Digital Democracy - Fall 2003
23 September 2003

Week 3:

Telcos vs. ISPs: The VoIP Conundrum

Andrew McLaughlin & Ethan Zuckerman

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Scenario Briefing

THE SITUATION

Welcome to Berkmania, known worldwide for its sandy beaches, lovely rivers, and noisy politics! Berkmania is a developing country with approximately 30 million people, a third of whom live in or around the capital city, and a per capita GDP of US $500/year.

Last week, the newspapers were full of headlines reporting the arrest and overnight detention of the CEOs of all ten Berkmani Internet service providers (ISPs). The charge: Providing telecommunications services without a license. Specifically, the ISP CEOs were charged with violating the national telecommunications law by allowing customers to make voice calls over their Internet connections. The relevant provision of the Berkmani Telecommunications Act states:

According to the national police, the criminal complaint was filed by the Ministry of Infrastructure, which owns 40% of Berkmani Telecom (BT).

At the time of the arrests, each of the ten Berkmani ISPs was, in fact, offering customers some sort of voice-over-Internet-protocol (VOIP) service. VOIP allows users to talk to each other using Internet connections - without having to use the traditional telephone system. A VOIP call to the United States typically costs $0.10/minute, compared to the $1.00/minute charged by BT.

THE PLAYERS

Berkmani Telecom. Berkmani Telecom (BT) is the national telecom company. BT consists of three divisions:

Formerly a 100% state-owned company, BT was partially privatized one year ago. The government's privatization called for 40% of the shares to be offered to a foreign telecom investor, and 20% of the shares to be offered on a regional stock exchange. At present, BT is owned by:

As part of the privatization deal, SBC was also awarded the management contract for BT. When it installed its management team last year, SBC announced that BT would move aggressively to become profitable by reducing costs, cutting losses, expanding coverage, improving services, and "cracking down on illegal abuse of the national telecommunications system."

Berkmani Internet Service Providers Association (BISPA). BISPA is the membership association for Berkmania's ISPs. Its ten members include all the competitive ISPs except BT Internet, which has declined several invitations to join. Berkmania's market for Internet services is highly competitive, with tight margins and low costs. BISPA encourages cooperation among the competing ISPs on issues of common concern, and operates a neutral Internet exchange point that allows the interconnected member ISPs to exchange traffic with each other directly, rather than having to send it all via expensive international satellite connections. BISPA also lobbies and negotiates on behalf of its members. For example, BISPA has been trying to open up BT's monopoly over the connection to a nearby underwater fiber cable; because BT has not allowed the ISPs to get access to the fiber cable, all BISPA members are forced to use satellite links for all Internet traffic inbound from and outbound to the global Internet.

Communications Regulatory Commission (CRC). The CRC is two years old, and was created as part of the BT privatization process. Under the Telecommunications Act, the CRC is defined as an independent regulatory body, with jurisdiction over all communications licenses and regulations. As such, the CRC is responsible for the licensing of telcos, wireless providers, and ISPs; the management of the radio spectrum; and the setting of interconnection rates.

The CRC operates the Berkmani Universal Service Trust (BUST), which collects a $0.02/minute fee on all telephone calls and uses it to subsidize wireline telephone connectivity for remote rural areas and poor urban neighborhoods. The BUST obligation is written into the licenses for BT and its two mobile telephone competitors.

In recent months, there has been a bit of tension between the CRC and the Minister of Infrastructure over the meaning of "independent." The Ministry has taken the position that the CRC can operate independent of the Ministry, but that all CRC decisions must be given final approval by the Minister; the CRC has taken the position that its decisions do not need Ministry approval. Two of the commissioners of the CRC are appointed by the Minister of Infrastructure, and the third is appointed by the Prime Minister. The CRC's funding is provided through the Ministry of Infrastructure. The Prime Minister has not taken a position, but directed the Ministry and CRC to work with each other in a reasonable manner.

THE NEGOTIATION

The 1-day arrest of the ten ISP CEOs last week provoked an intense public debate in the newspapers, on the radio, and on local websites.

Many argued that the ISPs were being unfairly persecuted simply for competing with BT, and for trying to offer the kinds of advanced communications services that are readily available in developed countries. Others countered that the ISPs were cheating the system and avoiding the obligation to contribute to the Universal Service Trust by using their Internet infrastructure to offer unregulated voice services.

Some commentators worried that if the ISPs are allowed to offer voice services, their prices will be so low that BT - with its aging copper wire infrastructure - will be unable to compete and will collapse, leaving the country without a national telecom company. (While BT has established a connection to a nearby submarine fiber cable, all BT domestic infrastructure is copper wire, or fixed terrestrial microwave.) Other commentators worried about the consequences for Berkmania if its citizens are unable to take advantage of the latest VOIP technology. Still others pointed out that BT generates a significant amount of hard foreign currency for the country from international call settlement regime, and that every VOIP call translates into a loss of some of that revenue. (Due in part to the large worldwide Berkmani diaspora, there are many more international telephone calls going into Berkmania than going out; therefore, BT is a significant net recipient of revenues from international telephone calls.)

In view of the confusion and uncertainty around VOIP, the Prime Minister has requested that the CEO of BT, the Executive Director of BISPA, and the Chair of the CRC meet face-to-face to attempt to negotiate a resolution. In particular, she has asked for the three parties to negotiate new legislation that would meet the needs of all. She has asked that the parties do their best to reach a compromise, and then report to her on the results.

Today is the day of the three-way meeting; the whole nation is watching closely.