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Regulators eye Internet calling

The attention poses a threat to a cheap alternative to traditional phone service just as it breaks into the mainstream.

Technologically, when a call is dialed over an Internet connection, the conversation is just a fancy form of computer data that barely resembles a typical phone call. Never mind technology, some states say: If it sounds like a phone call and gets dialed like a phone call, it should be regulated like a phone call.

THE SUDDEN ATTENTION poses a threat to a cheap alternative to traditional phone service just as it breaks into the mainstream. That regulators are even interested attests to a long-anticipated shift: the distinction between voice and data communications is vanishing.

It started in late summer with Minnesota and Wisconsin. And now officials in California have also deemed that companies selling telephone service via high-speed Web connections should be subject to the same litany of taxes and public service obligations as any traditional phone company.

With at least six other states now mulling the issue, the sudden spectre of costly regulatory burdens has rattled several new-age phone companies that sell their unlimited calling plans at prices $20 and more below the competition, not including the cost of high-speed Internet service.

Web-based phone companies got a surprise victory, however, when a federal court on Tuesday blocked Minnesota’s decision.

After years of crackling away in the background of the Internet boom — generally ignored by regulators and all but the most savvy Web users — so-called “voice-over-Internet-Protocol” or “VoIP” phone services are finally coming of age, aided by improving technology and the rapid replacement of dial-up Web access with speedy DSL and cable broadband connections.

Unlike traditional phone technology, VoIP converts the sound of a voice into small packets of data — about 50 packets for every second of conversation — scatters them across the Internet, and then reassembles them into sound on the other end of a call.

Two weeks ago, in the most prominent deployment of VoIP for consumers yet, New York-based cable TV operator Cablevision Systems began offering unlimited local and long-distance phone service to its customers throughout Long Island for about $35 a month.

By the end of this year, Cablevision expects to offer the service to the rest of its customers in parts of New York City, New Jersey and Connecticut.

Until now, a small company named Vonage was perhaps the best-known purveyor of Internet-based phone service with its banner ads plastered on leading Web sites such as Yahoo!

Vonage, based in Edison, N.J., says it has reached 50,000 subscribers, an impressive accomplishment for an unknown company that began actively pitching its service just a year ago.

But with an established customer base of 3 million, a third of whom already pay $45 for the broadband connection required for VoIP, Cablevision may bring new credibility to Internet-based calling.

Similarly, cable giants Comcast and AOL Time Warner are also gearing up for a broad rollout of VoIP service next year.

But regulators could stifle the advance of VoIP with their intrusion, critics charge. Others, however, favor government involvement for public safety reasons.

“It might hurt some of the players, but I don’t buy the argument that VoIP is under attack” said Muayyad Al-Chalabi, managing director for RHK, a telecommunications consulting and research firm. “I don’t think regulation will stop innovation.”

While the Federal Communications Commission has generally tried to nurture new markets such as wireless and Internet services by limiting regulation, the agency has so far only acknowledged the need to address VoIP, and may begin examining the issue by year’s end.

The issues include whether VoIP providers should contribute to state and federal funds that cover the cost of 911 emergency calling systems and subsidize local phone companies who serve remote communities. Vonage argues that it already contributes indirectly to those funds when it is billed by telephone network operators who carry Vonage calls to their destinations.

In the 911 realm, the FCC also needs to decide if and how VoIP providers should interact with public safety networks.

In fact, beyond cheaper prices, one key appeal of VoIP is that it can eliminate the tether between a phone number and a specific physical location: depending on the service, people who use VoIP can travel anywhere in the world, connect to the Internet, and still dial and receive calls using the same phone number.

As a result, a 911 call dialed from a VoIP phone may not be automatically routed to the appropriate local emergency switchboard, and an emergency dispatcher may not be able to identify the street address from which that call was placed.

The public safety issue doesn’t apply to VoIP providers such as Cablevision, whose service is restricted to the subscriber’s residence — so 911 calls are delivered to the appropriate emergency dispatcher and transmit the customer’s address.

But for companies like Vonage and 8x8, which advertise the mobile attributes of VoIP and a “local” area code that customers can use anywhere — a Manhattan area code, for example, in rural Wyoming — compliance with 911 regulation presents some complications.

And, since many traditional regulatory fees are assessed by state and federal agencies as a percentage of revenues from intrastate and interstate phone calls, respectively, the mobile aspect of VoIP also poses a challenge: How to divvy up payments to local and national funds for universal phone service and 911 when the phones themselves are on the move?

Bryan Martin, chief executive of 8x8, says he favors some regulation of VoIP for consumer protection.

“But this technology enables you to communicate from anywhere there’s an Internet connection, so we have no way of knowing where the subscriber is,” he said. “We don’t know where the call is starting or ending.”

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