Heritage Foundation Leadership for America

REGULATION IN BRIEF: 
VoIP Telephone Service

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December 9, 2003            No. 6
(Updated March 18, 2004)

Background:  “Voice over Internet Protocol” – or VoIP – communications technology allows voice conversations to be transmitted through the Internet or other digital networks rather than over telephone lines. Several types of VoIP services are offered today. Some are based entirely on the Internet – sending voice communications from one PC to another much like standard instant messaging services. Others rely on today’s telecom infrastructure to some degree, by using existing phone lines for the first or last part of the connection, and allowing use of the consumer’s existing phone. 

A wide variety of firms are offering the service, ranging from start-ups to traditional telecom companies. Within five years, according to Bernstein Research Call, some 18 percent of telephone lines could be replaced by VoIP technologies.

While VoIP is a substitute for traditional telephone service, it currently operates without the heavy regulation and fees to which traditional telephone services are subject to. It is not subject to regulation of rates and service, does not contribute to the various existing subsidy funds and is not subject to the “access fees” that long distance telephone carriers must pay to local carriers. Fearing that VoIP will undermine existing regulatory and subsidy schemes, many have called for it to be declared to be a telecommunications service, subjecting it to those obligations.  

Status:  In the past few months, three states – California, Minnesota and Wisconsin – have acted to impose regulation on VoIP. Their authority to do so, however, is in question – with a federal court in October ruling that Minnesota has no authority to regulate this largely Internet-based technology. Last week, the FCC announced it would establish a working group to sort out the regulatory treatment of VoIP. 

Discussion:  In the long run, the rules for any communications service should be the same, regardless of the technology used. There is little reason for policymakers to regulate some services but not others simply because of the technology used. And, differences in fees and subsidies may simply be unsustainable – consumers will simply flock to the favored technology.  

Yet, consumers would hardly be helped by simply exporting today’s Byzantine and antiquated system of telecommunications regulation onto this innovative new service. Today’s system of rules and subsidies – many devised decades ago – hinders innovation and distorts investment and, even before the advent of VoIP, was badly in need of reform.   

Action item:  Rather than impose today’s antiquated telecommunications rules on VoIP, policymakers should use the new technology as a catalyst for a top-to-bottom review of the current system, aimed at eliminating unneeded rules and fees. After – and only after – reform should policymakers consider applying the regulatory structure to all voice services.

This brief was prepared by Heritage Research Fellow James L. Gattuso.

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