Jeffrey Citron, Chief Executive Officer of Vonage, is adamant when he says states have no role in regulating his company. And now, armed and at the ready with a surprisingly strong ruling from a federal judge that agrees with him, Citron is itching to fight regulation on Voice over IP across the country. In this interview with Voxilla, Citron talks about efforts to impose rules on VoIP providers, why it may be time to reconsider regulations on monopoly-era telephone behemoths, why Vonage is not a phone company even though its ads say it is, why the company decided to impose incumbent-like fees on its users, and how it manages to stay ahead of its competitors.
When Federal District Court Judge Michael J. Davis last week threw out the Minnesota Public Utilities Commission's requirement that Voice over IP service provider Vonage be regulated as a traditional phone company, the ripples of the decision were felt throughout the country just as a number of other states were poised to follow Minnesota's lead.
Still, both the regulators and VoIP industry leaders warned that the full impact of Davis' decision would not be known until the judge's written ruling was made public.
Davis finally published his 22-page written ruling Thursday (complete ruling), and the strong language the judge used in condemning the Minnesota PUC's action – a decision Davis said is exclusively Congress's to make — was instantly assailed as a major victory for Vonage as well as other providers of IP-to-Phone VoIP service.
"The court determined that Congress has pretty much preempted the state of Minnesota from this kind of regulation," said Henry Hultquist, a senior attorney for MCI, said. "It's a very strong finding."
Hultquist pointed out that, though Davis' decision sets no direct "binding precedent" on other states considering VoIP regulation, including California, "it seems to be a fairly well-reasoned decision which means that other courts will take it seriously."
Burl Haar, executive secretary of the Minnesota PUC, said the commission will meet next week to decide whether to appeal Davis' ruling.
In the meantime, Vonage executives are saying that Davis' ruling has far-reaching implications in the company's battles with state regulators elsewhere.
On the day Davis issued his written ruling, Voxilla had a conversation with Jeffrey Citron, Vonage's chairman and Chief Executive Officer, about the Minnesota ruling, its impact on regulation efforts elsewhere, and the appropriateness of states' intervention in the Voice over IP industry.
Voxilla: Vonage originally had sought a temporary injunction against the Minnesota Public Utilities Commission's ruling to regulate the company. Judge Davis' decision seems to be more than what you asked for.
Jeffrey Citron: No, it's in line with what we were seeking. When we originally filed our appeal to the district court, we were seeking a preliminary injunction and then, ultimately, we would seek a permanent injunction. Obviously, the judge, upon reviewing our materials and hearing our side of the case, ruled for a permanent injunction.
After having a chance to read his order in some detail, I think his order is not only fair but it's also dead-on as far as the merits of the case. Based on those merits, this action calls for a permanent injunction against the state of Minnesota. But I think this decision can be applied to other states.
V: Legal experts are of a mixed opinion on whether the Minnesota decision will have an impact elsewhere. Some say it will. Others say that states such as California may still move forward with VoIP regulation plans and that there will probably be more legal challenges.
JC: I think this order has a broader context than just Minnesota. I think that states that are looking at regulation should be reviewing this order, they should probably use this judge's decision as guidance on how other federal courts would view any form of regulation on Voice over IP.
Judge Davis was very clear in highlighting that, first and foremost, Vonage is an information service. Second, he highlighted very clearly that Congress and the FCC want to keep, by both statute and interpretation, enhanced services from being regulated. In the case of Minnesota where they placed regulations on these services, the supremacy clause allows for the federal government and the district court to preempt the state.
V: Most agree that the outcome of the California Public Utilities Commission's actions against a number of VoIP services, including Vonage, which were obviously patterned after Minnesota's, are going to be key in the state regulation fight. California is demanding that you file as a telecommunications company. Do you expect to do so?
JC: That's a good question. I don't know what's going on in California.
We received the same notice that everyone else has received. It asked us to file — not to become a common carrier, they just wanted us to file. It's a little bit vague about what they wanted us to file for. We have had and will continue to have ongoing discussions with the PUC to try to clarify what it is that they are trying to achieve and what's the basis for their beliefs on what actions we should take.
Vonage is drawing no conclusions at this juncture. But we think that Judge Davis' order may very well provide a strong basis for which Vonage should not have to file. Now, with that said, I don't want you to take that as a reference that we're not going to file. We haven't decided on what action to take at all. In theory we could file and say "Hey, we're filing that we're not a carrier." It said we had to file, it didn't say we had to become one.
V: Some states are considering rule-making procedures, that would include some level of industry and consumer participation, that could lead to regulation of VoIP services on different terms than traditional communications carriers are regulated. Given Judge Davis' ruling, do you think such procedures are appropriate?
JC: I think on the state level it's probably inappropriate. Congress has already acted. They've already passed a series of statutes and laws, the FCC has passed interpretations of those laws in the furtherance of defining what is an enhanced service and how it should be regulated. Until such time that Congress should come and change those laws, I think it's very clear what Vonage does. I think it's very clear how it gets regulated, and who should be responsible for those regulations. In our case, we're an unregulated service.
With that said, I don't believe there's no place for regulation in the world of Voice over IP. There may very well an appropriate place for it. But I think one has to be extremely careful about going down that path. And I think (several FCC Commissioners) have all stated pretty publicly their views on going down this very slippery path.
To regulate communications, when the communications is an application on top of infrastructure, as opposed to bundled with infrastructure, is hard. It means the Commission itself has to look back and figure out what is its role is in the 21st Century.
Just to push this issue a little further, it may very well be that the proper framework for all regulation in this country may come down to the separation of regulation of the physical infrastructure separately and distinctly from the applications that live on top of that infrastructure. The applications are mutating, and changing and converging at a very dynamic pace.
V: Some argue that you want it both ways. They say you call yourself "a telephone company" in your ads, but then argue before regulators and the courts that you're not a telephone company. Which is it?
JC: In our ads, we call ourselves "the Broadband Telephone Company." It's not the same as "the phone company." It's like the cell phone company. Is a cell phone company the same as a phone company?
V: To the extent that they are both regulated, some would say "yes."
JC: But they are regulated differently. Wireless was, for a long time, only regulated as to what frequency it can use. The service itself wasn't regulated. And to this point in time, for the most part, cell phone service in this country is regulated by the federal government, not by the states. The states have very, very limited rights in that area. They are only beginning to get those rights.
V: Virtually everyone focuses on the issue of 911 and emergency services when they talk about VoIP regulation. Let's put that aside for a minute and talk about other regulatory issues. Traditional landline carriers collect fees for a number of services. This includes the Universal Service Fund (USF) – monies to provide telephone service to poorly served rural areas, funds to subsidize phone service for low-income families, and funds to provide telephone service for the disabled and deaf. Shouldn't VoIP providers help support such services?
JC: This is the greatest misconception in the history of telecom. Vonage pays into the USF fund. We've always paid into the fund and we continue to pay into the fund.
Today, our contributions to these funds that you have mentioned, USF and a variety of the other items, is now coming to a bill of almost $100,000 a month. We pay into the funds through our partners as an information service and as an end user of communications services.
We get billed these fees and we actually break them out on our customers' bills. We impose a surcharge, or fee, of $1.50 per phone line that our customers have, to recover these costs. And with approximately 54,000 lines at the end of last month, we recovered about $75,000 of the $100,000 that we spent.
V: So that would seem to mean that all IP-to-Phone VoIP providers are already sharing the burden of funding these services.
JC: Not necessarily. This is a very complex area. I don't want to over-simplify the differentials over what we do and what the others do. Suffice it to say, without going through the nitty-gritty, that we do pay. There are many Voice over IP providers who have figured out ways to get around paying those fees. We are not one of them.
V: So your contention is that Vonage is already complying with state regulations on these matters?
JC: To some extent. But these fees are not on an equal basis with all states. For example, we can have customers in the state of Montana but we don't have any facilities in Montana. So we don't pay anything to the sate of Montana. Since no one has a Montana phone numbers, there are no state charges on us. On a federal level, of course, for every call that customer makes, we're going to be paying USF on.
The collection of these funds has nothing to do with regulations. Clearly these funds are established under their own statutes. There's nothing that prevents the states or the federal government from changing the basis and the methodology about which kind of players have to contribute.
(FCC) Commissioner (Kevin) Martin discussed this publicly in a statement he released to the public. He is in favor of a fund for USF that would intentionally encompass other providers, including broadband providers. That obviously is not going to change the regulatory status of a broadband provider which is currently not considered a cell phone or common carrier.
If Congress and the FCC felt it appropriate to change the USF, they could easily adopt a proposal that is currently on the floor of the commission to change the system to a per-phone number based system, which would be a flat rate per number irrespective of how that number gets used. Whether its landline, or cell phone, or fax, or eFax, or VoIP, or whatever, it gets taxed. They're thinking like a dollar per number.
V: And Vonage would agree to such a fee?
JC: We would agree with whatever Congress deems appropriate. For us, it's very similar to what we do today. So we have a natural impetus to see it get approved this way. Likewise, there will have to some discussion about how people who contribute to the fund will also have an opportunity to draw from the fund. Some, not all, might argue that these funds are not really necessary. I mean Vonage today provides service to a lot of rural markets.
V: It raises an interesting point. Do you think it's unfair to collect USF fees from VoIP providers that then get spent by the incumbent carriers to lay down regular landlines to rural areas, but does not require them to offer those areas the internet access needed for VoIP service? Are you essentially being asked to raise funds to help your competition?
JC: That's a great question. One of the things that has to get established is what is the real role of the USF in the 21st century. That's one of the things that the FCC is grappling with today. Some would argue that USF should help further broadband deployment as a basic necessity. The question that gets asked is do natural competitive forces naturally resolve these issues in a world without subsidy. To some extent, Vonage is providing competitive services to very rural areas without receiving any subsidy for doing so. And we're doing it for competitive reasons.
V: Are there any regulations applied to landline companies that are appropriate for VoIP providers?
JC: Not that I can think of at this time. You cannot regulate Voice over IP as a common carrier, just like you can't regulate cell phone company as a common carrier.
The FCC has a mandate to foster a competitive environment and to deregulate the telecom industry. I'm in favor of deregulating and removing regulatory responsibilities placed on incumbent carriers.
But there are a couple of areas that do require regulation. Yes. There some very essential key databases and very essential key elements that make the PSTN work. They were given as land grants to the incumbent operators. Those access points, and the 911 network – things that the government built, not these carriers – those core elements need to be maintained as part of a public trust and need some regulation as to how they get accessed. But absent of that, I don't see much requirement for regulation in the world of telecom, especially given the new competitive forces.
V: What about abandonment regulations? Shouldn't a consumer be assured that he or she won't be stranded because a company decides to suddenly go out of business?
JC: Under Title 2 of common carrier there's a little known provision known as carrier of last resort. The original monopolies, the ILECs in our business, have to be carriers of last resort. So there is some requirement that they provide some level of service. The trade-off there is that they were given this business as a public trust. And because they were given that, they have to pay back forever. As the market becomes more competitive — and I'm not saying it's there yet, and as consumers have more choice, I don't think that the current regulations that you see in these states with regards to providing service — i.e.: you can't go out of business the next day and leave customers stranded without phone service — are really necessary. Customers have a variety of different alternatives for communications with 103 million cell phones in the United States, and I'm not even counting the pre-paid cellular phones. There are other methods of communicating that provide similar functionality. So I think that those regulations can and should be dismantled.
I'm sure there are some regulations some states feel are appropriate. But I always want to ask the parallel question: Today, at least in my life, I'm not sure which is more valuable to me, the internet or my landline phone service.
V: Which would you choose?
JC: I would much rather do without my landline than do without the internet. Yet there is nothing that requires an internet service company to not shut down one day and leave you without service. And that's happened plenty of times.
V: Technically, VoIP providers today are not able to offer the full-scale emergency 911 service the landline carriers are required to provide. Has the partial 911 service Vonage offers been used by customers in significant numbers?
JC: I would say no more or less frequency than any other typical user. Every day we send calls out to emergency operators on behalf of our customers who dial 911.
V: If that's true, it seems to bolster the argument some regulators make that when someone dials 911 in an emergency, they don't stop to think whether it's a broadband phone they're dialing.
JC: Yes, there's a truth to that. For competitive reasons and other reasons, we're on the very aggressive forefront of providing 911 service. We were the first carrier of our type to ever do this. And we're the only carrier doing it today.
It just shows you that you don't need to regulate Vonage to get 911. Competitive forces will resolve that. Vonage today has 50,000 customers. There's a good degree of likelihood that if Vonage didn't have 911 we wouldn't have as many customers because people would not be willing to give up that capability. Also, it's likely that if Vonage's competitors had 911 services that they'd have more customers than they have today.
V: How and when will the robust 911 service regulators want be available with VoIP?
JC: Vonage has been embarking on a developmental path, and we have been for some time, that is resolving the next layer of our 911 solution. We've got two paths that we're going down and both are proceeding well.
The first is identifying a number of emergency service operators that will be willing to test taking IP calls directly into their centers. Vonage will be able to route those calls directly to them and we will provide them the necessary equipment. That's a very interesting and aggressive approach to building out a new kind of 911 information system that could, in theory, when complete, provide a great deal more than the current 911 systems provide.
On the other end, there has been a solution put in place that does deal with mobility. It's basically what the wireless carriers have built. It's not a pretty solution, but it does work most of the time. And we think that we can build a solution very similar to what the wireless guys have done about transferring those calls over the dedicated 911 infrastructure and ultimately passing the appropriate address location information. How that address information gets into the system is a bit farther out. Today a customer manually inputs that information in.
We do see where there might come a time when some additional technology might be placed in equipment to provide that information on an automated basis. But, it is still unclear when this will come.