Ringing in the change
29 November 2004
Since the invention of the telephone, customers have wanted more for less. Voice over Internet Protocol (VoIP) telephony promises free calls and threatens the business models of current telecommunications operators. So can you get something for nothing? And how have regulators in the UK, EU and US dealt with the issues raised by the new technology?
In the UK, the Office of Communications (Ofcom) is midway through a consultation exercise to determine how it should regulate VoIP. Regulation of electronic communications is harmonised across the EU, and the European Commission has been running a parallel consultation. Meanwhile, the Federal Communications Commission (FCC) has also dealt with similar issues.
What is VoIP?
Traditional telephone calls can be thought of as two tin cans connected by a string. When you dial a number, the switches within the telecoms network provide you with a dedicated piece of string (or circuit) between the two handsets for the duration of the call. The network is dedicated to making sure that the call will almost always get through, even if there is a power failure, and that you can always call the emergency services. However, this dedicated network and reliability costs money and users are charged for each call.
By contrast, VoIP calls do not use a dedicated network and calls pass over private internet protocol networks and/or the public internet, which is also used for other services such as email. These networks do not guarantee that the service will always work or that emergency calls will get through. There are different VoIP business models: computer-based handsets that plug into broadband connections and VoIP services that look just like traditional telephony to the end-user.
Something for nothing?
So, is it possible to get something for nothing? VoIP has achieved rapid market penetration in the US, and AT&T recently cited VoIP as a major reason why its voice revenues were dropping at an annual rate of 20 per cent. European incumbent operators, such as BT in the UK, are also under pressure in their traditional voice businesses. However, the US experience is caused directly by a different regulatory and market structure, which means European incumbents have less to fear than the US long-distance operators.
Traditional US long-distance carriers (including AT&T and MCI) pay the local Bell companies (Verizon, Qwest, BellSouth and SBC) ‘access charges’ to originate or terminate long-distance telecoms services. In the US, VoIP providers have been able to argue that their calls are neither long-distance nor telecoms services (being rather ‘information services’) and so have been able to avoid paying access charges. This has given US VoIP providers a cost advantage over the traditional long-distance carriers, which has enabled them to offer retail prices significantly below those of traditional long-distance carriers.
By contrast, the interconnection charges payable by European VoIP providers are the same as those payable by traditional EU (carrier preselection) long-distance operators. EU interconnection charges, unlike US access charges, depend only on the elements of an incumbent’s network traversed by the call. They do not depend on whether the call is long-distance, nor is the conveyance of VoIP calls excluded from the EU definition of electronic communications services. VoIP calls originated or terminated over broadband are able to avoid applicable termination or origination interconnection charges, but VoIP operators have a much smaller cost advantage in Europe than in the US, so VoIP penetration, driven by low prices in the US, is unlikely to be replicated in the UK or EU more generally.
‘Publicly available telephony services’ and perverse consumer protection incentives
While US VoIP adoption is stimulated by a regulatory cost advantage, European regulators have been much more interested in consumer protection and which telephone numbers can be used for VoIP.
Since 25 July 2003, no individual licences have been required in the UK to provide electronic communications services or networks, although they are still required to use radio spectrum. Operators providing services are subject to general conditions (and those dominant in particular markets, additional obligations), and the scope of these conditions depend on the nature of the service provided. Private electronic communications have the least onerous requirements, publicly available electronic communications are subject to additional rules, and those providing publicly available telephony (PAT) services are subject to the greatest level of regulation.
The definition of a PAT service, found in the EU Directives, is an object lesson to the trainee draftsperson of the dangers of conflating a definition with an obligation. It defines a PAT service as being a service available to the public, for originating and receiving national and international calls, through a number in the national or international numbering plan and (rather than finishing at this stage and then imposing emergency access as a contingent obligation) access to emergency services. PAT service providers have additional rights, such as number portability and carrier pre-selection, but are subject to additional rules, such as the obligation to ensure network integrity and availability at fixed locations, to provide access to emergency organisations to callers and to pass on caller location data to emergency organisations.
Certain VoIP services may not be able to meet all the requirements of PAT services because, for example, the user may be nomadic and so the provider may not know their location, or the service may rely on a broadband modem which requires mains power. If a PAT service falls under the definition, on a first reading it would appear that the provider must comply with all obligations. The concern of Ofcom and the Commission is that this creates a perverse regulatory incentive to not provide access to emergency services at all and to avoid a service being regulated as a PAT service, rather than encouraging at least limited emergency services access.
Ofcom’s approach has been to seek to encourage providers of VoIP services by proposing to forebear from enforcing PAT service obligations, in return for such providers complying to the extent that they are able, and informing consumers both at the point of purchase and the point of use of the limitations of their service. Forbearance, while used by the FCC in the US, is not an established UK communications regulatory concept. In my opinion, Ofcom is acting outside the scope of its legal powers in proposing to forbear. However, in the absence of incentives from any market participant to challenge Ofcom’s approach, it seems likely to be adopted in the UK as a pragmatic compromise.
The ability for VoIP providers to offer their customers normal geographic numbers has been an enabler of VoIP’s rapid take-up in the US. Ofcom’s first proposal for the UK was to confine VoIP services to an ‘056’ VoIP numbering ghetto. However, in response to industry concern at both the market impact and incompatibility with the EU regulatory principle of technology-neutral regulation, Ofcom now allows VoIP providers to use both geographic numbers and the new 056 range.
Ofcom and the Commission are expected to conclude their consultations towards the end of the year, and regulators across the EU are dealing with the challenges of encouraging innovation while protecting consumers. While the market will determine the success of VoIP in Europe, regulatory lawyers should be busy for some time to come.
Robert Bratby is counsel at Wilmer Cutler Pickering Hale and Dorr