VoIP Brings New Services, Features And Risks

In telecommunications today, "VoIP" is all the rage. Voice over Internet Protocol is the latest buzzword in an acronym filled industry. It can mean lots of things, but all of them have to do with sending voice communications over the Internet rather than through the "public switched telephone network" or "PSTN." Beyond the technical differences, however, there are practical considerations of cost and allocation of risk that telecom companies and users of telecom services should be aware of and guard against. Some large sums - owed by someone - may hang in the balance.

First, a little background. The technical difference between VoIP and the PSTN is this: traditional voice networks use "circuit switched" technology, meaning that each time a call is placed a line (or "circuit") is connected in real time between the two parties for the duration of the call. "Internet protocol" (or "IP"), on the other hand, uses "packet switched" technology. Packet switched networks use digital transmission that sends information from one packet switch (or "server") to the next in bunches. These bunched communications are broken into "packets," sent as the network time allows, and then reassembled to form a message at the receiving end. Until a few years ago, this method was very efficient for sending data but could not provide voice communications of sufficient quality to be useful for most purposes. Recent technical developments, and the widespread deployment of broadband communications, have made VoIP much higher quality. This, in turn, has enabled many of the new services and accompanying legal and policy developments that are underway today.

Much of the controversy today derives from a lack of regulatory clarity about which fees apply to VoIP as compared to traditional telephone services. Under the Federal Communications Act, "telecommunications" services are those that offer essentially pure pipeline-style transmission. These offerings do not change the form or content of the information as sent and received. In contrast, "information" services involve transmission and some added element of computer processing, such as storage, interaction with information, protocol conversion and the like. "Internet access" is considered an "information service," as is most "internet protocol" transmission (because it has "net protocol conversion" which allows incompatible devices to communicate with one another by altering the information between sender and recipient).

VoIP comes in many variations, some clearly "telecommunications," some clearly "information," others vaguely between the two. The importance of this distinction lies largely in the fact that "telecommunications" services must pay telephone company "access fees" for use of the PSTN, and they must contribute about 12% of interstate revenue to the FCC-administered "universal service fund." Similarly, "telecommunications" services pay federal excise tax where applicable. On the other hand, "information" services pay none of these charges. Taken together, these charges are a substantial proportion of the costs of providing telecommunications services, and not having to pay them gives VoIP providers a significant cost advantage. Traditional telecommunications companies believe this situation is grossly unfair.

The result has been a series of controversies about whether particular variations of VoIP are "telecommunications" subject to these charges and fees, or are "information" services exempt from them. The difference can be tens of millions of dollars (for example, before it bought AT&T, SBC had sued it for $200 million over this very issue). The Federal Communications Commission has addressed some of the easier questions presented to it, but has avoided reviewing the more difficult scenarios. Recent court decisions and related developments may have forced a change in this policy. The FCC has asked for public comment on three Petitions which, taken together, could provide much needed clarification to the current confused situation.

In the easy decision category, the FCC previously made clear that AT&T's "IP-in-the-middle" service for calls that both originate and terminate in traditional TDM format and otherwise provide no enhanced functionality are "telecommunications" services that must pay access (and make contributions to the universal service fund as well). Similarly, the Commission ruled that AT&T's prepaid calling card services that included the playing of an audio advertisement were not made into "information" services by virtue of that ad, and therefore are also subject to access charges and universal service liabilities. On the other end of the spectrum, the agency has said that Pulver.com's Free World Dial-up peer-to-peer service, which is not interconnected to the public switched telephone network, is an "information" service exempt from the telephone company and regulatory fees. None of these decisions were difficult and all were based on determining whether a particular offering is "information" (and exempt from both charges) or "telecommunications" (and subject to both charges).

On the other hand, the FCC has avoided addressing questions in two scenarios: where the definition of VoIP as "information" or "telecommunications" is a close call, and where there are multiple providers involved in a call and it is unclear which one - if any - is responsible for payment of access charges and universal service. For example, over a year ago a Vonage request that the FCC rule that it is "information" service and therefore exempt from state Public Utility Commission regulation presented a perfect opportunity for the FCC to refine the definition of VoIP. Instead, the Commission cleverly dodged the dispute by deciding that, because the Vonage service is "inherently interstate," the PUCs cannot regulate it, and therefore the FCC did not need to go further and address the "information service" question. Similarly, in August 2004, VarTec filed a request for a ruling that it is not responsible for access or universal service payments on VoIP traffic which VarTec transfers to other companies before it is handed off to the local telephone company for connection to the PSTN. The FCC simply did nothing with this Petition for 13 months.

This uncertainty has left providers and telephone companies to seek other ways to resolve the question of who pays what to whom. Potential liabilities have continued to mount, in some cases to very large sums. And several lawsuits have been filed by telephone companies, most notably and aggressively by SBC and its affiliates. Many of these have subsequently been put on hold waiting for the FCC to bring clarity to the situation. Developments in one of these lawsuits, however, may have triggered the beginning of FCC action.

One of the SBC cases involves three defendants: VarTec, Transcom and Unipoint (a/k/a PointOne). The suit alleges that VarTec acted as an interexchange carrier and handed off calls to Transcom and Unipoint for termination to the PSTN via SBC telephone companies. The defendants characterize these calls as VoIP "information" service calls, while SBC says they are traditional "telecommunications." SBC argues that this case is just like the AT&T "IP-in-the-middle" matter previously decided by the FCC in SBC's favor. The defendants do not agree. In addition to this question, the case also presents the dilemma of "if the service is found to be telecommunications, in which case access and universal service payments are owed, which company must pay?"

In the prior AT&T ruling, the FCC made a statement that AT&T was the "IXC" and thus was responsible for the access charges because under FCC rules access charges are assessed on "the IXC." SBC argues that this statement, and the reasoning which SBC says supports it, means that VarTec is liable for access charge payments even though VarTec did not purchase service from SBC, did not interconnect with SBC for the traffic in question, and importantly, was not SBC's "customer" under SBC's tariff. This question was presented to the U.S. District Court in St. Louis in the SBC lawsuit against the three defendants and, presented from Vartec's perspective, was the focus of Vartec's August 2004 petition filed with the FCC.

In August of this year, the Court ruled that the case against Unipoint should be dismissed. The reason was that SBC had never claimed that Unipoint is an "IXC" since the FCC language on which SBC relies says that the IXC must pay access, and since SBC had not claimed that Unipoint was such an IXC, the Court concluded that there was no case stated against Unipoint. Since VarTec and Transcom had both filed for bankruptcy, the automatic stay of all litigation against a bankrupt entity had halted the litigation against them, and the Court therefore did not address their situations (though it clearly suggested that Transcom would be in the same position as Unipoint). SBC quickly filed a Petition with the FCC, and also managed to persuade the Court to reinstate the case against Unipoint (but hold it in abeyance) to prevent the statute of limitations from further barring its claims should the FCC rule favorably to SBC.

The FCC promptly issued a Public Notice seeking comment on the SBC Petition. Included in that same Public Notice was a request for comment on the VarTec Petition. Comments were filed on November 10 and replies on December 12. The deliberations on these two Petitions should create greater certainty regarding when access payments are due and who must pay them. However, the timing of the FCC action following submission of these comments is unclear at this time.

A related Petition was filed with the FCC in October by Grande Communications, a Texas company. Grande asked that the FCC rule that a company that terminates calls for others is not responsible for mistakes in characterizing the traffic as "information" or "telecommunications" if the mistake is based on a false or erroneous certification by the provider which sent the traffic to the terminating company. Grande proposes the certification approach as a simple method of addressing the responsibility of carriers whose customers represent themselves as enhanced service providers or the traffic they are sending as enhanced services traffic. The FCC issued a public notice on this Petition as well, and comments were filed December 12, replies are due January 11, 2006.

FCC action on these three Petitions could bring much needed clarification to the muddle that exists today. If the agency uses these requests as the vehicle to state its views on when access charges and, perhaps, USF fees apply, and who must pay them, VoIP companies will have a much clearer picture of the economics of their services and will be able to plan accordingly. In the meantime, users of VoIP services should be aware of the large sums at stake in the litigation over the regulatory classification of VoIP. Wherever a VoIP service is found to be liable for access charges, universal service contributions, and federal excise tax, there is a substantial likelihood that substantial sums are going to be due from someone. Often this means a new dispute starts over the assignment of this liability. Large users will always have contract clauses allowing for "pass throughs" of regulatory fees, taxes and surcharges. If these clauses are invoked for VoIP-related charges, the impact could be dramatic. Until the FCC has clarified the situation, this uncertainty will persist.

Published April 1, 2006.