INDUSTRY ANALYSIS
Government Oversight and Protecting VoIP

The Senate Commerce Committee will soon vote on a bill to bar states from meddling with Voice over Internet Protocol (VoIP), which allows the Internet to be used like a telephone.

The bill by Sen. John Sununu (R-New Hampshire) is one of many reactions to a growing movement from states and other pro-regulatory types to control VoIP.

VoIP works by taking sound and converting it into packets of computer data that are sent across the Internet and reassembled into sound at the specified destination. And although the technology uses the Internet to provide the service, adaptors exist that allow it to be used with a regular phone, so consumers of VoIP don't have to be computer savvy.

By using the Internet's infrastructure, VoIP makes calls much cheaper than traditional phone companies can provide. This is great news for consumers and bad news for those who cling to outdated ways of thinking. These include state regulators, who view communications services as a cash cow.

Milking the Service

Public Utility Commissions in a number of states, including California, New York and Minnesota, are working to milk the new service for as much as they can get, but in the process there is a serious risk they will strangle VoIP before it can create the telecommunications revolution everyone is expecting.

Sununu's bill, called the VoIP Regulatory Freedom Act, would put an end to this state meddling, although it would still force VoIP firms that connect to the public phone network to "contribute, directly or indirectly," to universal service. Of course, state regulators aren't the only ones targeting VoIP.

This month, the IRS announced that it is considering whether VoIP should be subject to excise taxes, and the FBI has been pushing for assurance of wiretapping abilities. The mammoth regulatory system that held back innovation in the traditional telephone space is now coming down hard on VoIP.

Consumer's Interest

That pioneers of this revolutionary technology are forced to defend themselves against public servants who are supposed to have the consumer's interest in mind is disturbing. It's also one more reason why the entire convoluted telecommunications regulatory machine should be dismantled -- for real this time.

In 1996, Congress passed a Telecommunications Act that was supposed to create a "pro-competitive, deregulatory national policy framework," but instead the last eight years have been filled with regulatory wrangling and burdensome lawsuits.

Through regulations stemming from the 1996 Act, government forced phone companies like the Bells to share their infrastructure with rivals at prices set by regulators. This scheme created a false "competition" that hampered and distorted investment. Now that disruptive technologies are making old services obsolete, the recognition that old regulations are obsolete should follow. Frustratingly, not everyone sees it that way.

Free Market Best

At a July hearing on VoIP, U.S. Rep. John Dingell, D-Michigan, said that he was "troubled" by Federal Communications Commission Chairman Michael Powell's assertion that "VoIP may be deemed an unregulated information service." Dingell also wants to allow states to meddle with the new tech.

"It is also critical that neither the Congress nor the FCC take any action which would disrupt the ability of states to perform the core consumer protection functions which protect consumers from the rascal acts of certain less scrupulous companies," he said.

This statement implies that Dingell doesn't believe that the marketplace is able to provide consumers the best service and that government is necessary to make the telecommunications system work. Nothing could be further from the truth.

Government Can Stifle Competition

History shows that government "oversight" of the telecommunications sector resulted in less competition, innovation and investment. In contrast, the Internet was largely left free of taxes and regulation, creating all sorts of innovative new possibilities that benefit consumers -- including VoIP. Regulators should be barred from trying to hold this progress back. It is unfair to consumers and future generations to attempt to slow down new technologies that bring cost savings and new efficiencies.

And while regulators are forcing VoIP firms to spend resources fighting battles of the past, newer technologies, such as one produced by the creators of the infamous file swapping software KaZaA, threaten the business models of VoIP firms. Just as KaZaA allows music and movie files to be swapped for free, Skype allows free Internet phone calls.

Currently, Skype's service can only be used on the Internet, not with a standard phone, so companies like Vonage and others may have time to figure out how to compete. But the point is that the telecommunications market has moved breathtakingly far away from the old, monopolistic phone companies that current regulations were meant to address.

Telecom has morphed into a hi-tech industry that plays by different rules, including extreme competition and innovation. Consumers should demand that legislators mandate a hands-off policy.