First, some background. Most everyone agrees that the current telco regulatory environment is a mess. Deregulation and the breakup of AT&T in 1984 later spawned the Federal Telecommunications Act of 1996, which attempted to provide a framework for multiple carriers. It set complicated rules for carriers to compensate one another for the use of their telephony lines and equipment.
There's also the Universal Service Fund, part of the 1996 act. It's paid into from a fee on land-based phone lines. In the same way that you subsidize rural mail delivery when you pay the same amount for service to a large office building as you do for delivery to a rural island via seaplane, the USF mandates that all system users subsidize service for rural areas, via multiple carriers.
But so much has changed during several decades of technology innovation that pretty much everyone is clamoring for changes. The way carriers get compensated for use of their equipment is dramatically different for broadband compared with voice. IP is packet switched, not hard-line-circuit-based like traditional voice. And nowadays, lots of voice traffic runs on IP, so it's a problem to regulate broadband in the same context as voice has been regulated for decades.
Local telcos are compensated in three ways, according to Jim Cawley, a commissioner with the Pennsylvania Public Utility Commission. First, they collect line charges from customers. Second, they collect access charges from other telcos that place calls to local customers. (No, you didn't read that wrong: Local telcos get paid for letting providers connect to their customers. In today's context, it's just as strange as a local ISP charging Google for you to search.) Third, if the provider is rural, it can draw upon the USF.
This structure differs dramatically from the way the Internet works. It would be insane to keep track of where every packet goes, particularly since a given Web page might have parts that go to dramatically different hosting sites.
In the Internet world, every Tier 1 carrier generally has a peering relationship with other Tier 1 carriers. In most cases, no money changes hands. The value exchange is essentially "you scratch my back and I'll scratch yours." In the voice world, it's called "bill and keep." Tier 2 carriers, on the other hand, pay access charges to the Tier 1 folks for upstream connectivity in their service areas, but not for access to foreign networks. They simply pay for the connection the way that you and I pay for home Internet. It's just at a different scale.
VoIP providers pay access charges when they access the traditional telephone system, which is one reason you don't see unlimited VoIP. They operate in the older telecom model, not in the peering model. The old telecom model had very limited circuits--they were all physical circuits, as opposed to IP, which is packet-based and thus more flexible about capacity. (When you're silent, the digital codec isn't transmitting much, but a silent line on a traditional system is still taking up full capacity.) Providers like Vonage, of course, would like to see a wholesale transition for voice to a bill-and-keep model, according to documents it filed with the FCC.
The new model that the telecoms are advocating would, among other things, "reduce all rates to a small per-minute charge of $0.0007." So it doesn't get rid of the access charge requirement, but it makes it relatively small. Here's the problem, according to Cawley: "You rely on access charges big time if you're a rural carrier." If the access charges go away, you need to make it up somewhere else. And since the proposed plan also does away with the USF in favor of a "Connect America" broadband fund, that means that local telecom carriers will be raising rates.
Bottom line, says Cawley, who has been regulating telecom for longer than some of us have been alive: "Local rates are going to have to go up." That, of course, is a further incentive for business to avoid their voice local exchange carrier for intra-company voice traffic and choose VoIP, which travels on a network that doesn't have complex and arcane compensation rules.
Regulation is a necessary evil in any society comprised of human beings and companies who would otherwise game the system. But regulators would be wise to heed Google's simple truth: It's not about voice anymore. Voice is just one app in an IP world. So simply tweaking the existing voice regulatory environment to include broadband would be a massive mistake. It would introduce further complication to a system that's complicated enough already. A forklift is what's needed.
It's going to be a wild ride. IT leaders must pay very close attention to how this regulatory environment shakes out.
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