Federal Internet Law & Policy
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VoIP: FCC: Steven's Report Dont be a FOOL; The Law is Not DIY

Steven's Report (April 10, 1998)

Sen. Ted Stevens
The first significant articulation of FCC policy concerning IP Telephony came in the proceeding In the Matter of Federal-State Joint Board on Universal Service, Report to Congress, Docket 96-45 (April 10, 1998) (aka, The Steven's Report).  Pursuant to a rider attached to the 1998 appropriations legislation by Sen. Ted Stevens, the FCC was required to file a report with Congress that addressed, among other things,
(1) the definitions of "information service," "local exchange carrier,"  "telecommunications," "telecommunications service," "telecommunications carrier," and "telephone exchange service" in section 3 of the Act, and the impact of the interpretation of those definitions on the provision of universal service to consumers in all areas of the Nation;

 (2) the application of those definitions to mixed or hybrid services and the impact of such application on universal service, and the consistency of the Commission's application of those definitions, including with respect to Internet access for educational providers, libraries, and rural health care providers under section 254(h) of the Act.

On April 10, 1998, the FCC filed its Report to Congress.   In re Federal-State Joint Board on Universal Service, Report to Congresspdf, Docket 96-45 (April 10, 1998). The text of the Report related to IP Telephony is below.  More information concerning the Report in the context of Universal Service can be found on the CT Universal Service page.

83. Having concluded that Internet access providers do not offer "telecommunications service" when they furnish Internet access to their customers, we next consider whether certain other Internet-based services might fall within the statutory definition of "telecommunications."  We recognize that new Internet-based services are emerging, and that our application of statutory terms must take into account such technological developments.  We therefore examine in this section Internet-based services, known as IP telephony, that most closely resemble traditional basic transmission offerings.   The Commission to date has not formally considered the legal status of IP telephony.    The record currently before us suggests that certain "phone-to-phone IP telephony" services lack the characteristics that would render them "information services" within the meaning of the statute, and instead bear the characteristics of " telecommunications services."  We do not believe, however, that it is appropriate to make any definitive pronouncements in the absence of a more complete record focused on individual service offerings.

84.   "IP telephony" services enable real-time voice transmission using Internet protocols.   The services can be provided in two basic ways:  through software and hardware at customer premises, or through "gateways" that enable applications originating and/or terminating on the PSTN.   Gateways are computers that transform the circuit-switched voice signal into IP packets, and vice versa, and perform associated signaling, control, and address translation functions.  The voice communications can be transmitted along with other data on the "public" Internet, or can be routed through intranets or other private data networks for improved performance.  Several companies now offer commercial IP telephony products.  For example, VocalTec sells software that end users can install on their personal computers to make calls to other users with similar equipment, and also makes software used in gateways.   Companies such as IDT and Qwest employ gateways to offer users the ability to call from their computer to ordinary telephones connected to the public switched network, or from one telephone to another.   To use the latter category of services, a user first picks up an ordinary telephone handset connected to the public switched network, then dials the phone number of a local gateway.  Upon receiving a second dialtone, the user dials the phone number of the party he or she wishes to call.  The call is routed from the gateway over an IP network, then terminated through another gateway to the ordinary telephone at the receiving end.

85 Commenters that discuss IP telephony are split on the appropriate treatment of these services.   Several parties, including Senators Rockefeller, Snowe, Stevens, and Burns, urge that IP telephony providers offer interstate telecommunications services and, consequently, should contribute to universal service support mechanisms.   Other parties, including Senator McCain, Representative White and the National Telecommunications and Information Administration, oppose application of Title II regulation.   Some commenters argue that IP telephony is a nascent technology that is unlikely to generate significant revenues in the foreseeable future.   Regardless of the size of the market, we must still decide as a legal matter whether any IP telephony providers meet the statutory definitions of offering "telecommunications" or "telecommunications service" in section 3 of the 1996 Act.

86 As we have observed above in our general discussion of hybrid services,  the classification of a service under the 1996 Act depends on the functional nature of the end-user offering.   Applying this test to IP telephony, we consider whether any company offers a service that provides users with pure "telecommunications."  We first note that "telecommunications" is defined as a form of "transmission."   Companies that only provide software and hardware installed at customer premises do not fall within this category, because they do not transmit information.  These providers are analogous to PBX vendors, in that they offer customer premises equipment (CPE) that enables end users to engage in telecommunications by purchasing local exchange and interexchange service from carriers.  These CPE providers do not, however, transport any traffic themselves.

87   In the case of "computer-to-computer" IP telephony, individuals use software and hardware at their premises to place calls between two computers connected to the Internet.  The IP telephony software is an application that the subscriber runs, using Internet access provided by its Internet service provider.  The Internet service providers over whose networks the information passes may not even be aware that particular customers are using IP telephony software, because IP packets carrying voice communications are indistinguishable from other types of packets.  As a general matter, Title II requirements apply only to the "provi[sion] " or "offering" of telecommunications.   Without regard to whether "telecommunications" is taking place in the transmission of computer-to-computer IP telephony,  the Internet service provider does not appear to be "provid[ing]" telecommunications to its subscribers.

The FCC is here setting forth the "Functional Approach" which, in short, suggests that things which function the same should be regulated the same. This approach does not reach why you might regulate the thing. It becomes a major refrain of those who argue that VoIP should be regulated like traditional telephony.

88   "Phone-to-phone" IP telephony services appear to present a different case.  In using the term "phone-to-phone" IP telephony, we tentatively intend to refer to services in which the provider meets the following conditions:

(1) it holds itself out as providing voice telephony or facsimile transmission service;

(2) it does not require the customer to use CPE different from that CPE necessary to place an ordinary touch-tone call (or facsimile transmission) over the public switched telephone network;

(3) it allows the customer to call telephone numbers assigned in accordance with the North American Numbering Plan, and associated international agreements; and

(4) it transmits customer information without net change in form or content.

89 Specifically, when an IP telephony service provider deploys a gateway within the network to enable phone-to-phone service, it creates a virtual transmission path between points on the public switched telephone network over a packet-switched IP network.  These providers typically purchase dial-up or dedicated circuits from carriers and use those circuits to originate or terminate Internet-based calls.  From a functional standpoint, users of these services obtain only voice transmission, rather than information services such as access to stored files.   The provider does not offer a capability for generating, acquiring, storing, transforming, processing, retrieving, utilizing, or making available information.  Thus, the record currently before us suggests that this type of IP telephony lacks the characteristics that would render them ?information services? within the meaning of the statute, and instead bear the characteristics of ?telecommunications services.?

90   We do not believe, however, that it is appropriate to make any definitive pronouncements in the absence of a more complete record focused on individual service offerings.  As stated above, we use in this analysis a tentative definition of "phone-to-phone" IP telephony.  Because of the wide range of services that can be provided using packetized voice and innovative CPE, we will need, before making definitive pronouncements, to consider whether our tentative definition of phone-to-phone IP telephony accurately distinguishes between phone-to-phone and other forms of IP telephony, and is not likely to be quickly overcome by changes in technology.  We defer a more definitive resolution of these issues pending the development of a more fully-developed record because we recognize the need, when dealing with emerging services and technologies in environments as dynamic as today's Internet and telecommunications markets, to have as complete information and input as possible.

91 In upcoming proceedings with the more focused records, we undoubtedly will be addressing the regulatory status of various specific forms of IP telephony, including the regulatory requirements to which phone-to-phone providers may be subject if we were to conclude that they are "telecommunications carriers."  The Act and the Commission's rules impose various requirements on providers of telecommunications, including contributing to universal service mechanisms, paying interstate access charges, and filing interstate tariffs.   We note that, to the extent we conclude that certain forms of phone-to-phone IP telephony service are "telecommunications services," and to the extent the providers of those services obtain the same circuit-switched access as obtained by other interexchange carriers, and therefore impose the same burdens on the local exchange as do other interexchange carriers, we may find it reasonable that they pay similar access charges.  On the other hand, we likely will face difficult and contested issues relating to the assessment of access charges on these providers.  For example, it may be difficult for the LECs to determine whether particular phone-to-phone IP telephony calls are interstate, and thus subject to the federal access charge scheme, or intrastate.  We intend to examine these issues more closely based on the more complete records developed in future proceedings.

92  With regard to universal service contributions, to the extent we conclude that certain forms of phone-to-phone IP telephony are interstate "telecommunications," and to the extent that providers of such services are offering those services directly to the public for a fee, those providers would be "telecommunications carriers."  Accordingly, those providers would fall within section 254(d)'s mandatory requirement to contribute to universal service mechanisms.  Finally, under section 10 of the Act, we have authority to forbear from imposing any rule or requirement of the Act on telecommunications carriers.   We will need to consider carefully whether, pursuant to our authority under section 10 of the Act, to forbear from imposing any of the rules that would apply to phone-to-phone IP telephony providers as "telecommunications carriers."

93   We recognize that our treatment of phone-to-phone IP telephony may have implications for the international telephony market.  In the international realm, the Commission has stated that IP telephony serves the public interest by placing significant downward pressure on international settlement rates and consumer prices.   In some instances, moreover, IP telephony providers have introduced an alternative calling option in foreign markets that otherwise would face little or no competition.  We continue to believe that alternative calling mechanisms are an important pro-competitive force in the international services market.  We need to consider carefully the international regulatory requirements to which phone-to-phone providers would be subject.  For example, it may not be appropriate to apply the international accounting rate regime to IP telephony.



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