09-09-03 Presentation by Raymond Gifford on "VoIP - Creative ...


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09-09-03 Presentation by Raymond Gifford on "VoIP - Creative ...

  1. 1. VoIP— Creative Destruction of Regulation Ray Gifford, President The Progress & Freedom Foundation
  2. 2. But in capitalist reality as distinguished from its textbook picture, it is not that kind of competition which counts but the competition from the new commodity, the new technology, the new source of supply, the new type of organization (the largest- scale unit of control for instance)–competition which commands a decisive cost or quality advantage and which strikes not at the margins of the profits and the outputs of the existing firms but at their foundations and their very lives. This kind of competition is as much more effective than the other as a bombardment is in comparison with forcing a door, and so much more important that it becomes a matter of comparative indifference whether competition in the ordinary sense functions more or less promptly; the powerful lever that in the long run expands output and brings down prices is in any case made of other stuff. It is hardly necessary to point out that competition of the kind we now have in mind acts not only when in being but also when it is merely an ever-present threat. It disciplines before it attacks. Joseph A. Schumpeter Capitalism, Socialism and Democracy, pp. 80-85, HarperPerrenial, 1942
  3. 3. Creative Destruction Every piece of business strategy acquires its true significance only against the background of that process and within the situation created by it. It must be seen in its role in the perennial gale of creative destruction; it cannot be understood irrespective of it or, in fact, on the hypothesis that there is a perennial lull. . . . --Capitalism, Socialism and Democracy --
  4. 4. VoIP subverts the PSTN Telecommunications Model Internet Internet Telephony Voice Apps Apps Information Service TCP/ TCP/ Traditional Telecom IP IP Voice Voice Telecommunications Transport Transport Transport
  5. 5. VoIP Subverts the Legal Categories for Telecommunications Computer III TA ‘96 Basic Telecommunications pure “transmission capacity for the the transmission, between or among points specified by the user, of information of the movement of information.” user’s choosing, without change in the form or content of the information Enhanced Telecommunication Service more than a basic transmission the offering of telecommunications for a fee service. directly to the public, …, regardless of the facilities used services, offered over common Information Service carrier transmission facilities used in interstate communications, which the offering of a capability for generating, acquiring, storing, transforming, processing, employ computer processing retrieving, utilizing, or making available applications that act on the format, information via telecommunications, …, but content, code, protocol does not include any use of any such capability for the management… of a telecommunications service
  6. 6. Why Does It Matter? Intercarrier compensation If a telecommunications service, then Access if long distance Reciprocal compensation if local
  7. 7. “Stevens Report” Begins to Address VoIP’s threat to regulatory status quo FCC responds to 1998 Inquiry from Senators Stevens (AK) and Burns (MT) about VoIP’s regulatory status. “Stevens Report” hedged conclusions: Telephone-to-telephone IP telephony bears many characteristics of a telecommunications service Computer-to-????? IP telephony should not be viewed as a telecommunications service Does not subvert USF because underlying infrastructure pays FCC likes VoIP arbitrage in international arena, as it puts downward pressure on settlement rates
  8. 8. Intrastate Access Revenues of Reporting Incumbent Local Exchange Carriers in the SEARUC States (Dollar Amounts in Millions) Intrastate 2002 ALABAMA $ 31.878 ARKANSAS $ 55.187 FLORIDA $ 584.696 GEORGIA $ 113.424 KENTUCKY $ 27.413 LOUISIANA $ 57.078 MISSISSIPPI $ 15.879 NORTH CAROLINA $ 218.171 SOUTH CAROLINA $ 68.146 TENNESSEE $ 36.944 VIRGINIA $ 248.764
  9. 9. Discipline before it attacks Be wary of applying old regulatory cost recovery mechanisms to a new platform Consider “layered model,” not service-based definitions model of regulation Look to analogous competitive markets for intercarrier compensation solutions Beware applying quality of service and public safety mandates on nascent technology
  10. 10. Effects of VoIP Squeezes ability to seek cost recovery from access and reciprocal compensation Beware a vicious cycle, as is now happening with federal USF contribution mechanism Forces rebalancing, or better yet, deregulation of retail rates Forces a different pricing model toward flat, monthly, charge, or tiers of bandwidth use. You will lose your most profitable access-payers first They have the most to gain by avoiding usage-based intercarrier compensation
  11. 11. Creative restructuring Enable private, negotiated intercarrier compensation arrangements Free parties for private negotiation toward best business arrangement for consumers IP-Backbone contract terms can bound negotiation Flat-monthly carrier-to-carrier charge Tiered-arrangements based on traffic imbalances Keep consumers informed, but let market reach equilibrium without intervention