Voice Over the Internet Protocol: Cultural, Technological, Business and Policy Challenges

1. Voice Over the Internet Protocol: Cultural, Technological, Business and Policy Challenges A Presentation at the Beijing University of Post and Telecommunications December, 2004 Rob Frieden, Pioneers Chair and Professor of Telecommunications Penn State University rmf5@psu.edu; http://www.personal.psu.edu/faculty/r/m/rmf5/

2. Pre-Convergence World View source: Kevin Werbach Cable Broadcast Telephony Data Wireless

3. Current World View source: Kevin Werbach Data Cable Broadcast Telephony Wireless

4. Current Reality source: Kevin Werbach Content Data Web Devices Apps Voice Users Video Email File Transfer Cable Wireless Satellite Fiber

5. The Main Points • Converging technologies and markets prevent effective regulation and fair competition based on fixed definitions. • National Regulatory Agencies (“NRAs”) cannot assign new and convergent technologies such as Internet access and Voice Over the Internet Protocol (“VoIP”) into a single regulatory classification. • In a future Internet-based telecommunications environment, new, horizontal regulations based on current market conditions should replace old, “top-down” “legacy” regulations.

6. Currently, Many National Regulations Fall Into Vertical “Silos” Title II Title III Title III Title VI VOICE VOICE AUDIO / VIDEO VIDEO Wireline Telephony Wireless Telephony Broadcast Radio / TV CableTelevision

7. Silo-Based Regulation Can’t Work in an Internet-Centric Environment • A digital environment makes it possible to send, receive and process bits that translate into many different types of services that previously consumers had to receive via different media. • In an increasingly converging, Internet-centric environment, users may employ a single access platform to provide many different services. • Silo-based regulation shoehorns anything that fits within a service definition into a specific “legacy” regulatory regime regardless of changed competitive conditions. • The existing definition driven regulatory system forces NRAs and reviewing courts to classify services into mutually exclusive regulatory silos regardless of whether the service functionally provides a competitive alternative to other services similarly defined, or to other services fitting into a different definition.

8. Horizontal Technical Layers . Content Rides on the Top Layer as Text, Speech, Music, Pictures, Video, etc. Logical / Code Layer Web Browsers, Email Client Software, MP3 Software, Word Processors, etc. Application / Services Utility Protocol Layer HTTP, SMTP, FTP, DNS, etc. Transport Layer TCP, UDP TCP / IP Protocol Suite Network Layer IP, ICMP, IGMP Link Layer Interface to the Physical Layer Ethernet, Modem, DSL, Cable, T1, Fiber Optics, Satellite, Bluetooth , Wi-Fi, etc. Physical Layer

9. The Layered Regulation Alternative • Calibrate regulation based on the current degree of competition using a 7- layered technological model used for conceptualizing telecommunications and information networks into hierarchy of functions. • At the bottom on this model lie the physical links, e.g., cables and wireless, and the transport technologies used to provide the transmission of information, communications and entertainment (“ICE”) services. • In the middle lie several layers that identify and manage the delivery of ICE traffic, e.g., the Internet Protocol, which provides an addressing system for identifying traffic senders and recipients, and the Transmission Control Protocol, which manages the complete link of sender and recipient via different networks. • At the top of the layered stack are software applications that provide the intelligence needed to shape the link into one that provides electronic mail, telephony, and a user-friendly multi-media interface for access to a variety of ICE content.

10. Problems With the Layered Regulation Approach • Some beneficiaries of light or non-regulation, based on applicable service definitions, face the likelihood of regulation, even if they later can secure forbearance of their new regulated status. • In an age of technological convergence, many stakeholders seek to serve as many markets as possible and provide services that seamlessly integrate vertically through many layers; and • Vertically integrated operators have incentives to favor affiliated ventures and to disadvantage competitors.

11. National Regulatory Authorities Could Calibrate Regulation as a Function of Competitiveness in Each Layer Content Transactions Layer: Competitive, therefore no regulation Applications Layer: Competitive, therefore no regulation Logical Network Layer: Likely to be competitive Physical Network Layer: May not be competitive and may require regulation

12. Partial Solution to Problems With the Layered Regulation Approach • Require operators to conduct business in single, discrete layers and to separate one layer’s activity from others that the same operator pursues. • In lieu of a separate subsidiary requirement, use accounting and auditing procedures to provide some degree of segmentation between various layered services while also providing some after the fact detection of discriminatory and anticompetitive conduct. • Reduce or eliminate regulatory requirements on a company-specific public interest assessment, or for an entire layer where competition thrives.

13. Case Study: Internet Telephony • Many NRAs consider non-commercial, computer-to-computer Internet telephony an information service. • These NRAs want to insulate the Internet, including Internet-mediated telephony, from “legacy” telecommunications service regulation. • However VoIP impacts universal service funding, emergency services, access by people with disabilities and homeland security. • The layered approach recognizes that VoIP is a software application on top of a broadband link: don’t regulate the software application, but don’t ignore the possible need to regulate the providers of the broadband link as different layers may have vastly different marketplace conditions.

14. The Layers Concept and VoIPsource: Robert Cannon Internet Voice over IP Apps Apps Voice Information Service TCP IP TCP IP Traditional Telecom Voice Voice Transport Telecommunications Transport Transport

15. Convergence Requires Inter-cultural Competency

16. Business Implications of VoIP • Moore’s Law Applies to Both Information and Telecommunications Technologies. • Digitization and “Killer” Applications are Disruptive Technologies that Ruin Business Plans. • On the Other Hand Technological Innovations Have to Enhance the Value Proposition as Faster, Better, Smarter, Cheaper and More Convenient. • Convergence Can Be Difficult to Implement and Exploit. • Most Installed Technologies Still Have High Sunk Costs. • Irrational Exuberance Can Create a Bubble and Bandwagon Mentality.

17. The Impact of Moore’s Law on Data Processing

18. Moore’s Law Applied to Telecommunications

19. NEAR TERM OUTCOMES • Incumbents Leverage Investment in Exchange for Favorable Deregulation and Relaxed Antitrust Enforcement. • Legislatures and NRAs Appear Willing to Abandon Procompetitive Policies in Exchange for Network Investment Promises by Incumbents. • Telecommunications has Lost Its Public Utility, Low Risk Status as Well as Its Growth Market Cache. • Technological and marketplace convergence has become a reality, but some of the winners win by exploiting inconsistent regulations, e.g., VOIP, Internet access via cable television vs. telephone networks. • Convergence ruins regulatory regimes based on mutually exclusive categories, e.g., streaming video vs. broadcasting. • Incumbents must strive to retain market share and relevance.

20. THE WAY FORWARD • Regulators need to maintain a “level” competitive playing field. • While properly striving for regulatory symmetry between competing technologies, regulators should not abandon procompetitive interconnection and facilities access policies. • The EU horizontal regulatory model makes sense in a convergent environment: emphasize competition policy rather than regulate by category. • Legislatures should concentrate on creating incentives to invest in the sector through coherent ICT development strategy.

21. Conclusions • Promoting near term availability of nearly ubiquitous broadband infrastructure does not require “heavy handed” “command and control” centralized management by the federal government. • It requires a cohesive “top-down” vision coupled with “bottom-up” community champion projects that aggregate supply of services and demand for them. • Incumbents should not be allowed to leverage future investment in exchange for even more regulatory forbearance. • Governments achieve ICT incubation success through diverse funding strategies including direct underwriting, loans, favorable tax treatment, financial support for research, development and technology demonstration projects (as was done with NSFnet). • Government can train people to become suppliers and consumers of network-mediated services.