VOIP: Revolution and Regulation 

January, 2006 - Anne Mizzi

Internet telephones are set to take the global communications industry by storm. Big names like Microsoft, AOL, Yahoo! and eBay are piling into the market and former state-run telecoms providers like BT are also investing. The technology was first developed by the US Defense Department as part of a research project on interconnection in the 1970s. But until recently only techno-geeks have had the interest and ability to make any use of it. But times have changed. The "backpacker" generation are using Skype and are finding the service sufficiently reliable to be a substitute for traditional fixed lines. It is only a matter of time before the promise of low cost calls causes more people to sign up. And as take-up grows, traditional telecoms providers will be hit where it hurts - in the long distance calls market where they have traditionally made their money. But so far, regulators have been holding back on subjecting the new technology to the full force of the regulatory restrictions imposed on traditional telecoms service providers. IP voice services are becoming a well-used commercial offering with many firms using IP-based voice networks. However, it is in the consumer market that the greatest shift will be seen. It is arguable that like the mobile phone and broadband, this technology could become ubiquitous in a very short time. The European Commission's head of Information Society and Media Viviane Reding recently described her "light touch" approach to internet telephony at a conference in London. But she acknowledged that regulatory barriers may be challenged as new markets and services emerge. There is no doubt that voice over internet technology is set to cause a revolution in global communications and fundamentally change the way the phone services are structured and delivered in future. This article, therefore, will give an overview of the technology and the market, outline the applicable rules in the UK and Europe and will ask whether the law is keeping up with the market. 1. What is VOIP? Voice over Internet Protocol (VOIP) is the technology used to transmit voices over a data network using the Internet Protocol (IP). IP is one of a family of software protocols. The software allows people to communicate across different connected networks, such as between computers with different hardware architectures and operating systems and even between computers and telephones by converting voices into packets of data, which are compressed and transmitted over a data network. (e.g. the internet or a commercial, private or managed network). VOIP can be run over a narrowband internet connection. But it is much more attractive when used over fast and "always on" broadband connections. More than six million people in the UK are already connected to the internet via broadband, which has become the fastest taken-up mass-market technology in history (before CDs, video games and mobile phones). VOIP services like Skype are already widely used by consumers. Benefits include: · Reduced cost · A single network carries both voice and other data · Widely available source code and platform · Automatic routing and nomadic services · New services, add-ons and updates are easier and cheaper to provide Being able to offer a package of communications services across a range of media, such as integrated messaging, bandwidth on demand, voice emails, "find me" and "follow me" services, real time language translation and voice portal development on the internet, is a particularly alluring aspect of the technology, although the main commercial driver for VOIP services is cost. But there are drawbacks – mostly relating to reliability and quality. VOIP phones rely on broadband connections, which are vulnerable to power outages. Conversations are interrupted when data packets are lost or delayed at any point in the network, which can happen where the connection is broken for any reason, if the network is congested or being worked on, or long distance calls are made which involve multiple routes over the internet. 2. Regulation of VOIP Consumer VOIP offerings do not lend themselves easily to regulation. Being part-telecoms and part-data and part of the largely unregulated internet, VOIP is sandwiched in a no-mans land between the heavily regulated voice telephony market and the relatively unregulated data telephony market. 2.1 Applicable regulations in the UK and Europe The electronic communications regulatory regime was introduced in the EU in July 2003 by a series of directives: · Directive 2002/19 on access to and interconnection of electronic communications networks and associated facilities (Access Directive) · Directive 2002/20 on the authorisation of electronic communications networks and services (Authorisation Directive) · Directive 2002/21 on a common regulatory framework for electronic communications networks and services (Framework Directive) · Directive 2002/22 on universal service and users' rights relating to electronic communications networks and services (Universal Services Directive) · 2002/58 on the processing of personal data and the protection of privacy in the electronic communications sector (Privacy Directive) The Communications Act 2003 (Act) is the implementing legislation in the UK and the Office of Communications (Ofcom) is the UK regulator. The directives (and their implementing legislation in each Member State) take a competition law based approach following market liberalisation in the 1990s. The directives replaced technology and service specific regimes with a technology neutral regime. 2.2 Previous Approach to regulation of VOIP The question of regulating VOIP as a voice telephony service was first raised in the mid 1990s as part of the general "internet excitement" as legislators struggled to understand their role in the fast emerging on-line world. The old EU telecommunications regime had focussed very heavily on voice services and creating competition in a market dominated by former national providers. Under that regime, the question of whether regulations would apply depended on whether a service was "voice telephony". On 1 January 1998, the Commission published a position paper on internet telephony in which it stated that internet telephony would not be subject to the regulation applying to traditional voice telephony it was a commercial offering providing a service to the public to and from public switched network termination points on the fixed telephony network involving direct transport and speech in real time. Internet telephony could not meet the conditions because its unreliability meant it did not meet the real time requirement. But the Commission did acknowledge that as the technology became more sophisticated, this might change. 2.3 How does the current law apply to VOIP service providers? The general position is that if VOIP services are equivalent to traditional voice services, they will be regulated under the new technology neutral regime, which covers electronic communications networks (ECN), electronic communications services (ECS) and associated facilities and services. ECN and ECS providers are referred to below as Communications Providers. ECNs are systems that transmit or convey any signals by electrical, magnetic or electro-magnetic means including all apparatus that makes up such system irrespective of the type of information conveyed. Packet-switched fixed systems, including the internet, fall within the definition. A "signal" is also broadly defined and includes anything comprising speech, music, sounds, visual images or communications or data of any description. ECSs are services (excluding content services) that are normally paid-for services which consist wholly or mainly in the conveyance of signals on ECNs. Clearly, VOIP services fall within the definition of an ECS. 2.4 Consequences of VOIP being regulated as a publicly available telephony service Different regulatory controls are imposed, depending on whether a service is private or publicly available. General conditions apply in an escalating scale. Where a VOIP service is a Publicly available telephony services (PATS), it is subjected to onerous regulatory requirements. These include lifeline requirements (obligations to give access to emergency services, operator assistance and directory enquiries) and obligations to: · take all steps necessary to ensure the integrity and availability of the public telephone network at fixed locations (Article 23 of the Universal Service Directive) · give access to national and European emergency numbers (Article 26 of the Universal Service Directive) · comply with provisions applicable to interconnection agreements under the Access Directive One advantage of being a PATS provider is the right to port a phone number to another provider. Therefore, the key issue for Communications Providers is whether is classed as a PATS. A VOIP service provider will be a PATS (as defined in the Act) if it provides a service and that service is available to the public. The service must also: · originate and receive national and international phone calls · give access to emergency numbers and · use numbers in a national or international telephone numbering plan Although there is nothing in the legislation to say it can do so, as described below, a VOIP service provider is permitted to opt out of PATS compliance. 2.5 Interim guidance Ofcom published interim guidance on New Voice Services (including VOIP or "Voice over Broadband") on 6 September 2004. This applies to publicly available phone-to-phone VOIP capability and does not cover the regulation of private voice services, e.g. where VOIP is used solely in a business context. Ofcom's approach in the interim guidance was to deviate from the classification of PATS in the Act to allow VOIP service providers to choose whether they wanted to be a PATS or not. It said that Communications Providers do not have to provide emergency access, but where they do not consumers must be fully informed. The legal basis for Ofcom's decision not to automatically impose PATS obligations on VOIP service providers is unclear. It has referred the question to the Commission, which has not yet answered this point. The Commission made some attempt to clarify the approach in a statement on 11 February 2005, which stated that automatic imposition of PATS obligations on ECS providers would impinge impermissibly on their commercial freedom and would not be consistent with the intentions of the Authorisation Directive (to encourage competition and investment in innovative services). The current regulatory approach means that although technically a VOIP service provider that gives access to 999 is classed as a PATS, it can opt not to comply with the PATS regulations provided it provides sufficient information to consumers about how its service is different from a traditional phone service. Part of the reason for this relaxation of the rules was a concern that market entrants would decide not to give customers any access to 999 in order to avoid being classed as a PATS. 3. Consultations and regulatory reform The Commission has stated it hopes to issue guidelines by the end of 2005 and that it may also include VOIP in a review of the EU regulatory framework for electronic communications in 2006. Ofcom is planning to launch a consultation on VOIP in November, which should provide guidance to undertakings providing a reliable PSTN service. Its approach to PATS classification and the opt-out is not expected to change as a result of this consultation. A further consultation on the general conditions will be launched in January 2006 which aims to clarify the general conditions taking into account the PSTN-centric approach and the increasing pressure to assist with anti-terror measures. In any event, it is likely that the whole regime will be overhauled in 2008, when the EU introduces new directives to replace the current regulatory regime. It is too early to tell what shape this will take but must take account of market developments. 4. Conclusion EU governments and regulators have insisted they will continue to apply a "light touch" to VOIP regulation but the situation is clearly under review. The market is still young, but is growing up quickly and regulators will no longer be able to treat VOIP services as an interesting exercise in technology of limited market impact. As the market matures and consumers start to choose VOIP offerings over traditional voice telephone services, regulators will be forced to address issues such as emergency service access, numbering, universal service contributions, minimum service standards (consumer protection), network security and law enforcement access. A recent OECD report, the 2005 Communication Outlook of 25 August 2005, acknowledged the predicament that regulators are facing: "Issues surrounding the classification and regulatory treatment of VOIP will likely become one of the key issues for regulators over the coming years… Concerns are likely to be raised as to how certain social obligations, such as universal service and emergency call features can be met in a changed environment where suppliers that do not have physical presence in a market can provide voice services to subscribers." As VOIP develops into a substitutable alternative to traditional phones, the rationale behind excusing VOIP service providers begins to fall away and the need for a re-think becomes even more pressing. When regulators wake up to a mature VOIP market they will be forced to decide whether to impose the full force of existing regulations on VOIP providers or whether it is in the long-term interests of competition to impose a simplified regulatory regime on all telephone service providers. Clearly if VOIP providers are required to add a significant regulatory compliance burden to their cost base, much of their commercial advantage over traditional voice providers will be eroded. It is inevitable that VOIP (and consumers) will pay the price for developing a true alternative to the telephone.


Anne Mizzi is a solicitor specialising in media and technology with commercial law firm Shepherd and Wedderburn. +44 (0)20 7763 3244


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