Qwest recently announced plans to offer VoIP in Minnesota. Will other RBOCs pursue a similar strategy?

America's Network, Dec 1, 2003 by David H. Yedwab, Lawrence J. Spiwak

David H. Yedwab

Executive vice president

Eastern Management Group

The early mantra "IP changes everything" is coming true, eventually--first data networks and computers and software, and now, voice. 2004 is going to be the year that VoIP begins to become mainstream and changes the voice telephony rules-of-thumb we have learned over the past hundred-plus years.

Fortuitously, from Qwest's perspective, the stars converged for it. By overturning the Minnesota Commission's ruling and finding that Vonage's VoIP is an information service, not subject to regulation, the court made Minnesota a virus-free test tube where Qwest can experiment, deploy and learn about its version of a mass market VoIP offering without being entwined with immediate threats of regulation.

Now, we must be careful here; Qwest isn't the only RBOC already offering VoIP services. BellSouth, SBC and Verizon, as well as Qwest, are already offering VoIP to business customers using variations of VoIP--IP Centrex and IP-PBX services. Qwest has indicated that the Minnesota offering will be to the mass market, and likely via its broadband DSL capability.

The telcos have been concerned about competition from the cable industry. In Minnesota, we may begin to see if the telephone industry's long experience in voice will give them an advantage in the coming head-to-head competition. I also expect that, even without a Minnesota-like regulatory hands-off, some of the other RBOCs will also add mass-market VoIP trials even before 2003 comes to a close.

Lawrence J. Spiwak

President and chairman of the board of editorial advisors

Phoenix Center for Advanced Legal and Economic Public Policy Studies

Whether the RBOCs will actually provide so-called VoIP on a mass market basis remains to be seen, and even if they did there would be little benefit to consumers.

On one hand, it strains credulity to think that the RBOCs would offer a Vonage-type service over the rival cable broadband plant, as this would effectively strand their existing revenue generating PSTN plant.

On the other hand, assuming an RBOC wants to offer a Vonage-type service ($35/month) over its own plant, then before consumers can receive great savings for long distance calls using VoIP, consumers must still pay the incumbent for its local POTS line (assume $35/month) and pay the incumbent (assume another $40/month) for DSL broadband service. Hardly a savings when consumers can get an "all you can eat" local and long-distance package from a UNE-P competitor for around $49/month.

So what is this really all about? By selling basic telephony as an "information service" rather than a telecommunications service, the RBOCs have found a convenient loophole to get out of their obligation to pay into the Universal Service Fund. The current fund already acts as a major barrier to entry as CLECs have to pay up to 10% of their gross revenues into the fund, but the RBOCs are essentially spared from harm because they are the ones that generally receive the funds to provide the USF. If the RBOCs stop contributing, therefore, then politicians might be compelled to double competitors' current contributions and to force Internet service providers (ISPs) to make up the shortfall, further stagnating new investment and entry.