANET. However, it wasn’t until 1995 that the potential of sending voice data packets over the Internet was realized by a group of technology enthusiasts in Israel. Alon Cohen and Lior Haramaty, founders of VocalTec, are credited with being pioneers of VoIP. In 1995 they introduced the first internet voice software called the “Internet Phone”. The software was designed to run on home personal computers using sound cards, microphones, speakers and a modem. The software provided users with an alternative to traditional phone lines and a way to lower cost on long distance services. Unfortunately, in 1995 there was lack of broadband availability and the software produced poor voice quality and connectivity. Another disadvantage was that users had to have the same equipment and software to send and receive calls.
By 1998, VoIP had made a considerable amount of progress. VoIP traffic represented about 1% of all voice traffic in the United States and gateways had been created to allow PC-to-phone and phone-to-phone connections. Organizations began using a unique marketing scheme of providing customers with a facility to make free phone calls including long distance calls. Each call began and ended with an advertisement. Hardware manufacturers Cisco Systems and Nortel introduced VoIP switching equipment that eliminated the need for functions previously done by the computer’s CPU. Companies began to implement VoIP on internal IP networks, and long distance providers routed some of the calls on their network over the Internet.
By 2000, VoIP had completely morphed from an alternative to traditional phone lines to a standard telephone service with voice traffic traffic exceeding 3%. By 2005, low cost unlimited calling plans and advanced telephony features had driven VoIP revenues to greater than $3 billion a year. VoIP technology has grown to include Video over IP and the future of this technology is still growing.

II. VoIP Economic Analysis – Skype and Comcast

End users (consumers) are major stakeholders in the telecommunications economic markets. Their ability to adapt to and productively use a new technology such as VoIP creates demand for that technology. If consumer adaptation proves too difficult or cost-prohibitive, then the technology will have little mainstream value. Concerning VoIP services and applications, however, consumers are indeed adapting and finding productive use for this new technology. Furthermore, end users are finding that they have increased features and options with VoIP services at lower costs than with traditional telephone services, and thus, demand is increasing exponentially. To illustrate these points, consider Skype, a free VoIP software application. Skype enables people to make toll free calls over the Internet to any other Skype software user. To date, over 300 million people worldwide have download Skype. That’s roughly equal to the entire population of the United States! All that’s needed on either end of a Skype call is a computer with an existing Internet connection. Both residential and business customers alike find value in Skype. In addition to essentially free calling, Skype offers consumers a superior set of features over traditional voice calling. For example, end users with inexpensive web-cams can make video calls with each other, a tremendous advancement over legacy voice-only communications systems. Callers can also transfer files to each other and do instant messaging during a call. (Skype, 2008)
Without connectivity to the existing telephone network, however, the value to consumers of computer based Skype software only goes so far. Consumers expect to be able to call any phone number anywhere, and not just other Skype software users. Recognizing this, Skype does offer connectivity to the existing telephone grid in addition to their free service, and this is how Skype generates revenue. Skype charges for calls to non-Skype telephone numbers. However, compared to traditional telephone plans, Skype’s prices are almost unbelievably low. For example, to make unlimited calls for one month to anywhere in the United States, including landlines and mobile phones, Skype’s no-contract, pay-as-you-go rate is just $2.95 per month! (Skype, 2008)
Skype is able to deliver these low rates because it doesn’t own infrastructure, and thus, there are no massive capital investment to recoup. Skype also has no implicit or explicit cross subsidies or universal service requirements to concern itself with. State public utility commissions did not set prices for Skype, and Skype users are not paying taxes, which contribute, significantly to the cost of traditional telephone service. Also, because of the 1996 Telecommunications Act, local telecommunications companies must provide at wholesale only the specific access Skype needs to complete calls. Lastly, Skype’s prices reflect the benefits from how all VoIP technologies work, which is that calls are efficiently routed across the Internet using IP packet switching for the majority of the call distance, and enter the grid at the cheapest point necessary.
Considering all the features and cost savings of Skype, why would everyone not dump their relatively expensive and featureless telephone service and switch over? The first and foremost reason is that not everyone owns a computer, which is a necessity to use Skype. Another reason is that not every computer owner finds it practical or convenient to always use their computer to make telephone calls. Thus, VoIP software services such as Skype will never replace the traditional telephone service, and will always depend upon the existing phone grid to deliver universal service. Therefore, Skype is not a true competitor to traditional telephone companies, but rather a complement to it. (Cooper, 2008)
Whereas Skype is a complement to the telephone industry; cable companies such as Comcast are direct competitors. Comcast is the largest provider of VoIP services in the United States with 6.1 million voice customers on their network of 14.7 million broadband connections. (Bode, 2008) Whereas Skype requires no significant infrastructure, but does require a computer and software, the more common means of delivering VoIP services to end users is via physical broadband cable lines to the home or business. From the end users perspective, cable VoIP services function identically to traditional telephone service, but this transparency comes with massive infrastructure costs. Comcast already made this investment in broadband infrastructure years prior to delivering television service, and only incurs additional costs associated with wholesale Internet access fees from the ILECs, which it then passes to consumers for a profit.
Comcast has traditionally been a MVPD business delivering cable television services to consumers. However, in the late 90’s, following the deregulation of local markets from the 1996 Telecommunications Act, and increased consumer demand for high-speed Internet service, Comcast recognized they were in a uniquely advantageous position to enter the telecommunications market and start delivering broadband internet service over their existing infrastructure. Furthermore, Comcast could cost-effectively bundle these services offerings to customers to provide incentive to existing cable customers to switch over. For consumers, the demand is for fast Internet service, and whether this service is obtained from the local cable television or phone company is irrelevant.
Having acquired AT&T Broadband, Comcast was in a competitively advantageous position relative to traditional telephone companies. Comcast had already invested in the infrastructure necessary to deliver high-bandwidth broadband copper cable to the “last mile,” and once they owned the infrastructure, it was relatively easy to deliver VoIP services to those same customers. After integrating the 1.4 million lines acquired from AT&T Broadband, and working out the kinks in VoIP service, such as 911 issues, Comcast started offering telephone service to its customers in 2005. That year, Brian Roberts, Comcast’s CEO, said their goal was to have eight million VoIP customers by 2010. Comcast is certainly on track to meet that goal, and are now the “king” of triple-play services: video, data, voice. Comcast now offers a standard rate of $29.99 per month for unlimited calls including nationwide long distance. Like Skype, these rates are flat and low. However, though their rates are lower than traditional telephone service, Comcast’s rates are higher than Skype because their infrastructure costs are much higher. Comcast offers additional features beyond traditional voice telephone service, such as the ability to retrieve a voicemail from a website.

III. Proponents and Opposition to Regulation

The debate whether regulation is helpful or harmful to the competitiveness in the VoIP environment has been going on since the technology was introduced. The answer is different depending on the culture and depending on the functionality at the center of the discussion. Deregulation can be helpful in developing nations or economies where competition exists. On the other hand regulation may be advantageous to consumers if, these developing areas are serviced by a single or limited number of providers. In mature cultures, the need for regulation may be precluded by the competitive environment created by various providers even when looking within a single, established, technologically advanced, developed nation, there are dramatic changes on the level of regulations implemented to ensure the promotion of competition.
Currently in the United States the FCC is battling the various states on who should have governing power over the technology. The Telecommunications Act of 1996 made it so that the states maintained control over the local telephone service. The problem with this is that the mere architecture of VoIP can cover multiple states simply to make a call to your next-door neighbor. Because of this there is no way for a state to govern VoIP and the FCC has taken control of all regulation or lack of regulation. There have been many attempts to put some regulation on VoIP. Among these desired regulations would be for VoIP providers to pay into the Universal Service Fund, and ensure that the service would work for and with those with disabilities.
The continued problem in the United States is what is the definition of VoIP? In the United States, as well as the other three countries we will review, the determination of this question is the key factor in creating regulation that can effectively govern VoIP. As of right now the United States still considers VoIP an information service, one that has different start points and end points. Current US actions seem to suggest that the FCC and other regulating authorities are fearful of instilling too many regulations on VoIP as it is a new technology and they fear that over regulating could cause a stiffening of the technology and its advancements.
The United States has many new entrants into the VoIP arena both in a telecommunications aspect and that of a local business. With the onslaught of all of this new technology and companies emerging attempting to compete, the FCC will be forced to enact regulation that will protect the customer. As the number of companies grow the chances of bad product or erroneous billing increases.
In 2004 the Senate rewrote and passed a bill that would allow the states to charge the universal service tax and a fee to compensate PTSN companies with access charges (McCullagh, 2004). This is just the start of widening government regulation. The FCC unanimously decided to implement the Universal Service Fund requirement on all VoIP providers that terminate on the PTSN as of June 2006. This did not include services such as Skype even though it can be used to connect to a PTSN line. (taxes, 2006)
As you can see, regulators and politicians are dealing with VoIP regulation from different perspectives. Regulators in the United States and around the world are trying to figure out whether or not and how to place restrictions on VoIP, knowing that it could change the economics and make it impossible for startup providers to survive.
In one instance, they are concerned with ensuring a competitive environment. In another instance, they are looking into how specific features should be regulated. Stances on telecom regulation vary widely around the world. In Canada the government is leaning toward imposing traditional telephone regulations on startup VoIP companies. India already has strict VoIP regulations in place as a means of protecting government revenues, while the Philippines VoIP regulatory framework is still in its infancy stages.
(a) United States vs. Canada, India and the Philippines
We begin a comparison of cultures looking first at the Canadian telecommunications industry. The Canadian Radio Television and Telecommunications Commission (CRTC) regulate the Canadian telecommunications industry. Like the United States, Canada sought to apply a ‘light-handed’ approach in terms of regulation, but their primary objective was to foster a competitive environment. In 2005, the CRTC employed a two-tiered approach to regulating VoIP services. This means that one set of rules was applied to the incumbents and another, actually no regulations were applied to new entrants. The ability of the new entrants to break into the market, offer these services and provide the desired competition would be virtually impossible without CRTC intervention. The intent of the CRTC ruling was to prevent the incumbents from bundling VoIP services into their other services and marketing them at artificially low rates. The ability of incumbents to bundle VoIP services with other broadband services would require a filing of tariffs and waiting for approval from the CRTC. (Muraskin, 2004) The CRTC would use these filings to ensure the incumbents don’t come back shortly after the fact, seeking rate increases. These rate increases would not receive CRTC approval. Like the Federal Communications Commission (FCC), the CRTC believes one of their primary functions is to promote and ensure the viability of competition, even in the local markets.
If the rules had been applied uniformly across both incumbents and new entrants, the incumbents would have applauded the regulation. In fact the two primary telecommunication providers, Telus and Bell Canada, were strong proponents of regulation, which would have further solidified their control of the market. Instead, since they were subject to regulations not imposed on the new entrants, the VoIP lines would be treated like any other local telephone service. The incumbents would be subjected to the tariffs until the new entrants achieved a 25% market share, after which the tariffs would be removed. The incumbents would be unable to offer the VoIP service at the lower rates that are enjoyed by the new entrants. They argued that ‘VoIP calls, essentially software for turning broadband connections into phone lines, are much less expensive than calls made over traditional phone lines and these regulations would preclude them from competing in this arena’. (Charney, 2005)
As one might expect, deep pockets can speak volumes. Canada’s federal cabinet over-ruled the CRTC and revoked the regulations on the incumbents. Did the implementation and subsequent revoking of regulation affect the competitive environment in Canada? Most of the smaller competitors and many consumers believed it did. They believed it allowed the incumbents to maintain their monopolistic control of the local markets in all telecommunication services, including VoIP. Ironically, Vonage, one of the new entrants the CRTC was attempting to help break into the competitive arena of VoIP believes the revocation of the regulations will actually help their cause. Their feeling is the case will bring the issue to the awareness of consumers and let them know they have a choice in home service providers. (Turner, 2006)
Looking at the telecommunications environment in India, we observe that regulation was applied in a more ‘heavy-handed’ manner, but achieving many of the same resistances and results. India has a well-structured regulatory agency in the Telecom Regulatory Authority of India (TRAI), which, like the U.S. and Canada, reports into their national government. India imposed heavy regulation on VoIP services up until very recently. Unlike Canada or the U.S. however, these regulations were not imposed to stimulate competition, but rather to prevent loss of revenues to the Indian Department of Telecommunications (DoT). In India, the government runs the telephone company; hence, competition-diverting revenue away from the incumbent is not necessarily viewed as a good thing and VoIP does just that. By rules established in the 1930’s (Telegraphic Wireless Act 1935), all international calls, incoming and outgoing, must be routed through TRAI. VoIP allows that process to be circumvented, thus avoiding the long distance charges that feed the government coiffeurs. (Elwood, 2006) What occurred as a result, were rogue VoIP services, set up and allowed international calls to bypass TRAI. These services, when discovered were shut down and the operators incarcerated. Eventually, India came to the realization they were suppressing the growth of some of their key industries through these restrictive measures.
India is at the forefront of technology and a primary provider of offshore development services and calls center technology. The inability of these companies to enjoy lower long distance rates affected their bottom lines, and hurt their competitiveness with providers of similar services in other nations. (Gosling, 2006) This seemed to get the attention that was needed to implement regulatory changes, but there was (and still is) tremendous resistance from the Department of Telecommunications (“the phone company”).
So while the TRAI has come around in its thinking, they still have future and past actions of the DoT to hurdle before the removal of regulations will truly benefit the consumers and enhance the competitive environment in India. Many experts believe the actions of the DoT in the past have hurt the future of VoIP implementation. Namely, prior to allowing VoIP services, DoT dropped their rates, making their services artificially more attractive and precluding competitor from implementing the necessary network infrastructure to fully implement the migration towards VoIP. (Ahmed, 2008) Using India as an example, you can conclude that regulation truly was harmful to a competitive environment.
The Philippines offers a different perspective on VoIP regulation. VoIP is still in its very early stages here, only beginning to define the regulatory framework, but you can see shades of other environments influencing some of their decisions. First, the National Telecommunications Commission (NTC), the telecommunications regulatory authority for the Philippines has already made a major decision by recognizing VoIP as a voice service as opposed to a data service. Similar to India, “all inbound and outbound VoIP traffic must pass through the networks of local exchange companies.” (Sims, 2005) The draft rules, which are still being evaluated and debated, require that VoIP service providers establish ‘interconnection agreements with at least one public switched telephone network (PSTN) and in exchange, the PSTN will provide routing of calls between other networks.’ (Pinaroc, 2008) The draft regulations include access fees and transmit charges but seem to be acceptable to the Internet Service Providers (ISP’s) at this point. At this stage, the jury is still out on the affects of regulation of VoIP, but it appears to be a mutually amicable process and having the advantage of learning from other nations should help prevent many of the pitfalls that others have experienced.

IV. Global Economic Effects

Contrasting other cultures to our own, and including our history of regulatory contentions with FCC versus state utilities, natural monopolies to basic definitions, we cannot honestly declare ourselves as the industry model for telecommunications regulation. And when it comes to VoIP, it is no different. A key first step is to do what the Philippines did and declare one way or another if VoIP is a voice service or a data service. Once this is defined, it will become more intuitive to create the proper regulatory framework that will encourage competition, but protect against monopolistic practices.
The general consensus is that less regulation establishes a better environment for promoting competition. While we limited our evaluation to the three countries, India, Canada and the Philippines, in addition to the United States, a cursory review of the European environments supports this viewpoint. They are seeking to lift regulations on incumbents rather than imposing regulations on new entrants.

V. Conclusion

VoIP technology is innovative and new and as such the Telecommunications Act of 1996 does not properly address issues of regulation. Lawmakers must decide if VoIP is a “telecom service” as states claim, thus making it subject to state regulations or is it an “information service” provided over the Internet and therefore not subject to regulation as VoIP providers claim. While deciding whether or not VoIP is a telecom or information service provider is important, it should not be the factor that decides the issue of regulation.
VoIP regulation should be based on protection for the consumer and fostering competition to prevent monopolistic control of the market. Opponents contend that regulation will create new costs that will not only curtail innovation, but will also stifle competition ultimately making the consumer the loser. Incumbent local exchange carriers champion deregulation and agree that regulation will threaten competition; however they also insist that VoIP providers pay access charges. Proponents contend that regulation is necessary to protect consumers from abuse and to maintain the universal fund, while states are concerned with infringement of their rights.
Taking each position into consideration, we conclude it is better to regulate. Without regulation consumers would be subject to overpricing, billing errors and poor quality. Competition can only run its course if the market is not monopolized by incumbents.

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