FCC E911 And Unbundling Rulings Add To VoIP Cost

By Greg Scoblete On Aug 22 2005 - 6:00am

VoIP telephony's days of offering a significantly less expensive alternative to landline phone service may be numbered thanks to recent rulings by the Federal Communications Commission (FCC), according to a new study by The Shosteck Group, a Silver Springs, Md.-based research firm.

“Much of the financial advantage that VoIP providers enjoy stems from regulatory, not technology, benefits,” the study said. As the FCC moves to envelop VoIP into its regulatory framework, with its associated fees and taxes, VoIP's distinguishing cost savings will erode, the report said.

The FCC's May 19 mandate that VoIP providers support E911 service for all subscribers by Nov. 28 was the first step. E911 refers to the ability to transmit both the caller's phone number and location to a public service answering point (PSAP) during a 911 call. PSAPs are supported by taxes and fees that, to date, VoIP companies have eluded.

Shosteck also noted that VoIP's low-cost future is threatened by two recent and related FCC rulings, collectively known as “unbundling.” The first frees DSL network owners from leasing space on their networks at government set rates to other Internet service providers (ISPs). The second ruling established that cable MSOs are not required to lease network space to competing ISPs.

“As VoIP providers capture more revenue, conventional operators will be more motivated to charge them for using their networks,” Shosteck noted.

According to retail VoIP companies, the regulatory landscape has indeed changed, but not necessarily for the worst.

“I don't look at these as challenges, but opportunities. This is how VoIP will become mainstream,” said Steve Seitz, 911 regulatory affairs VP, Vonage.

“We've had a nice vacation” from regulation, admitted Bryan Martin, CEO, 8x8. Martin said that the FCC was provoked to respond to some of the “reckless advertising” by VoIP providers claiming they offered 911 when in fact it was not an E911 service that could transmit caller ID and location information. “Now we're paying the price, but I think the FCC will ultimately help us make this a mainstream service.”

“Cable or DSL companies can't charge us more for using their networks. We're an Internet application, like e-mail,” said Katherine Bagin, marketing VP, AT&T CallVantage. “Besides, we're driving more broadband Internet subscribers who finally have an application in VoIP” that's worth the cost of a high-speed data subscription, Bagin added.

“It would be suicide for an ISP to restrict access to” a VoIP service, Martin said.

Complying with the FCC's mandate may solidify VoIP's position as a bona-fide replacement to a landline phone but it will carry costs, both to the end-user and to smaller VoIP start-ups, service providers said. Stand-alone VoIP providers like Vonage and 8x8 must enter into access agreements with competitive local exchange carriers (CLEC) and incumbent local exchange carriers (ILEC) that operate the 911 PSAPs.

Since VoIP is a nationwide service, a provider must have deep pockets to cover the new costs, ensuring that many small start-up firms with few subscribers will face steep challenges to stay in the market, Bagin said.

“We operate on slim profit margins to begin with and there's been some strong-arming by the ILECs” in negotiating access rates because they view us as a threat to business, Martin said.

“There are quite a bit of additional costs to us” for equipping VoIP service to offer E911, Seitz said. “But all 911 charges are passed onto the end-user, whether it's a traditional service or VoIP,” he added

“In addition to providing VoIP, we are the nation's largest CLEC, so we're in a better position than a stand-alone VoIP company,” Bagin said.

How the companies plan to pass on the costs has yet to be finalized.

“What we don't know now is whether we'll bracket out 911 costs or roll it into the overall service charge,” Seitz said.

8x8, which offers 911 as an optional service, charges a $1.50 per month fee. “That's our direct cost. We don't view 911 as a profit center,” Martin said. Of its total subscriber base, “only a small percentage” actually subscribed to additional 911 service. “It's not something they were too concerned with. They got their 911 through a cellphone.”