Spring-Summer 2005

Internet Telephone Service: A New Era of Competition in Telecommunications

Voice over Internet Protocol (VoIP), or Internet telephony, promises an evolutionary leap beyond standard telephone service. Because VoIP is significantly different than circuit-switched telephony, it requires a new regulatory framework—a streamlined set of federal guidelines geared to the more competitive telephony marketplace enabled by VoIP. Government should not regulate prices, set market entry rules, or the like for Internet telephony as it did in the era of local monopolies. But it will still need to guarantee consumer protections and ensure that providers meet required social obligations.

Given that telecommunications remains one of the most regulated and taxed sectors of the economy, there are a host of public policy issues surrounding VoIP. This brief, based on a recent Public Policy Institute report “Internet Telephone Service: A New Era of Competition in Telecommunications” discusses VoIP providers' social obligations, particularly universal service and 911 access.

Universal Service

Perhaps the most contentious and high-stakes policy issue related to Internet telephony is the issue of universal service. There are two key issues: (1) should VoIP pay into the fund and (2) if so, what should the revenues be used for.

We believe that, for the foreseeable future, VoIP services that use the North American Numbering Plan to assign phone numbers should contribute to universal service funding—at least until most households are VoIP subscribers. However, the issue of timing and managing the transition to a fully packet-switched network is one that should be taken into consideration. When most Americans have switched to VoIP, these services will simply be another Internet application, like email. At that point, VoIP services should not be required to contribute to universal service. However, at that time, it may be appropriate to require that broadband services pay into the universal service fund, provided that the revenues are used to support the deployment of high-speed networks, and not the public switched telephone network (PSTN). Some argue that broadband services should pay into the fund today. 1 However, given that approximately 20 percent of the population has broadband, subjecting it to universal service obligations would increase the cost of broadband and reduce its growth rate.

While VoIP services that use the North American Numbering Plan should pay into the Universal Service Fund (USF), it is less clear on how they should contribute. The contribution could be based either on phone numbers (a fixed charge per phone number) or as a tax on the monthly bill. Each has its advantages and disadvantages. While a per-number approach is easy to administer, it could reduce the functionality inherent in VoIP, for instance, the ability to maintain multiple numbers on the same account. One solution would be to assess a lower USF fee on second numbers. A per-number approach might also allow some companies to avoid their fair share of taxes if they use one number with multiple extensions. However, the FCC could account for this by imposing some share of the standardized USF fee on each extension. The advantage of a monthly bill tax is that it is more progressive—higher-income households consume more telecom services—and it does not discriminate against households with multiple numbers. A major disadvantage is that it could be difficult to administrator, as determining the cost of VoIP services that come bundled with other services could be quite complex.

With regard to expenditures, any universal service payments made by VoIP services should go to supporting the build-out of broadband telecommunications, not to the PSTN. Using these revenues to support the 20th century circuit-switched network will only delay that transition to a robust, packet-switched broadband network for the 21st century. As former FCC Commissioner Reed Hundt stated, this would be as if “government responded to Henry Ford's new invention of the automobile by discouraging the construction of roads and, instead, tax[ed] cars in order to subsidize canals and railroads.” 2 However, given that the costs of VoIP services, not including broadband, do not differ by geography (while the costs of broadband services do) and given that VoIP services are likely to be extremely affordable, especially for fixed-calling service packages, there appears to be little reason to subsidize VoIP services, even for low-income households. To the extent that affordability is an issue, regulators could extend programs such as Lifeline and Link-up to VoIP users.

While VoIP is likely to be very affordable, the underlying broadband service can be more expensive and can vary by location. Yet, universal broadband service has important economic benefits for the nation—including fostering rural development, among others. As a result, VoIP universal service revenues should be used to support the deployment of broadband telecommunications, particularly higher-speed broadband, to high-cost areas. Regulators could decide how to allocate these funds on the basis of a reverse auction. Broadband providers would bid on serving customers in high-cost areas with the lowest price-per-customer bids qualifying to receive universal service subsidies.

Other Social Obligations

Telecommunications is a regulated industry and has been required to meet a number of social obligations, including offering 9-1-1 emergency services, providing access for the disabled, including deaf and blind people, and giving law enforcement proper and authorized access to telephone traffic. VoIP can meet all of these obligations and in some cases meet them even more effectively than circuit-switched telephony. For example, deaf users could read messages from the computers without the need for expensive TTY teletypewriter service. Blind users could use VoIP to enable them to make calls or other commands using voice prompts. However, it is not automatic that all VoIP services will provide access for disabled users. For example, some VoIP services may have too much latency to provide 100 percent accurate TTY services. 3With regard to 9-1-1, it may be difficult for emergency service providers to automatically identify the location of VoIP providers. Moreover, in some cases VoIP customers must take steps to establish 9-1-1 service. Given that some customers may not do this on their own, it will inevitably raise issues about whether VoIP providers should do more. In fact, the Texas Attorney General recently filed suit against VoIP provider Vonage for failing to warn customers about limits to its 911 emergency dialing service, after a customer tried unsuccessfully to dial 9-1-1 on her phone. In spite of these limitations, VoIP could potentially provide greater 9-1-1 functionality than conventional circuit-switched telephony. For example, it is technically possible (although not available in the market yet) for subscribers to program their services to automatically send more comprehensive information to 9-1-1 emergency services providers, such as the person's medical records so that the ambulance has them before they arrive at the house. The telecommunications industry is working on the 9-1-1 challenge. 4 The FCC should provide the industry with a reasonable period of time to develop an adequate 9-1-1 system before requiring compliance. Until then, providers should be required to inform consumers if their (VoIP) services do not offer 9-1-1 service comparable to their traditional service.  


1 DSL providers are currently subject to paying into the universal service fund because it is classified as a telecommunication service.

2 Hundt, Reed, “Reforming Telecom Policy for the Big Broadband Era: Why is Government Subsidizing the Old Networks When ‘Big Broadband' is Inevitable and Optimal?” speech given to the New America Foundation, December 2003, p. 2.

3 Susan Breidenbach,“Getting Ready,” Network World, 8-12-02.

4 The Alliance for Telecommunications Industry Solutions is joining forces with the National Emergency Number Association to form a committee that will develop a plan to give Internet telephone users access to emergency 9-1-1 services. One likely solution is to tie location information to the broadband modem being used, so that emergency service providers would know what modem a caller is using. Many residential VoIP services already feature a traditional E9-1-1 service, which provides a location and call-back number automatically to the call taker.

Robert Atkinson is Vice President of the Progressive Policy Institute and director of its Technology and New Economy Project. He is also author of The Past and Future of America's Economy: Long Waves of Innovation that Power Cycles of Growth (Edward Elgar Press, 2005). 


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