VOIP No Longer for the Underdog

News Analysis: The telephone industry's old guard emerges as leaders of "new telephony," and they can thank federal regulations.

Internet telephony was once for underdog firms able to muster up a few hundred thousand dollars in investments. But thats not the case anymore, and perhaps federal regulations have played a large role.

The present-day landscape is very different from what early VOIP (voice over IP) entrepreneurs had in mind for the freely available software that turns Internet connections into free phone lines.

Because of VOIP, the "new telephone company" no longer needed to own a network of any kind.

Rather, it required only a little venture capital to build a brand and a Web site, and a requirement that all customers come with their own Internet connection.

However, there are very few companies of this type leading the market five years after the first commercial VOIP plans were introduced.

Rather, the biggest VOIP operators are the same giant communications businesses that the VOIP software was supposed to weaken.

Federal rules are a very likely candidate for this, mainly because there has been little other than federal rules to divide the market into "haves" and "have-nots," say many VOIP observers.

And for evidence, insiders point to a new set of Federal Communications Commission rules in effect later this month that are likely to tighten the old guards grip on the new phone market.

Those rules, guiding 911 phone calls, will be no problem for Verizon Communications, the nations largest local phone operator and a vestige of the original phone operator AT&T, now owned by SBC, both operators say.

But about half of all other VOIP operators, mainly newcomers to the phone business, say they wont be able to provide adequate 911 dialing for all customers, and will not be able to sign up any new customers as a consequence.

"The new entrants, the ones doing the really innovative things, are types of services that will be disadvantaged," said Jim Kohlenberger, executive director of the VON Coalition, a VOIP industry group.

Arguably, VOIP did create a "new" phone company outside the old guard, namely major U.S. cable operators.

But the likes of Time Warner Cable Co., Comcast Corp. and other top-tier cable operators now with millions of VOIP subscribers each are similar to traditional phone operators.

Each business owns its own network—cable operators built theirs of fiber, telephone companies out of copper—and each now sells the same hat trick of video, voice and high-speed data.

Another "new phone" company to emerge is Vonage Holdings Corp. of New Jersey, but its the only top-tier U.S. VOIP provider that isnt a cable operator.

Nonetheless, VOIP pioneers, who warned of the consequence of federal rules, are disappointed in how things have turned out.

"Who does this conclusion benefit? Perhaps it benefits incumbents trying to hold on to a captive user base," said Jeff Pulver, the serial VOIP entrepreneur and conference organizer who helped to create Vonage Holdings Corp., perhaps the best known of all the new VOIP operators not affiliated with a traditional phone company.

An FCC spokesperson wasnt immediately available for comment Wednesday.

The FCC has the difficult task of forcing corporations to meet certain economic and social responsibilities.

Its been well-documented that the FCC can have a big impact on startup companies investigating new technologies, which dont have the funds, or time, to deal with the government.

These startups often complain that rules put up a barrier around the scope of their products development.

Such appears the case for VOIP, which in earliest iteration, was mainly used by ham radio addicts experimenting with the earliest semblance of the Internet.

To test VOIPs commercial potential, Pulver and others created Vonage about five years ago in order to introduce the worlds first commercial Internet phone plan.

At the time, the Internet phone industry operated without any regulatory oversight whatsoever.

/zimages/1/28571.gifClick here to read more about VOIP wiretapping.

Startups Vonage, Skype and others thrived in the unfettered atmosphere, drawing in millions of paying customers.

"Fire your phone company," Vonage commanded in its advertising campaigns.

But as the numbers of VOIP subscribers grew—presently there are about 3 million—so did the scrutiny. At first, it was mainly negligence lawsuits against VOIP operators.

The FCC initially tried a very light set of rules. But the rules keep coming, each adding more expense.

An even bigger challenge is pending requirements that VOIP operators wiretap their calls, a technically difficult task.

/zimages/1/28571.gifClick here to read more about the VOIP 911 issue.

"I am baffled as to why the FCC felt compelled to single out the nascent IP-based communications industry to more onerous regulation," Pulver wrote.

/zimages/1/28571.gif Check out eWEEK.coms for the latest news, views and analysis on voice over IP and telephony.