International IP telephony: Governments, providers debate voice-over-IP issues, revenue streams

IP telephony is exploding worldwide as more governments deregulate their telecommunications industries, but many countries continue to protect incumbent monopolies by barring or restricting the nascent industry.

The regulatory limits matter, but not much, it seems. Revenues for IP telephony services are expected to reach $1.5 billion this year, a 475% jump over 1999, reports Frost & Sullivan. The growth is due largely to the more than $66 billion market for international calling, in which foreign students, immigrants, business travelers and others are feeding a frenzy for cheap voice calls. Such calls will comprise 75% of the IP telephony services market in 2004, according to IDC.

U.S.-based IP telephony providers say that foreign regulations have barred them from some small, developing nations such as Nepal but that there are plenty of foreign carriers with which to do business, from state-owned monopolies to small, unlicensed providers.

"The world is so big that we're focusing on countries with opportunities," said Rob Stephens, director of regulatory affairs at iBasis, a Burlington, Mass.-based company that operates a global IP network serving nearly 100 international carriers.

"It's in an absolute state of flux,"added Mary Evslin, vice president of marketing at ITXC, another IP telephony wholesaler. "We pay for [call] termination everywhere, whether we pay the PTT or a private company."

But there is a variation in how countries treat IP telephony.Although outright bans are rare - and difficult to enforce - many developing countries limit the industry in some way. Most industrialized nations, including Australia, the U.S. and the 15 countries in the European Union, do not regulate providers because they do not consider IP telephony a traditional voice service.

"Most of the developing world has taken a hands-off approach to voice over IP on the grounds that it's too new to do anything about it," said Scott Harris, a Washington attorney and former chief of the FCC's International Bureau.

But even countries with a laissez faire approach are re-examining their policies. The FCC, in a 1998 report, left open the possibility of regulating phone-to-phone IP telephony, although no proceeding is planned, said an FCC staff member. The European Commission in June launched a review to determine whether to change its hands-off policy.

Most countries aren't as liberal as the Western world, though. Large countries do not bar IP telephony now, though China and India once did, experts said.

Other countries allow IP-based calling but restrict it to deter competition. In some cases, only incumbent or major carriers are legally allowed to offer the service, effectively shutting out independent retailers. In other places, carriers pay high fees to be licensed. Generally, foreign regulators are more concerned about IP calls that touch the public switched network than about calls carried over private lines.

Sometimes a policy takes an odd turn. Hungary, for example, allows only the incumbent carrier Matav to carry international traffic until Dec. 31, 2001, says the ITU report. However, other carriers can offer IP telephony as long as the sound quality of their calls is below a certain level - that is, too poor to compete directly with the public switched network.

"That [policy] could change if technology changes to allow the quality of an IP telephony call to be like an analog call," said Sean M. Foley, a Washington attorney.

Why is IP telephony a threat to so many countries? In short, IP-based calls drain traffic from public switched networks run by state or private monopolies. As a result, the monopolies lose international settlement revenues they otherwise would have collected for terminating calls that originate outside their countries. Settlements are per-minute fees that U.S. and foreign carriers pay each other to complete international calls on their public networks.

Where they are not regulated, IP telephony providers do not pay settlement fees, access charges or universal service contributions. That perceived free ride irks regulated carriers that must pay those items.

The result is that many foreign regulators clamp down on IP telephony services - or permit them to be offered only by incumbents. For example, Brazil allows voice-over-IP services to be sold by only 12 regional monopolies until 2002. Independent providers can't operate there except to sell value-added service to corporations, Foley said.

IP telephony providers have found ways to enter even restricted markets by striking deals with incumbents. Take China, a nation of 1.2 billion with one of the world's largest phone networks. The government initially banned IP telephony and even arrested a Chinese group that tried to offer voice over IP in the late 1990s, said Larry Ehrhardt, a manager at Renaissance Strategy.

But China now lets incumbent China Telecom and four major spinoff carriers sell IP telephony. The country changed course in mid-1999, sources said, because it recognized a business opportunity for China Telecom and because it wanted to appear open during its bid to join the World Trade Organization.

Although ITXC does not pay these Chinese carriers settlement fees, it does pay them to terminate IP-based calls on public switched networks, Evslin said. ITXC also wholesales its IP network to carriers for a fee.

iBasis also has seen success in China. It has partnered with four major carriers to carry traffic and now handles 10% of all voice and fax traffic from the U.S. to China, Stephens said."There may be restrictions, but if you know how to make your arguments... they will join up with new carriers such as us," he added.

Although many foreign carriers are reluctant to give up settlement revenues, providers argue that lowering the cost of international calls will generate more traffic and lead to more profits.

Whether regulation will keep pace with the growth of IP telephony is unclear."Any country that wants to participate in the digital economy needs to offer an open, robust telecom infrastructure. Part of that infrastructure is voice over IP," Ehrhardt said.