VoIP is at last being taken seriously by the telecoms industry and its regulators: Skype’s software has been downloaded nearly 19 million times and the company is soon to launch SkypeOut, a pre-pay service; Vonage is offering rates as low as three cents a minute from the US to London.

In Europe, BT has announced the launch of BT Communicator, which will enable its customers to make free calls over the internet, and France Telecom has launched a service providing Wanadoo customers with unlimited VoIP calls for €10 a month.

But VoIP operators may be walking into a maze of regulatory rulings which could baffle them in their efforts to adapt their business models to exploit the new market opportunities and to resist the encroachment of competitors.

In the United States, the Senate Commerce Committee has recently approved a bill that would exempt VoIP services from state taxes and regulation, instead making the regulation of VoIP a federal matter. The Federal Communications Commission has stated that pending a "comprehensive examination of issues raised by the growth of services that use IP, including carrier compensation and universal service issues,” VoIP services will be subject to interstate access charges.

In Brussels, the European Commission is expected to publish guidelines later this year explaining how the new European regulatory framework should be applied in respect of VoIP. It has stated that if a VoIP service fulfils 4 conditions, including the provision of access to emergency services, it will be regulated as a publicly available telephone service (PATS). If the correct interpretation of this test for PATS is that a VoIP service is not PATS unless it can provide access to emergency services, then there is a disincentive for VoIP operators to provide such access, otherwise they will be subject to the general conditions applicable to PATS under the Universal Service Directive.

Another major challenge for telcos that own their own infrastructure, besides complying with any obligations imposed by regulatory authorities, is deciding when to stop using their existing switched infrastructure and instead raise the money to install VoIP infrastructure. This will be a particularly difficult decision for any operators who have recently invested in a new suite of switches, but all telcos have equipment replacement cycles to consider. Some telcos will also find their business revenue models have to be rewritten as smaller competitors offer innovative bundled internet and voice services. Responding to dynamic, entrepreneurial competition may not come easily to entrenched incumbents.

BT, of course, has already announced its network transformation timetable, aiming to begin mass migration of customers from the PSTN to an IP-based network in 2006 and to complete migration of the majority of customers’ PSTN services onto the IP network by 2008.

If VoIP operators interconnect with the PSTN they have to pay call-termination and call-origination charges, which could represent a significant cost to the operators. To avoid this, 10 residential VoIP operators were recently reported to have formed the Internet Phone Alliance (“IPA”), with the aim of enabling calls between their networks to bypass the PSTN, interconnecting instead via VoIP peering. The group members will all pay the IPA a subscription fee which should be substantially less than call-termination and call-origination charges.

Once broadband is widely available, converters or phones incorporating VoIP technology will enable several lines to be provided to a single household for the cost of one line. Numbering for this will be important. Ofcom has proposed the 056 range for VoIP services. However, there are strong arguments against prescribing a numbering plan for VoIP operators, for example, continuing to use geographic numbers would have the advantage of enabling businesses to appear to be local businesses in each area, whilst actually locating remotely in one place. Another question raised is given that customers can use VoIP–enabled phones from any PC around the world, whilst still using what appears to be a local number, how can VoIP numbering be regulated on an international scale?

It has been suggested that VoIP will not have a substantial impact in the UK, because lines and calls are already subject to fairly intensive competition yet in Italy, where long distance calls, residential subscription charges and SME subscription charges are all relatively high, the market conditions could be very attractive to VoIP providers. However, there is the intriguing possibility that VoIP may have an effect on the outsourcing market in the UK and beyond, where a conversion to VoIP in the context of a new IT implementation, resulting in faster systems that are cheaper to run, might lead organisations to save money by bringing key customer-facing functions such as telephony back in-house.

An alternative argument, however, is that operators offering focused service packaging (such as Outlook with emails, faxes, voice and organisers combined into one package) will be able to target market sectors such as the SME sector in the UK where BT has managed to retain a significant market share. WiFi and WiMax operators will also be potential beneficiaries of the growing VoIP market. WiFi and WiMax operators have so far been struggling to generate revenue from the provision of data over their networks, the provision of VoIP represents an opportunity for them to remedy this situation.

VoIP offers opportunity and risk to all telcos. It is up to them to take advantage of it.

First published in the September 2004 issue of Total Telecom.