Friday, February 06, 2004

From Daiwa EuroTelcoblog No. 21 Friday, 6th February, 2004: VoIP

VoIP = Victory over Incumbent Protests?

Following yesterday's announcement from the FCC that on 12th February it
would vote on the Free World Dialup petition from February 2003 (see PTT
Pulse, issue 54, 16 April, 2003, for a detailed summary of the various
industry and law enforcement arguments for and against), both the
DowJones Newswires and the LA Times are running articles today
speculating that the Commissioners are going to vote next Thursday that
FWD is not subject to legacy regulation. Both articles report that an
FCC pledge to rewrite wiretap laws in order to satisfy FBI/DEA/DoJ
concerns has led to the DoJ withdrawing its opposition to the petition.

The FWD petition raises a range of complex legal and technological
issues, but the important thing to remember is that it is a petition for
declaratory ruling, essentially requesting that the FCC formally state
that the FWD service itself is not telephony, and thus not subject to
the access charge regime, USO, or other burdens normally imposed on
carriers. It is also important to note that the FWD service does not
generate revenue from its users, nor does it interconnect directly with
the PSTN, both of which factors we believe may have some bearing on a
positive decision by the FCC. We think it is safe to assume that a
positive ruling in this case would squelch further pressure on similar
services which do not interconnect with the PSTN, though the
implications for services which do allow this are unclear at this point.

Nevertheless, we think that a ruling in support of FWD would: a) be
taken by many (rightly or wrongly) as a signal of a more benign stance
toward the entire VoIP issue on the part of the FCC; b) weaken future
arguments against the new generation operators from the incumbents
(which were quite vociferous in the case of the FWD petition); and c)
partially allay the uncertainties of potential investors in the sector.
Most of the regulatory issues involved in the US framework are not
relevant in Europe, and as we have written before, we think market entry
by the access-independent VoIP players into the European markets will be
a much more straightforward affair on the regulatory side. However, from
a sentiment standpoint in Europe, the boost which a positive FCC ruling
might give the industry in the US should have positive knock-ons in
heightening awareness of the issue in Europe, just as more
forward-looking incumbents and regulators start looking at how they are
positioned for the arrival of services in the near future.

Vonage funds European expansion

As if to underline the ongoing momentum of the sector and mounting
investor interest in it, Vonage today announced the closing of a $40m
financing round led by 3i and co-led by Meritech, both newcomers to
Vonage. Existing investors New Enterprise Associates and Vonage
management also participated, making the capital raised $103m in total.
The press release confirms that the funding is to support expansion and
service development in the US, Canada, UK and Switzerland. We expect to
see Vonage launching in the UK by the end of Q1, and while we have seen
BT move first with voice-over-broadband, we think there are holes in its
marketing strategy which Vonage and others will look to exploit in
marketing their own services (free on-net calls, richness of features,
portability of service). It is going to be an interesting year.

Elsewhere, our grapevine has very helpfully come back with some pointers on the identity of the mystery Nordic SIP start-up, to whom we hope to speak next week.

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