Vonage Casts Its Lot with the FCC

This morning the FCC will rule that the voice-over-Internet-protocol services offered by Vonage are exclusively interstate in nature. With this ruling, Vonage can legitimately claim that its services are subject to regulation only by the FCC rather than the states.Many reporters will hail the ruling as a monumental victory for VOIP. The outcome is actually much less clear.Practically every telephone and cable company, from AT&T to Verizon to Comcast, has or is planning a VOIP option. VOIP uses broadband routers and software to send voice messages from a regular telephone to other telephones around the world. To the user, it has the convenience of a wireless service but with higher sound quality and more software options than imaginable.Someday, most telecommunications will likely be VOIP as a matter of technological superiority.Historically, state governments have regulated local telecommunications. Minnesota looked at the Vonage offerings and decided they looked similar to those provided by regulated local exchange companies. Why should Vonage escape state regulation?Last year, Minnesota notified Vonage that it should register as a local telephone company in that state. Many other state regulatory agencies are eager to do the same.Businesses view American telecommunications regulation as profoundly burdensome. As a new company with a new technology, Vonage went out of its way in developing a business plan – even subcontracting the porting of phone numbers – not to be subject to state regulation.Rather than submit to Minnesota state regulation, Vonage successfully petitioned a federal district court to intervene until the FCC decides the jurisdiction of VOIP services. The Minnesota decision is currently under appeal to the 8th Circuit Court of Appeals.Vonage appears to have cast its lot with federal rather than state regulation. It is not a riskless choice. The regulatory direction of the FCC has changed course more than once, but the propensity of the FCC to lose major cases in court has not. Since the passage of the Telecommunications Act of 1996, the FCC has had three chairmen and may in the next year have a fourth.Federal regulation entails federal excise taxes and an ever-growing list of “fees.” That Vonage would prefer federal regulation to state regulation says more about the problems businesses have with state regulation than the health of federal regulation.Vonage must yet prevail in federal appeals court to escape regulation by Minnesota and other states. To enable it to have the best possible record at the 8th Circuit, Vonage has urged the FCC to decide and issue its opinion promptly. The FCC appears willing to accommodate Vonage.Today’s FCC ruling in favor of Vonage has been widely anticipated, but the media coverage will be at least partly inaccurate.The FCC decision is not “deregulatory.” If the FCC were truly deregulatory, it would assert that VOIP does not fit squarely in any regulatory pigeonhole, and leave it unregulated, as the FCC often has with cable modem service. Instead, the FCC will claim jurisdiction, leaving Vonage subject to the whim of both current and future FCC regulators.Despite the repeated press statements to the contrary, the FCC is not “pre-empting” the states.The FCC has the authority to “preempt” individual state regulations, but that is not the issue before the FCC today. Rather, the FCC will simply assert its own authority to regulate interstate telecommunications and information services. States may fend for themselves under their own statutes in an effort to regulate Vonage.The FCC is not resolving all VOIP issues. Today’s ruling may not unambiguously apply to any other, much less all, VOIP service offerings, since each offering is slightly different. The Vonage ruling is one of the first, giving it an enormous competitive regulatory advantage relative to other offerings. The FCC will take years to issue rulings on other VOIP service offerings, offerings that evolve substantially every few weeks.Although Vonage has cast its lot with the FCC, both must prevail in court against challenges from states and other groups. The FCC may win, but its court victories are enthusiastically celebrated not because they are predictable but precisely because they are not. Today the VOIP road seems clear, yet there are hidden pitfalls ahead.Mr. Furchtgott-Roth is a former commissioner of the Federal Communications Commission. He can be reached at hfr@furchtgott-roth.com.

Vonage Casts Its Lot with the FCC

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