VONAGE CEO: STATES WILL HURT VoIP START-UPS

State regulation could undermine efforts by new VoIP entrants to make business models work by wiping out venture capital funding in nascent providers, according to Jeffrey Citron, CEO of Vonage, currently the largest residential VoIP provider in the U.S.

Speaking at the Association of the Bar of the City of New York, Citron said a recent decision by the New York State Public Utilities Commission declaring Vonage a telecom corporation proves that states will regulate VoIP providers unless prohibited by the FCC or Congress. New York made its ruling largely to ensure that the VoIP provider meets 911 standards. A federal court in Minnesota last year ruled that Vonage is an unregulated information service, but Citron said he does not want to fight such battles in all 50 states.

While state litigation is costly, the Minnesota victory sparked $35 million in new funding for Vonage, Citron said. Such venture funding for other VoIP start-ups likely will disappear in the wake of the uncertainty created by the New York ruling, he said.

“So what happens?” Citron said. “All the capital that's going to voice over IP? Done. No more. No single investor in their right mind in this country will deploy any capital — none, not one dollar — to a start-up company going after voice over IP.”

With New York's traditional role as a regulatory leader among state commissions, other states likely will seek to regulate VoIP providers during the next several months, Citron added. At the same event, Sen. John Sununu (R-N.H.) agreed, noting that his pending legislation would block such action.

“Political realities” likely will prevent that legislation from passing in the next year and even an FCC decision excluding states from the regulatory process would face legal and political hurdles, said Robert Quinn, AT&T's vice president of regulatory affairs.

Regardless of where the directive comes from, action to prevent states from trying to regulate VoIP providers is needed quickly, Citron said.

“The key here is that we need to put that framework in place before others jump the gun and stifle the industry before the industry has a chance to blossom,” Citron said. “Because then, we'll get all the rules in place, but by then it will be all over — people really won't want to get involved.”