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New Rules for the New Telecom

When is a phone call not a phone call? That's the question the Federal Communications Commission will try to answer this year in its deliberations over voice over Internet protocol (VoIP), a technology that allows voice calls to zip over the Net instead of across traditional copper wires. Unfortunately for the FCC, the answer is anything but clear. The agency's rules date back nearly 100 years, to a time when various technologies delivered just copper-wire service. Broadcast radio, and later TV signals, flew through the air. In the 1960s, multichannel video began its journey across a coaxial cable.

VoIP is blurring all that. Now, you can make a voice call from one PC to another -- or forward a PC call to your cell phone. Interactive gamers can talk to one another over their high-tech consoles.

Should phone taxes apply? How will the FBI monitor such calls? Do you really need to be able to call 911 from your Xbox video-game console? Answering all these questions "won't be easy," says Republican FCC Commissioner Kevin Martin. "The issues are complicated -- and constantly morphing -- because of the myriad new ways technology can be used."

It's a good thing, then, that Martin is both a skillful politician and a veteran of telecom battles. He joined the FCC in July, 2001, after serving as a special assistant to the President for economic policy. Last winter, he led a successful coup against FCC Chairman Michael Powell's plan to unshackle the powerful Baby Bells -- Verizon (VZ), SBC (SBC), BellSouth (BLS), and Qwest (Q) -- from regulations that force them to sublease their lines to competitors (see BW Online, 2/10/03, "The FCC's Great Telecom Tussle").

On Jan. 2, Martin spoke to BusinessWeek Online Senior Reporter Jane Black about the issues VoIP creates for the FCC and how the agency will tackle them in 2004. Here are edited excerpts of their conversation:

Q: The rise of VoIP tends to be seen as a battle between the cable companies and the Baby Bells. But it's far bigger than that. In your view, what are the real issues opened by VoIP?

A: Voice over IP raises a lot of regulatory issues that can't be simplified into one set of problems, because VoIP services vary quite dramatically. Some services, such as, require special equipment for both the person making the call and the person receiving the call. Others, like Vonage, are very different in that one person has a voice-over-IP phone that, at some point, plugs into the public system telephone network [PSTN], and therefore can call anyone whether they have a VoIP phone or not.

Each kind of service raises different competitive issues. The one that's effectively a computer-to-computer call may need one set of rules. Other services, which take advantage of and plug into the public service telephone network, may need another set of rules that treat them more like a traditional phone provider.

But the commission is going to have to approach VoIP in a practical sense as well. People have an expectation that if they can pick up a telephone and it connects into another person's house that it's a telephone service. With that comes an expectation that this "phone service" will have 911 and access to other emergency services. They also expect that law enforcement will continue to have access to calls that must be tracked. People don't want to see a new technology provide criminals an opportunity to escape law enforcement.

Q: True. But there's worry among startups that the Baby Bells will use concerns about law enforcement and 911 as a way to keep new players out of the business. Are such fears valid?

A: Public safety and law enforcement shouldn't be used as a way to stop others from competing against traditional players and networks. These are legitimate concerns, but they're ones the commission is cognizant of. The services that are now available because of new technology are opportunities for new players to come in. We should be encouraging that. That's why we have to approach these public-safety issues separately from competition issues.

Q: What about contributions to the universal service fund, which subsidizes the phone network and guarantees every American reasonably priced phone service? For years, critics have been predicting that new technology like VoIP would undermine universal service and create a communications divide.

A: People have been worried for a long time that new technology will erode universal service by allowing people to avoid the obligation. One way to address the change in technology that's occurring is to require people to contribute if they use a telephone number. A telephone number, after all, is a key to the public system telephone network.

So if you're using voice over IP that works from PC to PC, you would not contribute to the universal service fund. But if you use one of the services that do give you a telephone number, like Vonage, you would pay.

In short, customers who take advantage of the PSTN should be the ones contributing to its upkeep. It's a solution that allows us to make sure that VoIP services that are used as substitute telephone service pay, while those that are an Internet-only service don't.

Q: That seems logical. But with services such as Skype, PC-to-PC calls are becoming easier and more popular.

A: The technology is constantly changing, and so is the way consumers use it. We have to evaluate how people use the technology, but I think that the telephone number solution would -- at least today -- capture the people who take advantage of the PSTN, while not being overly inclusive.

It doesn't mean that's a perfect solution, but it's a step toward trying to make sure that people who use the public system network contribute to its upkeep.

Q: So what's next?

A: There are currently three petitions pending before the commission. The Pulver petition asks, among other things, that a call from one computer to another computer be treated as an information, not a telephone, service. The two others from Vonage and AT&T (T) are asking for decisions on how to treat calls that use voice over IP for just one piece of the call's journey, such as transport or to connect to customers in their homes.

The commission is hopeful that we'll make a decision on the Pulver petition soon. We'll also release a notice of proposed rulemaking that will solicit comments from relevant parties on many of the questions that have arisen about how we should be treating the VoIP services that currently are offered.

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