Prepared Remarks of Kevin Werbach

Mr. Chairman, and Members of the Commerce Committee, thank you for the opportunity to testify on the implications of voice over Internet protocol (VOIP) technology.

This is an extraordinarily important issue for the US economy and the American people. We are witnessing the most significant change in telecommunications since Alexander Graham Bell called out for Mr. Watson. The growth of IP-enabled communications signifies nothing less than the transformation of the telecom industry, and the entire information sector that depends upon it.

The decisions regarding VOIP that the Congress, the FCC, and state regulators make will determine the path of this transformation. Will we try to put the genie back in the bottle, by subjecting VOIP and other real-time Internet applications to legacy regulatory obligations? Or will we take a forward-looking approach, recognizing the extraordinary economic benefits VOIP can provide, and continuing America's global leadership in information and communications technology? That is the fundamental choice this committee faces today.

I am the founder of the Supernova Group, an independent technology analysis and consulting firm. Earlier in my career, I had the honor of serving as Counsel for New Technology Policy at the Federal Communications Commission. I participated in the Commission's efforts, beginning nearly a decade ago, to understand a new phenomenon we called "Internet telephony." The FCC wisely decided to allow that technology to develop outside the constraints of legacy common carrier regulation. Following its longstanding approach to "enhanced" or "information" services, the FCC created a space for the nascent VOIP technology to develop.

As a result, investment and technological innovation has driven rapid development of VOIP, despite an extended downturn in the communications sector. The growth of VOIP has occurred not because it's a regulatory arbitrage trick, but because it's a better technology. It is more efficient, and more flexible, than the legacy circuit-switched technology. That is why all significant industry participants, including the Regional Bell Operating Companies, are deploying VOIP equipment within their networks in place of circuit switches.

This is a true success story of regulatory forbearance creating new growth opportunities. VOIP is already used significantly for office phone systems and for national and global backbone transport. Cisco alone has sold more than two million IP phones to enterprise customers. And research firm IDC estimates that 10 percent of worldwide voice traffic already uses VOIP technology in some manner.

The widespread rollout of broadband has created an opportunity to deliver VOIP directly to end-users as an application on top of data connectivity. This is a crucial conceptual shift, which I will explain later in my testimony. As a practical matter, broadband deployment allowed new entrants like Vonage and Packet8 to inject new competition into the local phone market. More than 100,000 Americans now subscribe to consumer voice over broadband offerings. And major players such as AT&T, Comcast, Time Warner Cable, and Qwest have announced plans to launch voice over broadband offerings in the near future. In short, VOIP is helping to fulfill the promises of competition, lower prices, and innovation that Congress hoped to achieve when it passed the Telecommunications Act of 1996.

It is now time for government to address the thorny policy issues that VOIP raises. The greatest threat to the continued growth of VOIP today is regulatory uncertainty and a patchwork of inconsistent decisions by state regulators and the FCC. We need a national policy that encompasses VOIP and the intertwined issues of universal service and inter-carrier compensation.

What VOIP Is... and Isn't

Voice over IP isn't simply another form of telephone service as we know it. It is the leading edge of a new communications paradigm. Until now, telephony has been tied to a specific kind of network and a particular industry structure. The service and the infrastructure were one and the same.

In a digital broadband world, however, there is one network of networks tied together by common technical protocols. The infrastructure that delivers Web pages and files can also carry voices and moving pictures. Voice is just one class of application, which can be implemented in many different ways. And telephony is just one of a plethora of voice applications.

It's worth explaining what I mean by voice as an application. The Internet is a connectivity platform. At its core, it is a set of technical and architectural protocols for interconnecting digital networks. Those networks can incorporate any physical media capable of carrying digital bits, and they can transport any application or content that can be encoded into those digital bits.

To a data network, a voice call is nothing more than an instant message with different latency and reliability characteristics. And indeed, all the major instant messaging providers such as Yahoo! and AOL offer voice chat capabilities in their applications today.

Because voice is an application in an IP world, it need not be tied to transmission facilities. I can load a piece of software called a softphone client onto my laptop computer or a handheld personal digital assistant and turn that device into a voice communications end-point. If I then use that device to call my friends, who is the service provider that would be subject to Title II regulation? The software vendor? The laptop manufacturer? My broadband provider? What if I'm online through a WiFi wireless hotspot in a Starbucks?

I can now buy a $50 Webcam from a company like Logitech, plug it into my PC, and use it to engage in free or very low-cost videoconferencing with other computer users around the world. Or I can subscribe to the online services associated with Sony's PlayStation and Microsoft's Xbox video game consoles, and chat live with other players in the same game. Or I can download a piece of free software called Skype and use it to make calls to other Skype users through a web of direct peer-to-peer connections, with no central network. Skype has announced free five-way conferencing, so that every call can instantly become a multipoint conference.

As these examples show, VOIP is much more than services that may, from a distance, look similar to traditional circuit-switched voice telephony. The legacy telecom regulatory framework is based on the idea of a call that originates and terminates between subscribers at defined locations, through a circuit established by one or more carriers. None of these concepts necessarily endures in an IP world.

Trying to separate out unregulated from regulated VOIP applications will prove to be a futile exercise. For example, if the full panoply of legacy regulation and taxes apply to a service that uses an ordinary-looking phone, providers will have incentives to make their terminal equipment look less like an ordinary phone. Instead of engaging in regulatory whack-a-mole, we must step back and examine the point of those obligations and taxes.

The Layered Model

All of this leads to the question now before this Committee: what policy approaches to VOIP will best serve the interests of the American people?

Let's be clear on what is not in dispute. No one in the VOIP debate questions that law enforcement agencies should have access, subject to appropriate procedural safeguards, to the information they need to do their jobs. No one questions the need to support emergency services such as 911, or to ensure that Americans with disabilities have access to essential communications services. And no one questions the enduring value of universal service to ensure that all Americans receive the benefits of telecommunications.

However, we must recognize that the communications world is changing. The way we meet those essential goals will change along with it. Just because certain mechanisms were used in the past doesn't make them sacrosanct. And if the system is flawed, or has not kept up with the rapid pace of technological development, we should not curtail that development in an effort to fix it. The challenge is to achieve our essential social policy goals at the least cost to innovation, investment, and competition.

I'd like to offer a general framework and a specific set of recommendations.

As a general matter, the legal framework for converged data networks should reflect the architecture of those networks. Engineers use the concept of layering to describe how data networks operate. The underlying physical transmission is a separate layer from the addressing and routing mechanisms that deliver traffic to the right points on the network, which is separate from the applications that encode and decode that traffic, and which is separate from the traffic itself. Open connectivity between those layers ensures innovation and competitive deployment of new applications.

The traditional communications regulatory framework classifies services into horizontal categories such as telecommunications and broadcasting. From that initial classification flow a host of legal obligations. If VOIP and other real-time Internet applications are deemed telecommunications services under the 1996 Act, they would be subject to the full panoply of regulation designed for circuit-switched carriers.

A layered approach to communications regulation, which I have outlined in some of my writings, would approach the problem differently. It would distinguish among content, applications, addressing, and physical connectivity. Competitive issues of market power and interconnection primarily concern the physical layer. If the physical layer is open, there is little or no need to regulate what runs on top. That is the lesson of the Internet, which emerged because Internet service providers and application providers like Yahoo!, Amazon.com, and eBay had nondiscriminatory access to underlying telecommunications networks.

The FCC, in its recent decision that Pulver.com's Free World Dialup service is an unregulated information service, effectively found such a layered model already present in the 1996 Act. The statutory distinction between telecommunications services and information services, derived from the FCC's earlier basic/enhanced division, recognizes that data applications ride on top of regulated transmission pipes.

Of course Congress, unlike the FCC, has the power to change the Act. Any reform of the 1996 Act should make the data-centric, layered model more explicit. IP is the future of the network.

Specific Policy Issues

Turning to the specific questions we have been asked to consider for this hearing, there are three kinds of policy obligations that potentially impact on VOIP:

- Economic regulation to ensure effective market competition.
- Universal service policies designed to achieve social goals for availability of telecommunications itself.
- Policies to support other social goals, such as law enforcement, access for people with disabilities, emergency services, local taxation, and consumer protection.

It seems quite clear that the bulk of the economic regulation in Title II of the Communications Act should not apply to VOIP. Common carrier regulation was designed for dominant incumbents like the old AT&T and today's Baby Bells. In the VOIP space, there is no such incumbent. Moreover, so long as the incumbent network owners do not discriminate, there will never be a VOIP provider with that degree of control. VOIP is an application using standard protocols. The barriers to entry are low, and the opportunities for innovation are high.

Application of legacy regulation to VOIP would do more than just stifle innovation in new competitive phone services. It would cast a pall of uncertainty over the entire technology sector. Would Microsoft be subject to those obligations for its Xbox Live online gaming chat service? Would a software provider that sells a VOIP softphone client to run on a handheld PocketPC or Palm device? Would Intel, for putting voice over WiFi phones into its reference designs for laptops, as it did last week at its developer forum?

Universal service raises somewhat different issues. It is a collective benefit that requires collective contributions. It would be a sad irony, though, if those contribution obligations stifled the deployment of affordable and innovative new service offerings. We must distinguish universal service, the important public policy objective, from the existing maze of hidden cross-subsidies and regulatory charges.

Moreover, just because some applications do not explicitly contribute to universal service funding mechanisms does not mean they provide no support to the system. Free World Dialup may be free, but its users must pay for a broadband connection, typically to a local phone or cable operator. Companies such as Vonage and AT&T pay for the circuits, transport, origination and termination they need to deliver their VOIP traffic. A portion of those payments makes its way into universal service funding mechanisms.

When the topic is VOIP and universal service, the elephant in the room is access charges. Whether VOIP applications are subject to access charges is not the same question as whether they contribute to universal service. Access charges are the non-cost-based, regulated rates that local exchange carriers charge interexchange carriers for originating and terminating telecommunications traffic. They are a descendant of internal accounting transfers by the old Ma Bell, subjected to twenty years of regulatory tinkering and industry horse-trading. They are just one of several inconsistent inter-carrier compensation regimes that telecommunications providers face, depending on the legal classification of traffic. The current system is artificial and unsustainable.

Inter-carrier compensation needs to be reformed for the US telecom industry to move forward. The industry knows it. Press reports suggest that local and interexchange carriers have been negotiating to develop a consensus proposal for inter-carrier compensation reform. The FCC is also looking to act. Those efforts will only succeed if all parties have a reason to come to the table. Subjecting VOIP to access charges, especially before comprehensive inter-carrier compensation reform, would be the best way to derail those much-needed reforms.

VOIP is just one factor putting pressure on the universal service and inter-carrier compensation regimes. Eight years after the passage of the 1996 Act, we still do not truly have the competitively-neutral, transparent, portable, explicit universal service funding system that the Act envisioned. Given the money at stake, this is the Bermuda Triangle of telecom regulation. Yet we must go there, if we want universal service to survive in the IP communications era. Attempting to regulate VOIP will not make the challenges facing universal service funding go away. It will simply create more confusion, limit competition, and delay the inevitable.

The layered model suggests a possible alternative path to achieve our universal service goals. Take a look at the personal computer industry. Different companies make chips, build components, assemble computers, and develop software. Every layer is a platform. Competitors in each layer work to reduce prices and improve quality, with stunning results. The PC you buy today is many times more powerful than the PC you could buy five years ago, and sells for half the cost. Once only for the wealthy, PCs are now in two-thirds of American homes, and the number continues to grow. All without any government-mandated subsidies.

The telephone business should follow the same path of rapid price reductions and performance enhancements as the PC business. Already, VOIP providers are introducing new price points and innovations such as area code mobility, real-time billing and service provisioning, and easy conference calling. They should be encouraged, not restrained.

Finally, we come to social policy obligations such as CALEA, disability access, consumer protection, and emergency services. Especially in the post-9/11 era, there is no question that law enforcement authorities must have the tools they need to do their jobs. CALEA is one arrow in the quiver of law enforcement agencies seeking information to aid their investigations. It is not the only tool they have available. And even if VOIP application providers on top of telecommunications networks are not subject to CALEA, the telecommunications service providers they depend on still are. Furthermore, because VOIP decouples the voice application from underlying transport, the provider that interfaces with the end-user may only have access to the call routing information, not the content of the communication.

The VOIP community must continue to work with law enforcement and national security agencies to find the most appropriate technical mechanisms for lawful access to information needed to support investigations. The FCC has announced its intention to launch a CALEA proceeding in the near future that will provide a public forum for these issues. There is no reason to short-circuit those processes.

Similarly, there is no reason to assume that, without rapid application of traditional Title II regulation to VOIP, the other social policy objectives mentioned above will not be met. As with law enforcement access, there may be alternative sources of legal authority. Furthermore, VOIP providers have already developed voluntary mechanisms to achieve goals such as interconnection with 911 and other public safety systems. Such industry efforts should be given an opportunity to succeed. If they do not, or cannot, achieve the necessary objectives in a reasonable period of time, regulators and Congress should consider the need for targeted action.

Applying the full legacy regulatory regime to VOIP and other real-time Internet applications, simply to ensure that particular social policy objectives are met, would be a colossal case of the tail wagging the dog.

Conclusion

Over the past decade, we have seen the benefits of a policy approach that shields Internet-based applications from unnecessary application of legacy regulation. Congress expressed its desire for an unregulated Internet in the 1996 Act, and the FCC has followed that direction in its regulatory proceedings.

With VOIP, we are seeing the Internet realize its destiny. It is evolving into a converged network of networks that delivers an array of advanced applications, services, and content to all Americans. Perhaps even more powerfully, it is allowing individuals themselves to create and share information with their families, friends, communities, and extended social networks.

We can embrace that future, or we can try to pull the Internet back into yesterday's regulatory system. Make no mistake. Broad-brush regulation of VOIP is tantamount regulation of Internet applications. From the network's perspective, a stream of voice bits is no different from an eBay auction or a Google search.

The US led the world in Internet deployment. Other countries are rushing to catch up, and by some measures such as broadband penetration they have surpassed us. If we are to remain the leaders in the information-driven global economy of the 21st century, we must continue our enlightened policies to favor innovation and competitive markets, while remaining committed to our essential social, public safety, and national security goals.

I commend the Committee for recognizing the need to address these critical issues.