Net Phone Firms Say New Fees Would Cripple Them

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April 10, 1998 (12:00 AM EDT)

Net Phone Firms Say New Fees Would Cripple Them

By John Borland,

Net telephony companies warned Friday that new federal regulatory fees tentatively proposed by the Federal Communications Commission could slow growth and hurt competition in their industry.

As part of a scheduled report to Congress Friday, the FCC said Internet companies providing phone-to-phone voice service probably should be required to pay into the federal universal service fund, which subsidizes local phone service for rural areas and poor customers.

The Commission stopped short of any official recommendation, however.

Net phone companies said they support the FCC's goal, but said their industry could be crippled if forced to play by the traditional phone companies' rules of fees and subsidies.

"Our industry is not based on shortchanging the universal service fund," said Tom Evslin, CEO of ITXC, an IP telephony wholesaler. "The cost of that by itself is trivial. It's much more how the fees are imposed."

Evslin said that if Net telephony were to be classified as a basic telecommunications service, and therefore liable for the fees, "it would be very threatening" to the nascent industry, crushing innovation and forcing IP phone users to subsidize old technologies.

In a letter sent to Vice President Al Gore earlier this week, Net telephony consultant Jeff Pulver and several CEOs, including Evslin, wrote that the fees threaten "to extinguish the private investment that makes these services possible."

IDT, a Net phone company, offered free phone calls to lobby Congress and the FCC against new charges. "We are calling a citizens' uprising against regulation," said CEO Howard Jonas. "We want to ensure that unfettered communications is available, especially in the United States."

Internet telephony has only recently climbed out of a hobbyists' ghetto, as advances in technology and voice quality have spurred a flurry of investments and mergers. Analysts estimate the market for IP telephony services will reach $2 billion in the next four years.

A combination of efficient voice transmission technology and a lack of regulation has allowed Net phone companies to charge prices as low as 5 cents per minute for long distance service. The FCC's proposal would undermine much of that cost advantage, particularly for companies operating only in the United States.

"It really does make it unlikely that Internet telephony is a viable alternative domestically," said Chris Moore, president of iPass, a Mountain View, Calif.-based Internet services company that is expanding into telephony.

"The effect would be heaviest on those doing domestic service, and negligible from a financial point of view on those of us who are in the international part of the business," agreed Evslin. The advantages of international IP service are still high enough to make the proposed universal service fees a small part of overall costs.

But the threat from regulators had diminished even before the FCC's report was released. The Clinton administration and several influential lawmakers have already registered their opposition to new fees. "It's very clear that the administration understands that nonregulation is one of the reasons why Internet businesses have grown and succeeded so well," Evslin said.

Friday's FCC report noted only that regulatory fees would likely be applied after more study of the issue. The Commission still must draft a set of rules on the subject and open them up to public comment before applying any fees to Net phone companies.