Verizon, Bandwidth.com interconnection deal could be precedent-setting

A new traffic termination between business VOIP provider Bandwidth.com and Verizon is good news and bad news for incumbent carriers.

First the good news…

The good news is that the deal represents an acknowledgement on the part of the VOIP provider that its traffic may be subject to termination charges. Some VOIP providers have argued that they are not required to pay terminating access charges because VOIP is an information service, rather than a communications service. And some of those VOIP providers have gone to great lengths to avoid paying termination charges, including disguising the originating phone number to prevent the terminating carrier from billing for the traffic—a phenomenon sometimes called “phantom traffic.”

“For too long, uncertainty over what charges apply to VOIP traffic has served as a wall to the innovations customers want and the lower prices they need,” said Bandwidth.com President John Murdock in an announcement from Bandwidth.com about the Verizon deal. “We are delighted to be working with Verizon in reaching a commercial deal that hopefully will serve as a path for the industry and service providers to move forward and better serve customers.”

Now the bad . . .

The bad news is that the new deal between Bandwidth.com and Verizon was made at a surprisingly low $0.0007 per minute. Small rural telcos traditionally have the highest termination charges because they rely on those charges to pay part of their network costs, which tend to be subtantially higher than for carriers in more densely populated areas. It’s unlikely that Bandwidth.com would be willing to sign an agreement to pay typical small telco termination fees (Unless the company is using phantom traffic techniques, however, it presumably is already paying those charges today.)

In a research note, Stifel Nicolaus analyst Rebecca Arbogast speculated that Verizon, which entails substantial costs in paying terminating access charges to small rural carriers, may have made the move as an alternative to waiting for regulators to make long-promised reforms to the access charge system. “In the absence of reform, we believe Verizon and others are looking to put downward pressure on intercarrier compensation in the marketplace,” wrote Arbogast.

Another concern is that Bandwidth.com may have left itself some wiggle room. Arbogast said it is Stifel’s understanding that Bandwidth.com and Verizon are treating the VOIP traffic from Bandwidth.com as a Title I information service, rather than Title II communications service.

According to Arbogast, it is also Stifel’s understanding that the new agreement applies only to traffic to and from Verizon’s traditional voice customers and not its wireless customers.