MEMORANDUM FROM: Wiley Rein & Fielding LLP DATE: December 9, 2003 RE: Summary of VoIP Forum

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1 MEMORANDUM FROM: Wiley Rein & Fielding LLP DATE: December 9, 2003 RE: Summary of VoIP Forum The Federal Communications Commission ( FCC or Commission ) held a forum on December 1, 2003 that addressed the regulatory implications of the development of VoIP. The impetus for the forum was the continued growth of the once nascent Voice over Internet Protocol ( VoIP ) technology. Additionally, various Senators have sent letters to the Commission stating the importance of a national framework that will encourage innovation in and deployment of VoIP networks. Senator John McCain has stated his intent to hold a hearing on VoIP early next year. In the Forum, the Commission began its review of a service that defies traditional regulatory classifications. The Forum brought together a diverse group of panelists ranging from small providers of VoIP services, including Pulver.com and Vonage, to large industry leaders, Time Warner Cable, Cisco, and Level3. State Commissioners from Florida and California also attended. No LECs participated in the Forum. Summary of the Issues Presented All of the participants stressed that VoIP is more than voice and that VoIP represents not just one technology but rather a full range of services. VoIP includes two-way calls that might interconnect to the PSTN, but also includes the voice chat component of Instant Messenger, Push-to-Talk service, Pocket Tunes which streams Internet Radio to Palm devices, and even game applications like XBox Live which employs a VoIP headset. Therefore, the majority of the panelists agreed that the Commission should not attempt to force VoIP into one of the traditional regulatory classifications. The majority of Commissioners were similarly concerned about creating opportunities for regulatory arbitrage. Many of the panelists further agreed that economic regulation (e.g., for ratemaking or service quality) may not be warranted. There is no incumbent VoIP monopolist, there are low market entry costs, and there are no inherent bottlenecks except to the extent that VoIP services overlay and interconnect with traditional platforms. Nonetheless, there was a sense that a regulatory scheme may be necessary to achieve some of the Commission s social policy objectives. Several Commissioners expressed concern about the impact of VoIP on universal service contributions as services migrate away from the PSTN. Disability access was another hot topic, although there was less support for regulation in that area. Finally, while some industry representatives believed that voluntary adoption of best practices by industry members would be sufficient to address concerns about complying with national security, CALEA, and E911 objectives, several Commissioners and other industry representatives believed some regulation would be necessary. However, as several panelists

2 noted, too much regulation could drive VoIP providers offshore, as has occurred with Internet gambling, putting providers beyond the regulatory control of the Commission and threatening the fulfillment of the Commission s social policy objectives. Commissioners Statements All of the Commissioners acknowledged the need to move expediently in this proceeding so as to create regulatory certainty that will allow for continued investment in and deployment of VoIP. Both Chairman Powell and Commissioner Abernathy illustrated a clear preference for minimal regulation of VoIP. Chairman Powell specifically stated that he believe[d] unflinchingly in maintaining an Internet free from regulation, [and that he] believe[d] that IPbased services such as VoIP should evolve in a regulation-free zone. Chairman Powell continued by contending, no regulator should tread into this area without an absolutely compelling justification for doing so. Similarly, Commissioner Abernathy asserted that the Commission should move forward with a light touch, arguing that historic common carrier regulation should not be applied to VoIP. In contrast, Commissioners Copps, Martin, and Adelstein focused on the need to bring certainty to VoIP regulation. To do so, they believed that the Commission must also address several other policy issues. Commissioner Copps and Commissioner Adelstein emphasized the need to avoid regulatory arbitrage while encouraging innovation and development. Commissioner Adelstein did, however, state that VoIP providers must contribute to the Universal Service Fund ( USF ). Commissioner Martin highlighted that VoIP s regulatory classification, E911, and CALEA must be addressed. The Status of the State Commissions The Commission and the majority of the panelists appeared to agree that VoIP should be treated as an interstate (if not global) service and therefore state regulation largely should be preempted. Florida Commissioner Charles Davidson agreed stating that Florida has advocated a hands-off approach. However, California Commissioner Carl Wood saw a continued role for the states, similar to its involvement in wireless matters. Carl Wood also maintained that states would continue to have a role in regulating consumer protection matters. Economic Regulation Chairman Powell indicated in his opening statement that the Commission should approach economic regulation with significant skepticism. Michael Gallagher of the NTIA similarly stated that any regulation should be minimal. Some panelists argued that any economic regulation would artificially influence investment decisions and create opportunities for regulatory arbitrage. However, California Commissioner Carl Wood did not rule out economic regulation. While the full panoply of common carrier regulation should not necessarily be applied to the entire VoIP industry, he believed that it might be possible and appropriate to tailor economic regulation to the different types of VoIP services. The panelists agreed that, regardless of the course the Commission pursues, the Commission needs to make its objectives clear because the lack of certainty is stunting investment in new applications. E911 Great discord arose among the panelists with regards to whether E911 regulations should be imposed upon VoIP providers. Although all of the commenters acknowledged the importance of public safety and access to 911 services, it was also apparent that an E911 solution for VoIP providers is not currently available. Jeff Pulver of Pulver.com and Jeffrey Citron of Vonage 2

3 declared that innovation, rather than legacy regulation, will lead to a packet based response system and that industry must be given the opportunity to develop its own standards for E911 service. The imposition of legacy regulation would only inhibit this development. On the other hand, John Billock of Time Warner Cable, Charles Giancarlo of Cisco, James Crowe of Level 3, and both state commissioners maintained that all VoIP providers should be required to provide E911 access. Additionally, Florida Commissioner Charles Davidson asserted that the government and VoIP providers together must work to fully inform the public as to the current shortcomings of VoIP during the transition to a fully implemented E911 service for VoIP providers. CALEA CALEA was one of the top concerns of both the Commissioners and the panelists. Some panelists, including John Billock of Time Warner and Charles Giancarlo of Cisco, believed that the FCC would have to impose regulations. Other panelists, however, pointed to their voluntary compliance with law enforcement as proof that voluntary participation by industry will be sufficient to satisfy law enforcement concerns. Jeffrey Citron of Vonage specifically argued that no formal requirements are necessary. He pointed out that many types of IP services are beyond the reach of CALEA, such as Internet chat. However, several of the Commissioners, Commissioner Adelstein in particular, indicated that CALEA is an issue for which FCC action may be appropriate. Universal Service In one of the question and answer sessions, Commissioner Adelstein expressed his deep concern about the impact of VoIP on the USF. None of the panelists specifically objected to supporting universal service; certain concerns, however, were raised. James Crowe of Level 3 stated that VoIP providers should be required to contribute to universal service but, in requiring them to do so, the Commission must also recognize that VoIP involves much more than just voice and then adjust the contribution amount to reflect this consideration. John Hodulik of UBS asserted that contributions based on interstate traffic no longer make sense since bandwidth, not distance, is now the issue. Florida Commissioner Charles Davidson contended that all contributors to the USF should be eligible to apply for withdrawal from the USF. Jeffrey Citron of Vonage pointed out that some VoIP providers, including Vonage, are already paying into the USF as an end user. Citron asserts that the amount Vonage is currently paying into the USF as an end user is roughly equivalent to the amount that they would be required to pay in as a direct contributor. Jeff Pulver of Pulver.com asserted that VoIP services that are offered to the public at no cost, such as a VoIP service offered in conjunction with AOL Instant Messenger, could not be required to pay into the USF because it would simply be a tax on the company. Several commenters suggested that the FCC reconsider what the goal of universal service should be over the next ten to twenty years, i.e., should the goal of universal service continue to be focused only on basic voice service. 3

4 Several commenters, however, did contend that VoIP providers should be required to pay into the USF without limitation. Specifically, John Billock of Time Warner declared that regulation should not be based on technical differences, because from the customer perspective, VoIP still looks like voice as opposed to data. Access Charges There was a general consensus among the presenters that the intercarrier compensation regime currently in place is a quagmire that must be addressed in its entirety, as opposed to simply with regards to VoIP. Several of the commenters went further suggesting that VoIP providers should not be exempt from access charges; others proposed a modified access charge regime for VoIP. Florida Commissioner Charles Davidson, specifically proposed that access charges should only be imposed on VoIP providers when the PSTN is accessed by the call and only to the extent the PSTN is accessed. Disability Regulation In their opening statements, Commissioners Copps and Adelstein recognized that regulation to ensure disability accessibility might be necessary. While most of the panelists believed that voluntary industry action would be sufficient to take the needs of the disability community into account, Dr. Gregg Vanderheiden, an expert in the field of assistive technologies disagreed. In his view, natural market forces do not account for disability access because companies who invest in such technologies are generally put at a competitive disadvantage until such investment is required for all companies. Thus, progress towards accessibility is only made when regulations are implemented and enforcement is threatened. He pointed to hearing aid compatibility with speakerphones as an example of how new technology causes people with disabilities to lose access, which is only restored once regulations are extended to the new technologies. International Aspects All of the panelists recognized that since VoIP is a borderless service, regulation would have an international impact. Many panelists pointed out that while the FCC needs to act to bring certainty to this industry, too much regulation could drive VoIP providers offshore, with negative economic and social consequences. In particular, once providers move offshore, the United States would lose the ability to ensure that providers comply with CALEA and other social policies. Some pointed to Internet gambling as an example of a service that had moved offshore in response to U.S. regulation. Tom Evslin, who spoke on behalf of the VON Coalition, indicated that foreign regulators believe that the FCC should forbear from regulating VoIP, as it has from regulating the Internet. He also noted that VoIP has been a force for competition around the world because it lowers the barriers to entry. Finally, he noted that while VoIP is not solely responsible for lowering settlement rates, it has been an important factor and FCC forbearance would accelerate that process. How to Proceed While the Forum was intended to establish a record and elicit initial proposals for a VoIP framework, commenters also took this opportunity to suggest possible courses of action. Several commenters, as well as Chairman Powell, noted that although VoIP is only a small portion of the Internet, the Commission s decisions regarding VoIP could have far reaching implications for 4

5 how all communications will be regulated in the future. Specifically, several commenters proposed that the Commission use this opportunity to rethink the Commission s current telephony regulatory regime. To do this, several commenters recommended that the Commission first determine the purpose of its rules and only then determine how best to apply the rules so that the designated purpose will be met. While some commenters asked the Commission to forbear from regulating VoIP, especially in light of the 9 th Circuit cable modem decision, Chairman Powell noted that forbearance is not a simple option. In light of these developments, Chairman Powell has established an Internet Policy Working Group headed by Dr. Robert Pepper, Chief of Policy Development, and Jeff Carlisle, Senior Deputy Chief of the Wireline Competition Bureau, to further investigate this technology. The Commission did not provide any further indication of the timing for release of the Notice of Proposed Rulemaking addressing these issues. * * * * * * * * For more information regarding the FCC s VoIP Forum on December 1, 2003, please contact Greg Vogt (202) or Brad Gillen (202)