The Federal Communications Commission yesterday unanimously voted that all VoIP services that connect to the traditional telephone network must pay into the Universal Service Fund just like regular phone and cable service providers.
The USF is a large pool of funds, currently totaling about $7.3bn, collected by federal regulators from phone and cable companies that is used to subsidize phone service in low-income and remote areas, as well as some education and library facilities.
DSL, regular phone and wireless services have been forced to pay a fixed portion of earnings into the phone, but VoIP providers that connect VoIP calls to traditional phone networks have not been required to pay -- until now.
Vonage Holdings Corp, the largest pure-play VoIP provider in the country, said yesterday that the new USF tax would result in a "slightly higher customer bill."
US VoIP industry advocacy group VON Coalition predicted the new fee would add about $1.77 to a typical $25 a month phone bill.
Just how much more consumers will pay depends to some degree on the contribution method VoIP providers chooses.
The FCC's order is to either contribute a "safe harbor" rate, which would be calculated according to a fixed assumption that 64.9% of a VoIP provider's total revenue is driven by long-distance calling, or a more complicated method.
The latter would be based on a "traffic study" that would determine what percentage of total revenue long-distance calling accounts for. If a VoIP provider discovers that less than 64.9% of its revenues are from long-distance calls, then the fee to consumers likely would be lower.
"Vonage is assessing which method of contribution would be most beneficial for its customers," said Holmdel, New Jersey-based Vonage, in a statement.
The company, which recently went public, also pointed out that the US Treasury recently waived the Federal Excise Tax for VoIP service "to the benefit of the customers, and now we must begin to collect USF tax, balancing the scales," said Vonage chief executive Mike Snyder.
What's more, the new USF fee may actually benefit VoIP providers, according to Snyder.
"Now that VoIP customers will be contributing directly to the fund, we hope as a result of this interim rule, VoIP companies will now be able to utilize universal service funds enabling Vonage and the industry as a whole to bring new technologies like ours to rural America," he said.
But Rich Tehrani, president of VoIP industry publisher TMC, saw the potential effect on Vonage in a different light.
"I expect Vonage to be hit hard by this news as Wall Street seems to be looking for reasons to punish Vonage. This will likely be another one," he said.
Rich Kotch, chief executive of US competitive local exchange carrier RNK Telecom agreed.
"[Vonage has] the most to lose and their customer market lead will put the most pressure on them because of the large number of customers they will have to either raise prices for or lose even more money per subscriber," Kotch said.
The US Telecom Association yesterday said, in a statement, that it applauded the ruling for ensuring all voice service providers were treated equal.
Greg Welch, chief executive of GlobalTouch Telecom said the ruling was no great surprise.
"As far as VoIP providers having to pay into the USF, it's like the old Groucho Marx joke about not wanting to be a member of a club that would have him as a member in reverse This decision points to the fact that VoIP is being invited to join the club by going mainstream," Welch said.
Kotch agreed the ruling legitimized the VoIP as an industry "in the eyes of the FCC."
Kotch also said the ruling puts pressure on every VoIP business plan that is aiming to compete with Vonage but may not have the funds to sustain the fight.
"Not to mention that it raises the price of VoIP and puts pressure on VoIP carriers to change their mantra of 'half price phone service,'" Kotch added.
The only potential downside of the ruling, according to Welch, is that it may be premature.
"These fees do siphon capital away from continued VoIP R&D at a critical stage in our industry's evolution," he said.
TMC's Tehrani said typical VoIP providers had now lost a price advantage over traditional phone services.
"This ruling may, however, be transparent to customers who only see USF charges on their phone bills, not on the plans they choose," Tehrani said. "This ruling may have little change on actual adoption rates by VoIP customers."
Peer-to-peer VoIP providers, such as Skype, will remain exempt from USF contributions, ruled the FCC.
"The biggest beneficiary of this ruling will be free calling services like Skype," said Rich Tehrani, president of VoIP industry publishing house TMC.
The FCC also raised the USF tax rate for US cell phone operators, from 28.5% to 37.1%.
