Is the VOIP Revolution Salvation or Armageddon?

By | February 9, 2004 | Feature

By Maury Mechanick

As the satellite industry emerges from its most recent downturn, a number of new opportunities and threats loom on the horizon. Among these, voice over Internet Protocol (VOIP) may be the most potent. VOIP will likely revolutionize how telecommunications services are provided in the United States and around the world, as well as how the telecommunications industry is structured. It is clear that this revolution will have a profound impact on the satellite industry. The jury is still out, however, on whether this impact will be positive or negative.

First, VOIP, at its most elemental level, simply is the use of the Internet to transport telephone calls as data packets rather than as voice messages via the public switched telephone network (PSTN). VOIP applications can come in a variety of forms. They include computer-to-computer connections generally not involving the PSTN; phone-to-phone connections that use an Internet link to connect PSTN customers on both ends of a call; and computer-to-phone connections that use a computer or a computer-enabled device to connect with a PSTN customer on the other end of the call.

Regulatory War

During the next several months, an intense regulatory war will be waged at the Federal Communications Commission (FCC) over whether VOIP should be classified as a telecommunications service or as an information service under the Telecommunications Act of 1996. The rhetoric will be fierce, the stakes high and the battle fascinating to observe.

The outcome will determine whether VOIP service providers must pay access charges, directly contribute to universal service funding, comply with federal and state public safety regulations such as E-911 services and handicapped access provisions, and comply with the requirements of the Communications Assistance for Law Enforcement Act (CALEA). While resolution of these issues will have near-term consequences for the evolution and spread of VOIP services, it is unlikely to dampen the rapid emergence of VOIP as the next generation of voice communications.

The implications of how telecommunications services will be provided and how the industry will be structured in the future are far reaching.

First, the current distinction between local and long distance telephone service, as we now know it, will simply disappear. In particular, the practice of per-minute charges for long-distance service will give way to bundled offerings of unlimited local and long distance services for a flat monthly fee. This inevitably will lead to the disappearance of long-distance service as a separate product and the rapid obsolescence of companies whose primary business activity is the provision of such services.

Second, the level and intensity of competition between the more traditional telephone companies and the cable companies will increase. VOIP will enhance the ability of cable companies to provide voice services, thereby enabling them to successfully execute the desired “triple play” of voice, Internet and video services over a single platform. How the telcos will respond to this remains to be seen, although this situation in itself may be a potential opportunity for the satellite industry.

Third, voice services eventually will disappear as a separate product line, with the PSTN and the Internet effectively merging into a single network. This combination ultimately would require a complete overhaul of the current U.S. telecommunications regulatory apparatus and would have global implications as well. Other consequences include elimination of any meaningful role for state regulatory authorities over the provision of telecommunications services in the United States and initiation of a massive policy debate domestically and internationally about whether to expand universal service requirements to include Internet or broadband access. Those issues could surface as early as the second World Summit for the Information Society (WSIS) session in Tunis in 2005.

Satellite’s Future?

The paramount question is what this revolution portends for the satellite industry. For those who fondly remember the boom of the last 1990s, Internet traffic was an important stimulus. In addition to providing basic access to and network interconnection for Internet services, satellites are particularly well suited for a number of specific Internet- related applications, including caching and multicasting. At first blush, a significant expansion of the Internet network would appear to be a welcome and exciting development for the satellite industry. The wild card is whether the eventual absorption of the PSTN into the Internet changes everything.

With the advent of fiber optic cables, satellites and voice started to diverge several years ago. This development mainly was driven by cost considerations since fiber generally was cheaper and, once laid, represented a sunk cost that was difficult for satellites to compete against in the voice realm, particularly on higher density routes. But there also was the specter of satellite delay.

Dangers Ahead

One of the real dangers lurking ahead is that, if the Internet is recast as a means of voice delivery as much as of data delivery, the problem of delayed delivery of satellite signals may resurface in the Internet context. To combat this flaw, the satellite industry must be prepared to rebut any lingering end user perceptions that satellite delay impedes voice communications, as well as to ensure that technical/protocol standards related to VOIP services are satellite friendly. If not, there is a significant chance that satellites could be frozen out of this growth opportunity.

A second concern relates to the ability of satellite operators and service providers to anticipate and proactively respond to the rampant industry restructuring and consolidation that VOIP will drive. To provide optimal service, it is essential to know who your customers are and what they require, as well as understand the fundamental economics of their businesses. But when these are all changing in real time, staying ahead of the power curve in responding to customer requirements is many times more difficult.

A related issue is whether the fixed satellite business could get lost in the shuffle. This concern is not theoretical. Even for those companies that in the past were “major players” in the satellite field, the satellite element of their overall businesses, with few exceptions, was never that substantial. As a result, the vagaries of internal reorganizations could involve the shedding of satellite services as non-core business activities, if times get tough.

Selling Out

Indeed, the privatization of intergovernmental satellite organizations (IGOs) is allowing major telcos that once were IGO signatories to sell their stakes. The willingness of these one-time signatories to sell is a strong confirmation that the satellite business is not viewed as particularly strategic to most of those companies. There is a danger that this view of satellites as a non-essential technology for telcos could expand. Satellites and other technologies are converging into a single product – bandwidth. Satellite industry consolidation also is contributing to the trend by shrinking the number of major players.

A true challenge for the satellite industry is to face these issues with its collective eyes wide open, not shut. Officials in the satellite industry must recognize the breadth of the VOIP revolution, its likely impact on future industry structure and how these changes will affect the underlying economics of the telecommunications business. Armed with this knowledge, the industry should better be able to anticipate where the market is headed and position itself to take maximum advantage of these developments. Failing that, however, the satellite industry simply may be relegated to road kill on the restructured information highway.

Maury Mechanick, a former chairman of the Intelsat Board of Governors, is counsel with the Washington office of the law firm White & Case LLP and a member of the firm’s Telecom, Media and Technology Group. He can be reached by phone, 202/626-3635, or by e-mail, mmechanick@whitecase.com

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