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(at
page 36ff.) (footnotes omitted)
c. Internet Telephony
Several companies now offer software that allows for real-time voice
conversations over the Internet (Internet telephony or "voice on the Net"
(VON)). These services work by converting voices into data which can be compressed and split into
packets, which are sent over the Internet like any other packets and reassembled as audio
output on the at the receiving end. Most Internet
telephony software today requires both users to use computers that are connected to the Internet at the time of the call, but some
recently announced services will allow the receiving party, or even both parties, to use an
ordinary POTS telephone.
FIGURE 6 -- INTERNET VS. CONVENTIONAL TELEPHONY
Internet telephony
consultant Jeff Pulver estimates that approximately 55,000 - 60,000 people now use Internet telephony products on a weekly basis,
although usage has been increasing rapidly and a much larger number of people have access to
Internet telephony software. Netscape and
Microsoft, the manufacturers of the leading Web browser software, have released versions of their software that incorporate Internet
telephony.
The FCC has not attempted
to regulate the companies that provide the software and hardware
for Internet telephony, or the access providers that transmit their data, as
common carriers or telecommunications service providers. In March 1996, America's Carriers Telecommunication Association
(ACTA), a trade association primarily
comprised of small and medium-size interexchange carriers, filed a petition with the FCC
asking the Commission to regulate Internet telephony.
ACTA argues that providers of software that enables real-time voice communications over the Internet should be treated as common
carriers and subject to the regulatory requirements of Title II. The Commission has sought comment on ACTA's request. Other countries are
considering similar issues.
The ACTA petition raises
the fundamental question of whether a service provided over the
Internet that appears functionally similar to a traditionally-regulated service
should be subject to existing regulatory requirements. The petition argues that VON providers
should be considered as fundamentally analogous to switchless long-distance
resellers, and thus should pay the same rates to LECs for use of local networks to
originate and terminate interstate calls. Under this
analysis, shown in Figure 6, the current pricing structure allows VON providers to charge an effective usage charge of zero, while
long-distance carriers must pass on roughly six cents per minute in access charges for every
interstate call.
ACTA's view, however,
oversimplifies the comparison between VON and long-distance voice telephony. There are
many differences, beginning with quality of service. Current Internet telephony products do not provide comparable sound quality
to traditional long-distance service. Most
existing systems require both parties to be connected to the Internet through a personal computer at the time of the call, and the sound
quality of Internet telephony products tends to be appreciably worse than
circuit-switched voice telephony. At this time, Internet telephony is in most cases not a comparable
substitute for long-distance voice service.
However, distinctions in
quality and ease of use should not be the sole basis for regulatory decisions.
Cellular telephony typically provides poorer sound quality than wireline service, but this fact does not affect the classification of
cellular as a telecommunications service. Moreover, service
providers are working to improve sound quality and ease of use, and several providers have begun to deploy "gateways" that
allow Internet telephony conversations to be terminated or even originated on an ordinary
telephone. When such gateways are used, however, the pricing structure changes. Gateway providers must pay for hardware
at points of presence to route voice traffic between the Internet and the voice network,
and must also pay local exchange carriers to terminate or originate calls over
voice lines. Thus,
gateway providers plan to charge per-minute rates for their Internet telephony services, rather than the "free" calling available through
current computer-computer Internet telephony products.
Even these current
products, however, do not really provide for "free" calling. Service providers
and users still must pay for their connections to the local phone network, and
for their connections to the Internet.
If these services are priced in an inefficient manner, the issue is not one related to Internet telephony, but is a broader
question about the pricing for Internet access and enhanced services that use local exchange
networks. The issue of pricing for Internet access is discussed in detail in the following
section. The fact that some Internet packets now encode voice rather than data does not alter the
fundamental economics and technical characteristics of network traffic. If anything, a shift toward usage of the
Internet for
voice telephony might result in usage patterns that looked more like those of
circuit-switched voice calling. The
issue of how exactly Internet telephony affects network usage, and how pricing affects usage of Internet telephony, is not at all
settled. Local calling throughout virtually all of the United States is priced on a
flat-rated basis, yet people do not tend to stay on the phone all day.
Internet telephony is also
technically different from long-distance voice calling. A circuit-switched voice call uses an entire 56 kbps channel for every
call. By contrast, Internet telephony uses digital compression techniques that can encode voice
transmissions in as little as 4 kbps. Internet
telephony is also packet switched, which means that it does not tie up a call path for the portion of the call carried over the
packet-switched Internet. Of course, when
a packet-switched Internet telephony call is originated through a modem over a
dial-up circuit-switched
connection to an ISP, the potential efficiency benefits of packet-switched voice transmission may not be realized. In some cases, the long-distance and international voice transmission networks, which are in most cases digital today,
may actually do a better job of compression than Internet telephony products. All of these possibilities, however, reinforce the notion that the cost comparison between Internet and
circuit-switched voice telephony
is not obvious, and is highly contingent on network arrangements that are
evolving rapidly.
Finally, as a practical
and policy matter, regulation of Internet telephony would be problematic. It would be
virtually impossible, for example, for the FCC to regulate as carriers those companies that merely sell software to end users, or
to require the ISPs segregate voice and data packets passing through their networks for
regulatory purposes. Rather, VON software could more appropriately be compared to
unregulated customer premises equipment (CPE), like telephone handsets, which facilitate
calling but do not themselves carry calls from one party to another. Moreover, although ACTA claims that Internet telephony unfairly deprives
interexchange carriers of
revenues, others argue that these services provide valuable competition to incumbent carriers. The existing systems of access charges
and international accounting rates, to which long-distance carriers are subject,
are both
inefficient artifacts of monopoly regulatory regimes. If circuit-switched long-distance carriers
are paying excessive and inefficient rates as a result, the best answer is to
reform those rates rather than attempting to impose them on other parties.
The FCC should consider
whether to exercise its preemption authority in connection with Internet telephony.
ACTA has submitted a petition, similar to its FCC filing, to the Florida Public Service Commission.
In addition, the Nebraska Public Service Commission staff recently concluded that an Internet telephony gateways service
operated by a Nebraska ISP was required to obtain a license as a telecommunications
carrier. If federal rules governing Internet telephony are problematic, state regulations seem
even harder to justify.
As discussed below in section D, there is a good argument that
Internet services should be treated as inherently interstate.
The possibility that fifty separate state Commissions could choose to regulate providers of Internet telephony services within
their state (however that would be defined), already may be exerting a chilling influence on
the Internet telephony market. Netscape, in its
comments on the ACTA petition, argued that the Commission should assert exclusive federal jurisdiction and preempt states from
regulating Internet telephony.
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