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VoIP and the Prepaid Market: Implications and Opportunities

Understand Voice over Internet Protocol (VoIP) technology, its benefits to the prepaid industry, current regulatory landscape, and the challenges faced regarding access charges and state vs. federal regulations.

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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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