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VoIP and the Prepaid Market: Implications and Opportunities

VoIP and the Prepaid Market: Implications and Opportunities. IPCA Regulatory Seminar 2/27/2004. Robert S. Metzger Gibson, Dunn & Crutcher LLP 333 South Grand Avenue Los Angeles, CA 90071 (213) 229-7924 1050 Connecticut Ave., NW Washington, D.C. 20036 (202) 955-8590 rmetzger@gibsondunn.com.

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VoIP and the Prepaid Market: Implications and Opportunities

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  1. VoIP and the Prepaid Market: Implications and Opportunities IPCA Regulatory Seminar 2/27/2004 Robert S. MetzgerGibson, Dunn & Crutcher LLP333 South Grand AvenueLos Angeles, CA 90071(213) 229-79241050 Connecticut Ave., NWWashington, D.C. 20036(202) 955-8590rmetzger@gibsondunn.com

  2. What You Need to Know About ...VoIP • What Is “Voice over Internet Protocol” • Actual & Potential Benefits To the Prepaid Industry • Current State of Regulation • Federal Communications Commission • State Agencies • Current Positions • BOCs ... CLECs ... C-VoIPs” • Congressional Interest

  3. What is “VoIP” • Voice over Internet Protocol: common features • Digital and packetized format • Created by computer processing • Using the Internet Protocol • Voice over Internet Protocol: key issues and potential distinctions • Public Internet or private managed IP network? • Origination or Termination to PSTN? • Special devices or consumer premises equipment? • “Origination” and/or Receipt in IP format? • IP conversion at origin or gateway?

  4. Benefits of VoIP • Too many to mention! • Far lower capital costs – vs. SS7 • Not dependent on legacy providers and networks • Promotes innovation in applications and competition among providers • Dispersal of Applications • Network flexibility • Voice one of many IP-enabled applications • Convergence: voice – video – data • “Location-independent”

  5. Benefits to the Prepaid Industry • It Depends! Potentially, VoIP could drastically lower local connection and long-haul costs: • Local connection: via “local access” (PRI-type) dial-up in lieu of state tariffed “8YY” rates to gateways • Long-haul domestic: via very low-cost, powerful managed IP networks in lieu of IXC rates • International: very low cost, potentially outside ITU settlement rate scheme • Problems: • Resistance by everyone who wants to make calling card users pay them more ( --)

  6. Calling Cards & VoIP: The Resistance • States: • If Prepaid Long Distance Calls via VoIP were treated as an “Information Service,” No Excise Tax Receipts • State Utility Commissions Claim To Protect “Rate Base” of ILECs and RLECs • States Also Assert Universal Service and Various Consumer Interests • RBOCS • “8YY” Origination Tariffs are ... “well above cost” • Switched Access charges for calls going interstate • IXCs: don’t want C-VoIP competition

  7. Current State of Regulation - I CONFUSED UNCERTAIN CHAOTIC OPPORTUNISTIC PREDATORY (?) SUBJECT TO DOMINANT MARKET ACTORS COMPLICATED NOT LIKELY TO BE RESOLVED SOON

  8. Current State of Regulation - II The Federal vs. State Question • Minnesota: VoIP (Vonage) = An “Information Service” not subject to state regulation • Other States: seeking to regulate at least some forms of VoIP (e.g., California, New York) • FCC: decision in Pulver.com (Feb. 12, 2004) suggests strong federal interest (and preemption) of many VoIP issues – as most VoIP packets are “heading interstate” and because of interstate character of the Internet

  9. Current State of Regulation - III • Access Charges: • Generally applied by LECs to origination and termination of interstate switched calls • FCC stats: average $0.0066 per access minutes • (Versus 3 – 5 ¢ / min for local 8YY access) • ILEC Position: • Access charges have been accruing on VoIP calls originated or terminated to PSTN ... since inception • CLEC Position: (We hope not!) • C-VoIP Position: • FCC determined to “forbear” from regulation in ’98 • Access charges don’t presently apply to any VoIP

  10. Access Charge Issues • FCC On The Subject • 1998: “Universal Service Report”: recognized functional similarity of “PTP-ITP” to “telecommunications services” but did not subject to access charges • 2002: Inter-carrier Compensation NPRM appeared to confirm that VoIP was not subject to access charges • 2004: Feb. 12 decision on Pulver.com • CPE-dependent free service using the public Internet is an inter-state “information service” (by 3-2 vote) • 2004: Feb. 12 announcement of broad rulemaking (yet to be released) on “IP-enabled services” • 2004: Feb. 12 non-decision on AT&T Declaratory Petn.

  11. What the FCC Hasn’t Decided • Do Access Charges Apply to any form of VoIP? • If so, to which? To Phone-to-Phone? • From when? How are they to be measured? • If prospective, how to be implemented? • How Far Does The Federal Interest in VoIP Preempt State Concerns? • Can federal interests permit a “VoIP enabled” substitute for 8YY calls? • Is VoIP subject to federal Universal Service? • If “Exempt” – Why? Information Service or “Forbearance” (more likely)

  12. Prepaid Industry Objectives • Clarity of Regulatory Risk (Past Access Charges) • Extend VoIP Benefits “Beyond Broadband” • Continue Forbearance From Regulation • Foster C-VoIP Providers • Keep VoIP Free From Switched Access Charges • Enable CLECs and C-VoIP to Offer 8YY Alternatives to Tariffed Local Rates • Avoid having VoIP become the “exclusive preserve” of the RBOCs

  13. Key Regulatory Issues • Declining viability of Existing “Categorical” Regulatory Regime: USF and Inter-carrier Comp under Scrutiny • Fundamental Choice of Regulatory Strategy to be made • Rule-based approach (regulate to protect public interest) • Market-based approach (competition and regulate “by exception”) • Broad application to all providers on capacity basis • Prioritization of Critical Regulatory Objectives • Assure Universal Access to Services (and Viability of USF) • Ensure Fair Market Competition ... And Price/Value To Users • Encourage Innovation & Investment in New Facilities/Services • Protect Consumers and Respect State & Local Interests • Respect State Revenue Interests (excise taxes) • Timing & Implementation of Change: Pressure Is ON

  14. Supplemental Materials

  15. Regulatory Baseline & “IP Arbitrage”

  16. Background: Telecommunications - legacy

  17. Telecommunications In transition

  18. Telecommunications: convergence Fiber to the Subscriber (1Gig-E)3G/4G WirelessEnd-to-End IP – Peering w/ PSTNPTP Voice over IP (SS7 Compliant)Broadband @ ~ 1 GB BandwidthHD and Digital TV/Audio, VOD, PVRWeb-enabled provisioning, service sets“IP-LEC” or “Convergent Service Provider”

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