September 15, 1998

BELL COMPANIES TAKE THE LAW INTO THEIR OWN HANDS ON INTERNET TELEPHONY

by Andy Oram
American Reporter Correspondent

CAMBRIDGE, MASS.—People may look back several years from now and say that our era saw the merger of the Internet with the telephone system. But while the two systems are technically compatible, their business and regulatory models clash irreconcilably. Jumping in the breech are recent decisions by Bellsouth and US West, incumbent local telephone companies, to charge new fees to companies offering Internet telephony.

The use of the Internet for telephone calls is the current flash point in the battle between companies coming from either side of the inexorably closing divide between Internet and telephony. There are many forms of Internet telephony; what links them is that they digitize sound and break it into packets to be transmitted using the Internet Protocol that has come to characterize data exchange worldwide.

The advantage of Internet telephony is that it can be done for the cost of a local call, just like sending email or downloading a Web page. Standard telephone lines introduce tiny gaps and imperfections into the transmission, but several companies are building high-speed networks that should match the quality of traditional long-distance calls.

Many boasts have been made that long-distance calls on the Internet are cheaper because they use the telephone network more efficiently, but the claims have been hotly disputed. What clearly makes Internet telephony competitive is that it bypasses the charges that the government and local phone companies place on traditional long-distance phone companies. The Internet carries no access charges or payments into the universal service fund.

The type of Internet telephony targeted in Bellsouth’s September 1 announcement, and the follow-on US West September 11 announcement, is the one that most closely resembles regular long-distance calls. The user picks up a standard telephone headset and dials a company that provides a gateway to the Internet. The gateway sends the user’s voice over the Internet to a similar gateway near the recipient of the call.

The Bells hear a quack and see a waddle here. Bellsouth has contacted providers of this kind of service and told them it will start treating them like any other long-distance company, thus making them pay the access charges due Bellsouth by regulation. The US West announcement is essentially the same.

The effect will be to make Internet gateways much less attractive in the Southern and Western states served by those companies, and quite possibly to drive the providers out of business entirely.

There are other forms of Internet telephony, however. You can make a call from your computer using a variety of free or commercial software. Such calls would be impossible to distinguish from other Internet traffic. Both the FCC and the Bells are wisely avoiding any attempt to track or place charges on such calls.

Defenders of the Internet telephony companies say that it may be a temporary free-loader, but that it represents a wedge driving innovation forward. The technical case for using Internet telephony is that newly developing technologies will be able to integrate voice with other media and bring an era of true multimedia, collaborative communications.

Thus, the argument goes, we must continue protecting Internet telephony gateways for a while longer. The various costs loaded onto long-distance companies, along with the red tape they face, would debilitate the promise of the new technology.

An opposing point of view considers this argument self-serving balderdash for get-rich-quick Internet telephone companies. According to this point of view, the local phone companies can’t afford to leave the fledgling Internet services alone. If they do, every long-distance call will be on the Internet a few years from now and the local companies will be starved for income. Victims will include the poor and rural telephone users who don’t give a hoot for streaming multimedia but are subsidized by the universal service fund that long-distance companies currently pay into.

Bill McCloskey of Bellsouth’s Media Relations told me that affected companies have made inquiries but not yet indicated support or resistance to the new policy.

Local phone companies do not oppose Internet telephony in itself. Bellsouth, for instance, offers it through a long-distance subsidiary. Bell Atlantic recently agreed to provide its own gateway (Internet-to-telephone) to Internet telephony providers.

Where does the FCC stand on all this? On a threshold. They have been following the controversy for a long time, but have remained cautious in changing their regulatory regime. Many experts are calling for a complete overhaul. And it looks like Bellsouth got tired of the wait.

The first brush the FCC had with Internet telephony came in 1995, when a consortium of long-distance carriers called ACTA petitioned them to impose access charges on the brand-new industry. The petition was poorly argued and tried to cover the hidden use of computer calls (because the gateway industry did not yet exist).

Later, long-distance telephone companies came to their senses and saw that Internet telephony was a boon rather than a threat. Rather than worrying about the Internet companies as competitors, the traditional long-distance companies started to develop their own Internet-based services.

It was thus left to the local companies to defend their revenue streams. They did so in a series of petitions trying to force Internet service providers to pay access charges. Their arguments did not involve Internet telephony, though. Instead, they made the twin arguments that all Internet traffic was long-distance and that calls from customers to Internet service providers presented an unprecedented burden for local phone companies.

Later still, the universal service fund turned into an arena where the phone companies called on the FCC to make the Internet industry pay its share.

The FCC saw no duck in Internet telephony, just a goose that lay golden eggs of ever-growing sizes. The agency was understandably reluctant to make a ruling that would completely change the pricing structure of the vibrant Internet service industry overnight, and could well put 90% of its providers out of business.

However, in a report to Congress in April 1998, the FCC hedged a bit on one portion of the Internet industry. “The record currently before us suggests that certain ‘phone-to-phone IP telephony’ services lack the characteristics that would render them information services within the meaning of the statute, and instead bear the characteristics of telecommunications services.”

In other words, the gateway services should be considered long-distance carriers. Bellsouth and US West took their cue from these words, and levied their charges on precisely those companies.

Should the FCC follow along, even worse times are to come for that industry, because its report reminds readers that the regulatory burden for long-distance phone companies includes “contributing to universal service mechanisms, paying interstate access charges, and filing interstate tariffs.”

The FCC is showing its characteristic caution, however. The report says, “Because of the wide range of services that can be provided using packetized voice and innovative CPE, we will need, before making definitive pronouncements, to consider whether our tentative definition of phone-to-phone IP telephony accurately distinguishes between phone-to-phone and other forms of IP telephony, and is not likely to be quickly overcome by changes in technology. We defer a more definitive resolution of these issues…”

It is worth noting that an August report from the FCC’s cable service bureau showed similar forbearance on whether to change the regulation of cable companies that offer Internet service. So long as the current system appears to produce the results desired by the public, the FCC doesn’t want to make changes based on fussy interpretations of formal laws.

So the FCC is tacking in the general direction of the Bells’ unilateral policy change. But it does not want to steer its enormous regulatory ship according to every twist in the shoreline. It is looking for long-range trends and major changes in the environment. The delicate balance to be maintained is between immediate needs of everyday telephone callers and the potential glories of future technology.


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