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June 29, 2006

Has Anyone Read the FCC’s USF for VoIP Order yet? To lift from Stephen Colbert, “Is it bad or the worst thing we have ever seen out of Washington?”

In a monumental act of misdirection, the FCC released an Order making all prior regulations of VoIP (both Interconnected and potentially peer-to-peer) look like kindergarten musings.

All I can do is ask: Was recent DC activity on Capitol Hill a calculated effort of misdirection of David Copperfield proportions (David Copperfield of modern magic and Claudia Schiffer fame, not the David Copperfield of Dickens fame, although many a VoIP provider might, as a result, find itself living in a Dickensian “Bleak House” as a result)?

How come we couldn’t see the humungo elephant right in front of our eyes? While we were amassing all our troops on the hill trying to protect our flank on the eastern front, we were getting wiped out this week on the western front.

Frankly, many of us got sucked up in the hysteria on Capitol Hill. Perhaps we should have figured out a better way to divide and conquer. I kind of hate the analogy, but I feel a little like Germany in World War I (World War II is simply too disturbing an analogy), fighting a war on two fronts – the Eastern Front on Capitol Hill and the Western Front at the FCC. While we were amassing all of our troops on Capitol Hill with our current allies (e.g., Google, yahoo, Amazon, eBay), we were quietly getting wiped out on the Western Front with little news of the massacre reaching us on the Hill.

What were we fighting for on the Hill? To move the line of scrimmage a few inches towards Net Neutrality? Maybe we should have left that political battle to the better heeled, better connected behemoths of the Internet. It turns out we had a fight for our lives on the Western Front.

I must confess some negligence on my part. Jonathan Askin and I have been abroad trying to cut deals to advance Internet communications (and our stake in its future), while leaving the US battlefield largely unattended. To its credit, the VON Coalition was single-handedly trying to defend the entire industry (VON member and non-member alike) against an absurd misapplication of the Vonage Order and misguided efforts to claim that VoIP is a telecom service. Jim Kohlenberger and Staci Pies were largely left to fight the battle alone, with an occasional nod from the rest of us. A few more Jim’s and Staci’s fighting for our survival would have come in handy last month.

By way of excuse (which does nothing to set things right), none of us knew what the FCC was up until a couple of weeks before adoption of the FCC Order. I don’t know that we had sufficient time to affect any positive change within the Order, even if we were fully committed to the project. Like global warming, it was probably too late by the time we saw the signs. But to our credit, we did flag the issue as soon as we saw it rear its ugly head on June 14th.

At first review, the Order appears to be a laughable, legally suspect, misapplication of the state of the law and prior rulings and an unsubstantiated gross mischaracterization of the opinions of the VoIP community and VON in particular.

To be candid, we have not had a chance to digest the 151 Page Order and Further Notice, (some might say “only” 151 pages to undue years of precedent and forward momentum in the evolution of the Internet and Communications). We felt compelled to red flag the Order and issues for our friends and colleagues attempting to advance Internet communications, before you embark on your Independence Day Holiday. The Order should make for some riveting beach reading.

And let’s not forget that the Founders of American Democracy wrote the Declaration of Independence over this same weekend exactly 130 years ago and declared their independence from the tyranny of the old guard at the dawn of the Industrial Age. Well, perhaps we should be preparing our own Declaration of Independence as we enter the Dawn of the Internet Age and declare our independence from the tyranny of the old guard.

***

Below is an initial summary of some very surprising findings in the FCC’s USF order.

Overall the order:

• Is not limited to calls that touch the PSTN – includes IP to IP calls (pg 20)
• circumvents the Vonage decision to allow state regulation of VoIP, if you report actual revenues (pg 29)
• requires pre-approval of traffic studies – but not for wireless providers because pre-approval would be disruptive to wireless, but not VoIP (pg 30)
• requires double payments of USF fees for 2 quarters – waiving the “carrier’s carrier” rule so that wholesale providers also have to pay USF for the same service (pg 30)
• Includes new VoIP registration requirement with the FCC
• does not include a transition period
• indicates a desire to expand the definition of Interconnected VoIP in the future (pg 20)
• includes international traffic
• ignores Small Business Administration arguments (pg 121)
• Does not discuss this decision’s impact on VoIP providers, but finds it will have minimal impact on LECs (pg 13)
• requires VoIP providers to pay into USF at the highest rate of any service
• buried deep in footnote 209, relieves DSL of USF obligations

What VoIP providers need to do:

Interconnected VoIP providers will need to register with the Commission using FCC Form 499-A to obtain an FCC Registration Number and file an FCC Form 499-Q beginning on August 1, 2006. Interconnected VoIP providers are also required to begin filing FCC Form 499-A on April 1, 2007 where contributors report gross-billed and actual collected end-user interstate and international revenues. Beginning on page 53, they have the proposed new forms – which still must be approved by OMB. They are seeking emergency OMB approval of the paperwork.

USF – Interconnected VoIP Order Summary

A VoIP Provider has 3 choices:
1. Pay at the 64.9% safe harbor rate (which is presumably higher than actual interstate revenues)
2. If you want to use a traffic study to prove a lower rate, you must petition the commission and it must be pre-approved by the FCC (unlike wireless). If they don’t immediately approve the traffic study (as is presumed), you must pay at the 64.9% safe harbor rate. (pg 29)
3. You can pay on actual revenues, in which case you would “no longer qualify for the preemptive effects of our Vonage Order and would be subject to state regulation.“ (page 29).
Taken together, these seem to back providers into using the seemingly discriminatory and arbitrary 64.9% safe harbor.

FCC’s Rationale:
• Decision to Apply USF to VoIP Will Have Minimal Impact on LECS. Rather than addressing its impact on VoIP providers, the commission noted that “the structure of the telephone bills of a typical local exchange company customer should not change as a result of this Order,” and therefore concludes (para 20), that it will have “minimal operational affect” and “the changes can and will be implemented in time for contributions for the fourth quarter of 2006.” At the same time, they ignore the individual impact on new VoIP filers. (para 20, pg 13)
• No Classification of VoIP as telecom or information service: While there is no classification made on whether Interconnected VoIP is a telecommunications service or an information service, they specifically “find that interconnected VoIP providers are ‘providers of interstate telecommunications’ under section 254(d)”. (p. 20)
• FCC says VON Coalition conceded FCC’s authority to impose this requirement. Erroneously, “[w]e note that both Vonage and the VON Coalition have stated on the record in this proceeding their belief that interconnected VoIP providers should be required to contribute to the Fund, apparently conceding that the Commission has the authority to impose such a requirement.” (para 35, pg 20) They base this on our statement that, “The VON Coalition agrees that applying USF contributions to Interconnected VoIP services is primarily a question of ‘how’ as opposed to ‘if’ or ‘when.’”

Scope:
• Applies whether or not the call involves the PSTN, and may expand interconnected VoIP definition. “We emphasize that interconnected VoIP service offers the capability for users to receive calls from and terminate calls to the PSTN; the obligations we establish apply to all VoIP communications made using an interconnected VoIP service, even those that do not involve the PSTN.” They also note that they “may need to expand” the definition of Interconnected VoIP service. (para 36, pg 20).

Rationale for 64.9% Safe Harbor:
• Disagree with VON Coalition that Interconnected VoIP services do not provide telecommunications. They find that VoIP “transmits” over the Internet and thus is telecommunications – an ominous finding that could have enormous implications for other Internet applications like e-mail, instant messaging, streaming media that also could be said to transmit communications over the Internet. (para 40,41, pg 22) They also specifically, “disagree with the VON Coalition’s assertion that interconnected VoIP providers do not provide telecommunications and that the use of permissive authority is therefore inappropriate.”
• FCC Finds it “Reasonable” To Apply Treat VoIP Traffic as 100% Interstate. Because the VON Coalition and others argued in advance of the Vonage decision that VoIP services are “interstate in nature” and that VoIP traffic is “jurisdictionally interstate”, the FCC finds “that it would be reasonable for us to treat the interconnected VoIP traffic as 100% interstate for USF purposes.” (Footnote 178, page 27, 28)
• Study they used: They relied upon this study to say that 64.9% of VoIP traffic is interstate or international: http://www.ilocus.com/ui_dataFiles/news16sept05.htm

Forces choice between highest 65% save harbor, or undermining Vonage decision. “to the extent that an interconnected VoIP provider develops the capability to track the jurisdictional confines of customer calls, it may calculate its universal service contributions based on its actual percentage of interstate calls. Under this alternative, however, we note that an interconnected VoIP provider with the capability to track the jurisdictional confines of customer calls would no longer qualify for the preemptive effects of our Vonage Order and would be subject to state regulation. “ (page 29)

Forces Double Payment of USF for two quarters. Erroneously arguing that this addresses the VON Coalition’s concerns about double payment of USF (footnote 195), they find that “carriers supplying telecommunications services to interconnected VoIP providers who are not themselves carriers should continue to include the revenues derived therefrom in their own contribution bases for two full quarters after the effective date of this Order.” (page 30) They also find “wholesale carriers may not exclude these revenues by invoking the “carrier’s carrier” rule during this interim period” – and find that it is not illegal because it is interim.

Footnote 206, relieves DSL of USF contribution. Buried deep in footnote 206, the FCC relieves DSL providers of USF payments, finding a provider “is not required to contribute to the universal service fund based on the revenues derived from providing that transmission service”

Further Notice:
In the Notice, the Commission requests comment on a number of items related to the safe harbors established, as well as on the appropriate means of establishing the jurisdiction of calls for traffic study purposes. For example, some parties utilize the originating and terminating telephone numbers as a proxy for determining the jurisdiction of a call. Because of the "nomadic" nature of mobile wireless services and interconnected VoIP services, others have asserted that merely comparing originating and terminating telephone numbers is insufficient to establish the jurisdiction of a call. The Commission also seeks comment on whether and to what extent it can (and should) adopt a revised methodology for interconnected VoIP providers to contribute to USF. Comments are due 30 days after the Notice is published in the Federal Register, and reply comments are due 60 days after publication of the Notice.


Well, count me fully in. We cannot be asleep at the wheel while the rules continue to undermine the future of the Internet and communications. I will not watch from the sidelines or from abroad while the FCC sabotages Internet communications.

I think we probably have to appeal this FCC Order. It won’t be easy and it won’t be cheap. Frankly, I thought we would win in our challenge of the FCC’s Order imposing wiretapping obligations on VoIP providers, so I might be out of touch with what is legally suspect. For this reason, I ask for input from legal and policy experts out there. We need to wage a challenge immediately, but thoughtfully, and we need everyone’s support. Perhaps this is the time for all of you who base your livelihood on Internet communications or just care about its sustainability and advancement, to join the VON Coalition or, at least, demonstrate your support. But first, let’s all read the Order.


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(c) 2006 Jeff Pulver. All Rights Reserved.
(This blog posting is copyright protected by Jeff Pulver. Portions of this blog posting may be quoted or abstracted if attributed.)

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Posted by jeff on June 29, 2006 09:24 AM | Permalink

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Comments

the FCC is a bad example of the government for the corporations rather than a government for the people. How can you add a tax on VOIP when not a single one makes money?

Posted by: mark at July 6, 2006 01:31 AM

Jeff,

thanks for your summary!

But my take out of this silly stuff has some
good conclusions as well.

If all this "man in the middle regulation" ;-) finally takes place, we will see a migration of VoIP services to the user premises.

In consequence, the following will become true
way sooner as we all might like:


1.) ... who needs centralized servers for VoIP?

2.) Centralized telephony servers will bypassed

3.) The last users of the PSTN system
will make business by doing emergeny
relays for VoIP users


4.) CALEA will be based on IP-Interception
only.
Which of course will ignite even better
CPE-servers and Endponits at the user
premises that can do decent E2E encryption.


5.) VoIP: A service turns in to a product
(or VoIP becomes commodity ...)

By that, I strongly believe that such rulings
will just speed up the collapse of regulated
systems.


Do they really like what they call for?


Willi

Posted by: Willi at July 3, 2006 05:30 PM

Jeff,

Thanks for the detailed analysis. The FCC Order is extremely troubling and I support your call to action. We will stand with the VON Coalition to oppose it.

KG

Posted by: Kevin Gavin at July 1, 2006 04:30 AM

Reading p20, it seems that only calls from services which touch the PSTN (but, for those services, all calls) would be affected.

They say basically: "we don't want to distinguish between on-IP and IP-PSTN calls IF (and that's important) the service the user has WOULD allow PSTN access". I don't see pure IP-to-IP services affected here, given they don't touch the PSTN.

Posted by: Alex Mayrhofer at June 30, 2006 11:48 AM

Jeff, Several questions, possibly you or Jonathan would please answer:

You said "Is not limited to calls that touch the PSTN – includes IP to IP calls (pg 20)". Does this mean that calls placed using APPLICATIONS such as Skype, Microsoft Messenger, Apple's equivalent, etc are covered?

Skype may be a gray area because they sell an interconnected service.

You also said "includes international traffic". Does this obligate someone using a VoIP application to talk from Israel to a user of a similar application in the U.S. pay the USF?

If I use a P2P VoIP application to call from Israel to Canada and some of my packets are routed via a "peer" in the U.S., am I liable to FCC regulation and the USF?

Thanks,

Geoff.

Posted by: Geoff Mendelson at June 29, 2006 10:55 AM

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