Tuesday, March 30, 2004

Daiwa EuroTelcoblog No. 30, Tuesday, 16th March, 2004: Notes and reflections from European Commission VoIP seminar/various (original email blast 2:27 PM Tuesday, 16th March, 2004)

Notes and reflections from European Commission VoIP seminar

Yesterday we attended the European Commission workshop in Brussels on IP Voice and Associated Convergent Services, in conjunction with a review of the Analysys report of the same name (http://www.analysys.com/pdfs/EC_VoIP_Report.pdf). The event was attended by around 250 persons, who we believe largely comprised representatives from carriers, national regulators and the telecoms consultant/analyst community (though we didn't see any brokers there whom we recogsnized). Carriers which either identified themselves or were known to us by sight included TeliaSonera, Tiscali, Telekom Austria, TP SA, London Internet Exchange and Skype. The event was largely devoted to Analysys' presentation of its report, which covers much ground which should be familiar to our readers by now (slides are to be found here - http://europa.eu.int/information_society/topics/ecomm/doc/useful_information/library/studies_ext_consult/ip_voice/analysys_presentation_on_voip.ppt), and the Commission has invited comment on the report at this address until the end of April (infso-b1@cec.eu.int). The report itself is very thorough and an interesting read, definitely worth the time commitment, but we don't intend to summarize it here. Our focus here is on the feedback session which followed, and the various takeaways we derived from the event as a whole.

Our summary points here would be:

If you feel confused after reading this - consider yourself well-informed. We think the subject contains a number of pitfalls and grey areas which will keep regulation lawyers in champagne for the next decade (too bad none of them are listed - they may be the main beneficiaries of the IP revolution!).

Regulators, carriers and the Commission itself seem to be continuing to come up with more questions than answers as to how to define the market, and on the economic externalities surrounding market definition.

Numbering and emergency services are likely to be the battleground where the action is fiercest, as the needs and interests of all stakeholders are most sensitive in these areas, and most susceptible to politicization, in our view.

By the time the dust settles, we think the market will have worked out its own solutions. Technology is evolving very much faster than the legal framework's ability to interpret it, in our opinion. As the Analysys team pointed out, one risk for regulators is that regulation which is overly specific may in fact spur the development of applications and business models created explicitly to circumvent it, or may have unforeseen impacts at a later date.

Feedback session

Following the Analysys presentation, the Commission's moderator, Peter Scott, head of DG InfoSoc, asked for the feedback session to focus on three issues: critique of the Analysys report itself, concerns about numbering issues and emergency service compatibility. This focus was largely maintained, but other lines of questioning found their way into the exchange. Sadly, the forum was too large to allow any meaningful interactive exchange on each individual comment/question in the time available, and Analysys/the Commission responded only sporadically. In the case of the Commission, remarks were measured on the whole, for obvious reasons. However, as a first crack at airing the concerns and opinions of the various stakeholders, the event was probably about as good as could have been expected.

Issue 1: Extraterritoriality

The feedback session opened with questions on the extraterritoriality issue - namely, if a user of a (for the sake of argument let's say a Vonage-type) VoIP service is in nomadic mode (using their "fixed" phone number in a location other than the country associated with the number), what is the country of origin of the call? Is it the country associated with the number, the country where the caller is located, or the country where the operator is based? What happens when the operator is based outside both countries (e.g., the glophone, where an American company issues an extended New York number to a user in Sri Lanka, who may be using it in Japan to call an American ex-pat friend in Argentina who normally lives in Chicago but has a New York phone number from Vonage)? What is the mechanism for protecting consumers in the event that a SIP proxy server located in a country outside the EU (let's say Russia for example) is shut down by the government/regulator? One Amsterdam-based lawyer enquired as to whether the country of origin treatment under the existing E-Commerce Directive would be sufficient to cover VoIP operators, in light of comments made by Analysys that services such as Skype might be more appropriately described as "goods" rather than "services"? The Commission was not forthcoming on this issue, though the chairman of Analysys remarked that in his view the situations were very similar.

Issue 2: Impact on SMP

UK super-mega regulator OFCOM chimed in to challenge an assumption made in the Analysys presentation with regards to the influence of VoIP on SMP designation. The example given in the presentation was the "Blast-me" premium service from Vonage, which forwards an incoming Vonage call to all numbers listed by the user, so as to never miss an important call. The principal author of the Analysys report stated that this service opens up the potential for the receiving party to determine which network receives termination revenue, and therefore may weaken the basis for designation of SMP for mobile operators in termination. Conversely, we might argue that in the European environment, the calling party is exposed to greater risk, because of the lack of transparency as to where the call is terminating, and therefore there are greater issues of consumer protection involved as well (in the US market the called party pays model makes this less relevant). We think the Analysys analyst, rather than suggesting an overhaul of the regulatory framework, was merely using this example to illustrate some of the discontinuities which regulators and operators will regularly encounter in convergent service offerings. The implication, as we read it, was that as such services gain scale, these discontinuities may indeed reach a level at which regulators can no longer afford not to reappraise the basis for regulation in certain defined markets. One issue which did not come up was the treatment of incumbent VoIP offerings. If we assume that BT and TeliaSonera's pre-emptive strikes are directional indicators for the incumbent sector as a whole, then we have questions over whether these products should be viewed as ancillary or niche products, or whether the incumbent's brand/marketing clout confers a certain influence which others do not possess. In other words, if incumbents are going to market these products to defend their positions, should they be compelled to offer them on a wholesale basis to competitors, as they must in much of the access and calls market?

Issue 3: Market definition

On the issue of market definition, the representative from TeliaSonera stated his view that the need to revisit existing relevant market definitions grows more urgent by the day, as an overly compartmentalized definition of the markets may serve as a disincentive to investment and competition. Analysys, though sympathetic to the view, commented that knocking down the existing definitions shortly after they have been introduced would do little to promote regulatory continuity (indeed we note that only half of EU member states have concluded relevant market reviews, which were to have been completed by 24th July 2003). Another attendee later questioned whether there was scope to impose a kind of open access obligation on mobile operators, given their position with regards to access and call origination within their own customer base (where calls to non-geographic numbers are frequently outside the calling plan). This may be the sort of issue which could become more of a flashpoint as 2.5 and 3G services continue to evolve. As we have written repeatedly in the past, relevant market definitions come under pressure and in some cases collapse within the IP environment. In the glophone example cited above, the transaction itself straddles mobile (because the users are physically away from the location associated with the number), local call origination (because the numbers making and receiving the call are nominally fixed line phones in New York City), domestic long-distance (because in fact the call is nominally being made from a New York number to a residence in Chicago) and international calling (both users are physically located in countries other than those associated with the numbers). Related to, but separate from this, are the externalities associated with taxation and universal service obligation. In this scenario, the governments of Sri Lanka, Japan, Argentina and Chicago are realizing zero revenue from the transaction, while arguably subsidizing New York on a number of different levels.

Issue 4: DIY

A European Commission member sitting in the audience stated that he felt the Analysys report had underestimated the potential for self-provisioning of services (for those who haven't read it, the report cites a do-it-yourself category of VoIP, in which users independently create a P2P session, but states that this sort of example may be limited to those with a high degree of technical expertise). He went on to pose the hypothetical situation in which a major software maker bundles a Skype-like application in its products - call us crazy but this sounds a lot like some of the speculation surrounding Microsoft's endgame with regards to the SIP functionality embedded within Windows XP. This is entirely consistent with our own views on the self-provisioning phenomenon, where what we see, both at the user, "service provider," and developer level is a steady and accelerating move towards greater independence in the development and provisioning of services. We have given some airtime recently to some emerging "darknet" applications (see EuroTelcorama No. 5 and EuroTelcoblog No. 27 for discussions of WINW and W.A.S.T.E.), where we see the technology barriers to self-provisioned communications networks potentially dropping rapidly. The Norwegian company Paradial, whom we are looking forward to visiting at CeBIT next week (Hall 6, stand H38), has a product called RealTunnel (http://www.realtunnel.com/), which enables the voice/video IM element of MSN Messenger to traverse corporate firewalls and network address translation (NAT), which would seem to offer the voice/video IM players some scope to improve their competitive positions relative to Skype, and to drive usage of the IM-to-voice/video click-though type described by BT at its BT Communicator launch last week. The service, which has received some favorable reviews in Computerworld, is currently free and the company is to introduce a public SIP service shortly. Even in the less glamorous arena of email, services like zoemail (www.zoemail.com) are testament to users' growing desire to define who they communicate with and on what terms. At the other end of the spectrum, the developers, we find phenomena like shtoom (http://sourceforge.net/projects/shtoom/), which is an emerging toolkit to enable developers to write SIP applications in a relatively straightforward manner using the Python language. We recently had a long conversation with the project coordinator in Australia, and he remarked that the voicemail function he was working on consisted of only about 50 lines of code!

Issue 5: Numbering

Numbering is a thorny and convoluted issue, and we remain none the wiser after yesterday's meeting. OFCOM, which was the only vocal national regulator present, claimed it is open to issuing geographic numbers in principle, though in certain cities in the UK, this might give rise to number shortages. The numbering plan could be changed to accomodate such a policy decision, but OFCOM claims to be wary of imposing additional costs on business in changing the numbering scheme yet again (residents of the UK will note the frequency with which we still see businesses, company stationery and vehicles displaying numbers from the old plan - 0171 and in some cases still 071, instead of 0207). Conversely, OFCOM claimed yesterday that some new VoIP players want the ability to offer non-geographic numbers in order to emphasize the "nomadic" nature of the service, though we think that some callers may be wary of non-geographic numbers due to limited transparency (this is particularly relevant in the case of calls from mobiles and in the "Blast me" scenario above). A representative from German regulator RegTP reported that it is currently in consultation over the allocation of non-geographic numbers - no mention was made of geographic number allocation. Tiscali listed regulatory uncertainty over geographic numbering first among the three big challenges it has encountered in introducing VoIP in Europe. The other two challenges cited are interrelated in our view - the inconsistent availability of wholesale line rental (WLR) and abuse of market dominance by incumbents. In the case of WLR, Tiscali states that the scale of its footprint is such that it can't gain adequate coverage solely through unbundling, and that ATM bitstream access has some technical shortcomings. On the abuse of market dominance issue, Tiscali's example was the bundling of calls and subscription (a key retention tool for the incumbents), though we expect that the issue of "naked DSL" (ADSL access with no PSTN subscription charge) may also become more controversial. The alternative carrier lobby is already very vocal on these issues, but we expect the Commission to come under increasing pressure to promote the separation of access and services in order to allow a more economically viable foothold for newcomers. Related to this is the issue of number portability, which one attendee pointed out had not been addressed by Analysys. We have seen Vonage customers porting numbers to the service in the US, but given the limited experience we have in the European scene so far, it is difficult to see how this will play out. Certainly, the bias so far seems to be towards non-geographic numbering, which would eliminate number portability as a marketing ploy for VoIP players, and the attitude towards emergency services expressed so far is also not promising in this regard. A Dutch consultant remarked that his company had undertaken research in the corporate market on behalf of OPTA, in which a significant number of companies indicated an interest in adopting a separate corporate numbering range and opting out of conventional national numbering entirely, which he believed raised the issue of how such numbers would be allocated and if there is consensus building around number auctioning.

Issue 6: Emergency services

Emergency services is always an issue to get the crowd going, and yesterday was no exception. TeliaSonera's representative spoke at length about the proliferation of false alarms and outright abuse that had arisen as a function of near-universal mobile penetration, and urged prudence in opening up the emergency services infrastructure to the inherent vulnerabilities of the public internet. Our impression was that his stance was that VoIP service providers should be prevented from offering emergency services, as seemed to be the implication of OFCOM's consultation paper on numbering from late February (http://www.ofcom.org.uk/consultations/current/vobs/vobs.pdf?a=87101). OFCOM stated yesterday that it sees hard-and-fast rules in this area as less feasible than a voluntary product labelling scheme on the part of operators. The Analysys analyst argued that applying the "duck" test (if a service appears to a consumer to be indistinguishable from ordinary telephony service, then it should be classified as such) might be overly narrow and impede competition. However, he also warned of the public outcry which would greet the first tragedy in which VoIP played a part, and the resulting backlash in the mainstream media ("Granny burns as regulators sit on the fence"). Conversely, in exempting "edge" operators (such as Vonage or Telio) from complying with emergency service obligations might set an unfortunate precedent for the long term, when players with SMP might also have moved entirely to such solutions. In such a scenario, where would the obligation for emergency services lie - with the access provider, with no one? At present, we think that the idea of barring operators from offering emergency services is inconsistent with the experience of the mobile market. Mobile handsets in Europe must be able to dial 999/112 even if outbound calls have been blocked by the operator, the keypad is locked or the SIM card removed. However, the ability of authorities to pinpoint the location of mobile callers is still sketchy at best, and mobile coverage itself is still far from perfect. Nevertheless, mobile networks have never been barred from offering emergency services on this basis, and it seems odd that we are hearing such a reactionary bias at such an early date in the VoIP story. Moreover, the penetration of DECT cordless phones in Europe often makes emergency calling from a fixed line a less-than-perfect proposition in the case of blackout or battery failure. The Vonage solution, which requires some active involvement and responsible behavior from the user (informing the company if the address associated with the number is going to change due to travel or relocation), is surely better in an emergency than nothing at all.


We think yesterday's event was a good impetus to further discussion and consideration of the complex issues around definition and regulation of IP services in Europe. We think the issues are suitably complex that both the Commission and the national regulators must tread lightly and prudently in order to avoid adverse outcomes for consumers, competition and existing carriers. Asked point blank whether the Commission was in "promotion mode" or merely trying to increase information flow, DG InfoSoc Chief Peter Scott commented that the majority of conversations he has with stakeholders are on the issue of implications and interpretations of the Framework. Thus in the short-term we think the Commission is working towards consensus building and consultation, though Mr. Scott went on to say that in the long term IP services might have the potential to bring "real competition" to Europe. From this we conclude that the Commission is broadly supportive of technical innovation in the longer term, tempered by the need for transparency in the interim. Between the short and long terms lies a lot of uncertainty, in our view, primarily at the national level. OFCOM may be in consultation mode, but our conversations with internet telephony service providers in the UK give us the impression that they believe numbering, consumer protection and emergency services issues are moving in a direction which is unhelpful. The relative lack of input in yesterday's session from other national regulators suggests to us that many face a steep learning curve in addition to the challenges of transposition to the New Regulatory Framework. One lawyer present yesterday asked how the Commission would deal with assymetrical definitions of publicly accessible telephony service (PATS) at national level (she asserted that some countries had omitted references to emergency services compatibility from their national regulations), and the response was that the Commission would work to ensure uniform transposition to the NRF. Unfortunately, this was greeted by laughter in the audience. Clearly there are other issues merely beyond the NRF, its application and the Commission's ability to impose order - foremost among these is the rate of technology change, which we would argue is already rendering parts of conventional regulatory definitions of limited use. We think that the pace of technology change is already outstripping that of institutional reform, and that by the time the official response has been codified, the market being regulated may bear little resemblance to the applications being used by consumers. More worryingly, when such a large group of qualified and intelligent people as we were with yesterday finds it so difficult to even roughly estimate the rate and extent of change coming, we are clearly sailing in uncharted waters, which have the potential to deliver some profound positive and negative surprises for many market participants. Much of the incumbent segment in Europe has taken a serious beating in the past few sessions, but yesterday only reinforced our long-held view that visibility is deteriorating rather than improving. We continue to maintain a [NEUTRAL] stance on the European incumbents.

No comments: