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, 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 circuitswitched
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.
