The “convergence” of telecommunications technology and computer-based data sharing is reaching a “critical mass” as 2004 opens. Actions taken, court decisions reached, and announced plans are clear signals that the traditional Telco business model has died and we are simply waiting to bury the body. The problem lies with regulation, both State and Federal, and with what is sure to be a bloody battle over such issues as open access, line sharing, interconnections and the definitions of telephone service vs. data services.

With the announcement Dec. 11, 2003 by AT&T of it’s intent to further widen it’s offering of Voice over IP (VoIP) services in 2004, the next shot has been fired in what is expected to be a long and bitter battle over taxes, open access, and regulation.

Data services have not traditionally fallen under the strict regulation that voice services have been subjected to. For the past several years there have been on-going battles over how voice calls are to be delivered, billed, taxed and regulated. One constant has emerged: near total confusion and no clear answers.

A case in point is the June 2000 decision by the US 9th Circuit Court of Appeals in San Francisco that ruled that Portland Oregon did not have the right to force cable TV companies to allow competing ISP’s to use the cable network. And yet the ruling also declared that the internet service provided over cable networks is a telecommunications service subject to regulation as a telecommunication service by the FCC. The ruling then went further to state that the FCC was not required to regulate the service. Both sides in the dispute declared victory but the net result was status quo, and continued confusion.

FCC Chairman Michael Powell addressed a meeting of the Technology Advisory Council of the FCC, October 20, 2003. He began his address, “Communication policy is about to be — if it isn’t already — at a crossroads. I think there is going to be a very, very important set of decisions to be made as to how we embrace Internet-premised, Internet-based IP type communications and whether we will tailor a set of regulatory clothing uniquely for it, or whether we will make it wear Ma bell’s hand-me-downs. “

Voice over IP (Internet Protocol) is being described by advocates as strictly an additional internet service, which indeed it is. As a consequence VoIP has not been regulated. But it is also being sold as a replacement service for the heavily regulated traditional voice services which also would seem to subject cable operators to same interconnection and line-sharing requirements as apply to phone companies under the 1996 Telecom Act, and as the 9th Circuit Court ruling stated.

It is the interconnect agreements and fees that have caused the biggest heartache for Incumbent Local Exchange Carriers (ILECs) and the issue of open access to the cable infrastructure is an open wound in the side of Internet Service Providers.

The current situation is that Cable operators that also are offering data and telephone services over their networks currently have their cake and are eating it too. They are neither fish nor foul. When convenient they are a Telco. When convenient they are a data company. This is a condition that they have so far managed to preserve, but that will come under increasing pressure. The likely force that will break the logjam is the issue of taxes.

Chairman Powell is correct when he states that a set of very important decisions are in the offing. These decisions are not a matter of academic interest but will affect all aspects of the internet and the future of Telecommunications in very fundamental ways.

The internet has enjoyed “tax free status” until the law prohibiting taxation of the internet was not renewed when it expired. Despite the conventional wisdom, the US Senate is blocking the permanent ban on taxation of the internet. States and municipalities have complained from early on about their inability to tax internet access. Unless the Senate acts quickly in the new year, that tax ban will go the way of the Dinosaur.

Since the long distance voice capability of VoIP is not dependent entirely on local voice circuits, interconnect fees between phone companies and other providers are impacted, and the tax base built around the use of voice circuits is eroded. The lines between “data” services and “voice” services are not just blurred, but erased. How are government and industry going to deal with the tectonic shifts in the Telecom service landscape? Only time will tell, but one thing is for certain — the process is going to be very painful and the result completely unpredictable. You can take that to the bank.