TCS Daily

Tip-Toeing on Top of VOIP?

By Kevin Werbach - December 3, 2004 12:00 AM

Beware of incumbents bearing gifts.

Local phone giant SBC says its TipTop service, which it is rolling out across its 13-state territory, is just a new option to make life easier for VOIP companies. Yet that's not how those putative customers see it. Following on the heals of BellSouth's recent petition to eliminate pro-competitive "Computer III" safeguards, SBC's move looks suspiciously like a step toward strangling the nascent residential VOIP industry. Even FCC Chairman Michael Powell, who has pushed through a series of rule changes favorable to the local incumbents, finds TipTop alarming. He issued a strongly-worded statement warning SBC that he would fight "any action that might slow the IP-services revolution."

The details of TipTop are somewhat technical, but the issues ultimately come down to money and power. SBC and its fellow Baby Bells have the power. VOIP providers, such as Vonage, AT&T, and Level 3, must interconnect with these local phone companies to originate and terminate calls on the public switched network. In other words, they must contract with the Bells to allow their customers to make or receive calls involving non-VOIP users, which today are the vast majority of the public.

Here's where the money comes in. The Bells want to charge VOIP providers the inflated "access charges" they impose on traditional long-distance companies. Those charges, a legacy of cross-subsidization by the old AT&T monopoly, bear no relationship to market prices. If VOIP providers had to pay access charges, their costs would skyrocket. Imposing access charges might wipe out the competitive benefits of using more efficient Internet technology, effectively halting the momentum toward VOIP. Fortunately, the FCC has so far blocked the Bells from taking this step.

SBC's TipTop tariff would replace the reasonable interconnection charges VOIP providers now pay with higher per-minute fees based on access charges. SBC asserts that TipTop is just a new alternative which VOIP providers are free to select or reject. TipTop offers interconnection at a different point in the network, which, along with other technical benefits, might make it preferable to the business services which VOIP providers currently purchase.

The problem is that, if TipTop goes into effect, SBC will have every incentive to push VOIP traffic towards its higher rates. It could change the terms of its existing offerings, or even withdraw them, in order to force VOIP providers to switch. The "voluntary" TipTop could become a back-door way of imposing the very access charges the FCC has rejected. Even if it doesn't, it will establish a precedent. Local phone companies arguing before Congress and the FCC for repeal of the access charge prohibition will point to any TipTop usage as evidence that imposing access charges on VOIP wouldn't be such a bad thing after all.

It's a good sign that Chairman Powell felt the need to speak out publicly about the threat TipTop poses. Reportedly, the FCC has asked SBC to commit in writing to keeping TipTop voluntary, but the company has yet to agree. The FCC is considering whether to allow access charges to be imposed on VOIP in its pending IP-Enabled Services proceeding. It also has before it a petition on the subject from Level 3. Earlier this year, the FCC allowed access charges on AT&T's VOIP backbone service, a move I criticized. Powell's statement suggests that he understands that opening the access charge floodgates more broadly could wash away the potential of an independent VOIP market.

The debate over interconnection rates for VOIP raises some challenging issues. The Bell companies deserve to be fairly compensated for use of their networks, and ultimately, rates should be set wherever possible through market forces rather than regulatory intervention. The way to do that, however, is through the transparent process of FCC proceedings that squarely consider all the issues. Tip-toeing around those proceedings with a tariff filing isn't the right way to resolve the matter. The VOIP community deserves better.


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