A European Perspective of VoIP in Market Competition

The debate on the future of VoIP (Voice Over Internet Protocol) is not new. For some time now this technological innovation has been considered one of main drivers for reshaping the telecommunications industry. Such is the case that even former Federal Communications Commission Chairman, Michael Powell, said at the Davos World Economic Forum (Switzerland, Jan. 2004) that VoIP “is probably the most significant paradigm shift in the entire history of modern communications, since the invention of the telephone”. However, the lack of maturity of the technology itself (as well as of the infrastructures that should have supported it) caused the most optimistic expectations surrounding it not to have been met during its initial phase of development. The latter applies particularly in Europe. Nevertheless, its gradual conquest of the business market and some positive (although heterogeneous) statistical trends for residential^a users have once again attracted the attention on the changes that the development of VoIP would bring.⁸

It is important to note that there is no single architecture for using IP technology with voice applications, and the development of one model or the other would bring on very different consequences for the structure and balance of the market. In the broader sense with which it is used, VoIP is not a synonym for “voice over the Internet;” truly speaking this refers to the specific use of VoIP on the global public Internet. However, there are many IP-based data networks deployed that are not directly connected to the public Internet (i.e. managed networks or private intranets).⁷ Particularly relevant within the latter are the Next Generation Networks (NGN) arquitectures, which basically refer to all-IP architectures capable of providing end-to-end “managed” IP services over broadband infrastructures.

After this clarification, it is obvious that, from the residential market perspective, VoIP development is connected to broadband development. On the one hand, it is obvious that its usage is growing at the same pace as broadband connections. In the opposite sense, VoIP can be one of the main broadband progress drivers.¹⁰

As a consequence, the appearance of VoIP is a key factor in the transition towards a new electronic communications market, governed by current trends toward broadband and mobility accesses. The development of the market, notoriously in Europe, has been characterized by the difficult balance between two almost conflicting models: service-based competition as opposed to facilities-based competition. With VoIP the clash between companies basing their business on one model or the other reappears. Another comeback is the debate between regulators regarding which of the models is most convenient to achieve an effective degree of competition in the market.¹

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Implications for Competition

Regarding facilities-based operators, one of the most repeated clichés states that VoIP could represent the virtual disappearance of traditional operators, or in the best scenario for them, that their income would fall considerably. However, these operators have not stood still, but quite the opposite. They cannot trust the traditional voice business to continue to represent their basic source of income in the future and are, indeed, reacting to this fact. Broadband is taking an increasing importance in their final balances. It is obvious that the interest of these operators lies in convincing their customers to contract added value services (and not only a simple broadband connection) that, in some mid-term future, will be provided over a NGN-type arquitecture. As a consequence, their strategy regarding VoIP shall probably be to integrate the application in “bundled” offers “simplifying” user decisions (especially, the so-called “triple play” or “multi-play”). Additionally, this will not prevent them from using the technology in their traditional service transparently for the user and even providing VoIP as a new and standalone service should they need to react to the movements of their competitors. To this extent, the European Commission (EC) recognizes that “the potential market entry of formidable new providers of VoIP services is inducing existing players to respond with their own VoIP products or packages which include voice.”³

Also, it is necessary to underline that VoIP is interesting for any other company with its own infrastructures, including cable, fiber (FTTx) or wireless/mobile communications operators. Similarly to the case of copper pair operators, VoIP allows providing innovative and integrating solutions that resolve in part the shortages of their current offerings.

For operators lacking infrastructures, the incentives make easy the decision of offering VoIP applications. VoIP services provide an excellent opportunity for Internet Service Providers (ISPs) to earn higher profits. Additionally to ISPs, new VoIP telephony specialized operators could easily appear because the investment in interconnection elements (gateways, network intelligence) would be relatively modest as compared to that traditionally necessary to enter the telephony market. Lastly, under a “voice over Internet” architecture are VoIP application providers such as Skype, who take this scenario to the limit and suggest an evolved Internet world where the provision of services and applications is completely separated from the transmission infrastructures. In this extreme scenario, companies coming from the telematics background are those leading the way to follow, while the role traditional telecommunications operators can play becomes significantly reduced. With these conditions, it would be natural to expect many different agents being interested in providing VoIP services.^b The current debate about “network neutrality” it is but another manifestation of this discussion.

Therefore, should an adequate (but complicated) balance between all the interests at stake be achieved, it is clear that VoIP has the potential of contributing to a more intense degree of competition among different types of agents. However, for the puzzle to show such a clear image a central piece is missing: in order for VoIP to be a service that truly replaces traditional telephony, any maneuver by companies without its own network depends on them being able to use the infrastructures (at least, transmission capacity) of other operators. This fact illustrates, as pointed out in next section, the importance of the regulator’s decisions.

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Implications for Regulation

Currently, no VoIP-specific regulation exists in the European Union (EU), although some attempts were brewed before. The growing market activity has “triggered,” however, a greater interest on which would be the most appropriate regulation for VoIP services.

In response to this renewed interest, a series of public consultations on which would be the most suitable regulatory treatment for VoIP were launched by many European national regulatory authorities (NRAs) as well as by the EC itself. The European Regulators Group (ERG) in its common statement published in February 2005 “jointly recognized the importance of ensuring that there are no regulatory hurdles to the roll out of these kinds of innovative services” and also that “this is a positive first step towards an EU-wide ‘light touch’ approach to VoIP on which the Commission intends to build in its further work on this issue.”⁴ However, VoIP is not explicitly considered in the review process of the regulatory framework for electronic communications initiated in November 2007.^c

Following this “light touch” argument, the main consequence would be that, during an initial stage, the minimum possible ex ante regulations^d should have to be applied, as a complement for the general competition rules with an ex post approach. However, the existence of an agreement on this general approach does not imply any uniformity in national decisions. As admitted in the ERG document stated above, “there have been tendencies of divergent approaches by the national regulators with regard to submitting these new services to regulation,” which in long-term, could be detrimental for the development of a pan-European services market.³

Indeed, this “light” approach embraces different perspectives on the issues focusing the debate, that is, those identified as major keys for the development of VoIP business: access, on the one hand, and consumer protection issues, on the other. The first group includes how to manage numbering and interconnection. The second requires considering all the existing obligations in the traditional telephony regulatory regime: universal service, the possibility of accessing emergency services,³ accessibility for the disabled or call interception management.

Taking these issues into account, a sort of “dynamic” regulatory framework based on a series of regulatory scenarios could be designed, representing a calibration of the VoIP-specific legislation. The first one would be the maintenance of the current situation (today’s scenario) where VoIP would not be considered as a voice service, but as a data/ information service instead. The second one (mid-term scenario) would be the development of a regulation modulating the degree of intervention in obligations and rights of operators as well as of users, in particular with regards to relevant key issues under discussion — interconnection and numbering. The third would be the absence of differentiation between VoIP and conventional telephony (long-term scenario) from the regulatory perspective. This last one would assume full technological neutrality, one of the main objectives of the EU regulatory framework, and would imply a step forward in the so-often announced and never resolved design of the converging regulation.

However, despite talking about neutrality, the decisions regarding numbering, interconnection or user rights are never “neutral” from the perspective of market evolution. Different regulatory decisions could foster either a model coming from the computer industry (where the EU is, in general, behind the U.S.) or a mixed model based on consumer electronics and telecommunication operators (“telco” model in which EU agents play an important role). As a consequence, and still within the “light” regulatory approach, it is unlikely for the European Union main players to clearly bet on a model that it is perceived as a major milestone in the telco commoditization route.

Besides the above, the scenarios described must be, undoubtedly, overseen in terms of VoIP market development. In the long term, progress must be made towards a true convergence scenario. However, the progress of VoIP in the short and mid term will be surely conditioned by the regulatory framework designed for it and there is no doubt as to the fact that benefits for users will largely depend on a common European Union approach instead of a fragmented vision.

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