VoIP and the End of Monopoly

Published March 5, 2004

On February 25, David Dorman, chairman and chief executive of AT&T Corp., told Bloomberg’s Brian Sullivan, “we think that we have the opportunity to transform our core network to all IP, but continue to offer what I’ll call legacy services to customers that are on those legacy services during that transition, but be the leader in Voice over IP adoption.”

Two weeks earlier, on February 10, Vonage CFO John Rego told a group of investors that VoIP would completely replace the existing Public Switched Telephone Network (PSTN) within 20 years. According to Comm Daily, which covered the conference, no one on the panel, which included representatives from Verizon, Cablevision, and Comcast, disagreed.

The rise of voice-over-the-Internet Protocol (VoIP) technology – the convergence of telephone and Internet technologies – could dramatically lower the price of telephone calls, obliterate the distinction between local and long-distance calling, and finally deliver the long predicted videophone in every home. None of this will happen, however, unless federal and sate regulations keep pace with technological change.

VoIP is the latest wave of technology-driven competition that has shaken the telecom industry to its roots. The regional Bell operating companies, or RBOCs – SBC, BellSouth, Verizon, and Qwest – are engaged in a fierce battle for survival. They are reeling from the loss of customers to wireless and cable companies, bleeding red ink from having to subsidize resellers who use their lines and equipment at regulated prices, and losing investors.

The so-called “unbundling requirements” of the 1996 Telecommunications Reform Act require the RBOCs, as a prerequisite to entering the long-distance market, to lease lines and equipment to competitors at government-controlled prices many experts say are below cost. While characterized as deregulation, critics say the 1996 act actually introduced a complex and ultimately unworkable system of government price controls and complex service classifications requiring extensive government interference with the industry.

Regulatory uncertainty compounds the problem, particularly concerning the terms and conditions under which telcos must “unbundle” new broadband lines and equipment. While the FCC announced a year ago that it would not force telcos to give competitors access to new broadband connections, it has yet to resolve questions about the application of its new rules.

Meanwhile, investors are holding up hundreds of billions of dollars in investment capital, waiting to see if the new infrastructure they build will also have to be shared with competitors paying below-market prices. Capital spending on telecommunications facilities nationwide fell from $100 billion in 2000 to less than $40 billion in 2003. Outdated and uncertain regulations weren’t responsible for all of this decline, but there is little doubt they prevent the industry’s recovery.

Conventional phone companies and their trade associations do not want VoIP burdened with all the regulations imposed on their wireline businesses, but they are also afraid their lunches will be eaten by competitors free from rules and tax burdens they must cope with. They seek for wireline providers the same “light touch” regulatory regime proposed and in some cases enacted for cable, wireless, satellite, and now VoIP platforms.

Until and unless the telcos are freed from rules forcing them to lease their lines and equipment to competitors at below-market prices, fees for universal service, 911 emergency services and subsidized Internet access for public schools and libraries, and federal, state, and local excise taxes, it is reasonable for them to work to have the same or at least similar rules, fees, and taxes imposed on their competitors. That would be bad for consumers and the industry.

The FCC needs to finish the job of exempting broadband from unbundling requirements and should try again to end, or at least substantially reform the UNE-P process. Regulations, fees, and taxes that artificially divide types of telecom services and cross-subsidize different classes of users need to be scaled back or repealed. Making the moratorium on Internet taxes permanent and maintaining definitions that would make VoIP off-limits to state and local excise taxes is necessary too, but only as the first step to lowering or repealing taxes on wireline services.

Much of this work needs to be done at the federal level. This is not, as some claim, a violation of federalism. As the Competitive Enterprise Institute’s Solveig Singleton wrote recently, “The world is changing, and some political arrangements upon which we have relied may need to change with it. This does not mean abandoning the goal of preserving freedom through institutional checks and balances. If federalism might fail us in some sectors, we need far stronger legal and regulatory reforms at the federal level than anything undertaken so far.”

Joseph L. Bast is president of The Heartland Institute, a 20-year-old nonprofit research organization based in Chicago, and publisher of IT Update, a monthly technology newsletter. He can be reached at [email protected].