FCC Deregulates VoIP — And Broadband Demand Is About to Surge

The FCC just changed the rules of the game for internet phone service, and the ripples are going to push more Americans onto broadband than any marketing campaign the cable and DSL companies have ever run.

In a 5-0 vote, the FCC declared that Pulver.com's Free World Dialup service is an unregulated "information service" — not a traditional telephone service subject to state-by-state telecom regulation. While the immediate ruling applies to one specific computer-to-computer VoIP service, the broader signal is unmistakable: the FCC is taking the position that internet phone services are fundamentally different from traditional telephones and shouldn't be saddled with century-old common carrier rules.

For Vonage, AT&T's CallVantage, Comcast's emerging VoIP offering, and the growing wave of VoIP startups, this is a green light. For broadband providers, it's a gift from heaven.

What Just Happened

For the past year, state regulators in places like Minnesota, California, and New York have been arguing that VoIP services like Vonage should be treated as telephone companies — meaning they'd need to obtain certifications, pay into universal service funds, comply with state-specific call quality requirements, and generally jump through the same regulatory hoops as traditional telcos.

Vonage and other VoIP providers have been fighting this in court and at the FCC, arguing that they're software services running over the internet, not telephone companies. The compliance costs of being regulated as a traditional telco in 50 different states would be crushing for any startup VoIP provider.

With this ruling, the FCC effectively sided with the VoIP industry. While the specific case involved Pulver's free PC-to-PC service, FCC Chairman Michael Powell made clear in his statement that the broader VoIP industry should expect similar treatment. State regulation is largely off the table.

Why This Matters for Broadband

VoIP is the killer app that finally makes broadband economically irresistible.

Here's the math. A typical American household pays roughly $50-80 per month for basic phone service plus long-distance calling — sometimes much more. Vonage's $24.99 unlimited plan, or competing services from AT&T, Net2Phone, and 8x8, can cut that bill in half or better.

But you can't use Vonage on dial-up. You need broadband. So the savings on phone service create a powerful financial incentive to upgrade to DSL or cable internet. For many households, the math works out like this:

• Current phone bill: $60/month
• Current dial-up bill: $24/month (AOL)
• Total: $84/month

After switching to broadband and VoIP:

• Cable internet: $42/month
• Vonage: $25/month
• Backup landline (basic): $15/month
• Total: $82/month

The costs are roughly equivalent, but you've gone from dial-up to broadband and your long-distance calling is now unlimited. For a household that makes a lot of calls — particularly long-distance — the savings can be substantial.

The FCC's deregulation ruling removes the biggest cloud hanging over VoIP services: the threat of expensive state-by-state regulation that would force prices up and make some providers unviable. With that cloud lifted, expect VoIP to grow faster, and broadband adoption to grow with it.

The Numbers Already Tell the Story

Vonage announced earlier this month that it has crossed 150,000 subscribers — up from just 25,000 a year ago. AT&T launched its CallVantage VoIP service to consumers in March, betting that the parent company's brand recognition can move millions of customers from traditional landlines to internet phone. Cablevision is rolling out cable-based VoIP in its New York service area. Time Warner is doing the same in select markets.

Verizon, ironically, is in an awkward position. The company is rolling out VoIP service over its own broadband network — but every Verizon DSL customer who switches to VoIP is canceling their Verizon traditional landline. Verizon is competing with itself, choosing to cannibalize its high-margin landline business rather than let competitors do it for them.

Industry analysts estimate U.S. VoIP subscribers could grow from a few hundred thousand today to 3-5 million by the end of 2005. That's still a fraction of the roughly 150 million U.S. landlines, but the growth rate is what matters. And every VoIP signup means a household that needs broadband.

The 911 Problem Remains

The FCC's deregulation ruling didn't address one of the most serious concerns about VoIP service: emergency 911 calling.

Traditional 911 calls automatically transmit your location to local emergency dispatchers. VoIP services have struggled with this because internet phones aren't tied to a physical address the way landlines are. You could plug your Vonage adapter in at a friend's house in Chicago and still be using your home's listed New York address. If you call 911, where does it go?

Several states have proposed VoIP-specific 911 mandates, requiring VoIP providers to offer location-aware emergency calling. The FCC hasn't acted on this yet, but it's a growing political issue. Expect federal rules requiring VoIP 911 capabilities within the next year or two.

For now, anyone using VoIP as their primary phone service should keep a basic landline as a 911 backup, or at minimum, make sure all household members know to call 911 from a cell phone if there's an emergency.

What This Means for the Phone Companies

Verizon, SBC, BellSouth, and Qwest are facing an existential threat to their core business — and they know it. Wireline phone subscribers have been declining for several years as people drop landlines in favor of cell phones. VoIP accelerates that decline by giving the remaining landline customers a cheaper alternative.

The Bell companies' strategic response has two parts:

1. Push DSL aggressively. If your phone customer is going to ditch the landline anyway, you want them to be your DSL customer — both because DSL is profitable and because you can sell them VoIP service that runs over your own broadband. SBC has been particularly aggressive on this front, with promotional pricing around $26.95/month for entry-level DSL.

2. Build their own VoIP services. Verizon's VoiceWing, SBC's CallVantage partnership, and BellSouth's emerging VoIP plans are all attempts to capture VoIP revenue rather than lose it to outside players.

This is why Verizon is pouring billions into FiOS — fiber-to-the-home — while SBC pursues its Project Lightspeed FTTN strategy. The future of the Bell companies isn't selling phone lines. It's selling the broadband pipes that VoIP runs over.

The Bottom Line

The FCC's ruling is a regulatory victory for VoIP, but its real significance is what it unleashes downstream. Cheap, reliable VoIP gives broadband a compelling consumer use case beyond "the internet is faster." Save money on your phone bill. Unlimited long-distance for $25/month. Voicemail in your email inbox.

For the millions of Americans still on dial-up because broadband seems like a luxury, VoIP changes the calculation. Broadband is no longer just about better web browsing — it's about cheaper phone service that more than pays for the upgrade.

Expect 2004 and 2005 to be the years broadband adoption finally accelerates from steady growth to outright surge. The FCC just removed one of the biggest barriers. Now it's a question of how fast the cable and phone companies can sign people up.