Introduction:

Thanks Kathy. It's normal practice for we government types to start our talks with a disclaimer that we're not speaking officially for our agencies. But in this case I have to highlight that familiar disclaimer in bold face -- not only because the FCC has not yet officially spoken on this issue, but also because I'll soon be working with four out of five new commissioners, and far be it from me to prejudge their views in this uncharted territory.

But I nevertheless appreciate the opportunity to focus on issues relating to the international development of internet telephony because I think this is possibly the area of greatest growth potential for voice over the internet.

Obviously international telephone calls are way overpriced. Here in the United States a domestic long distance call averages 13 cents/minute; an average international call from the United States to overseas is priced at 88 cents. This same story is much worse in other countries, where international calling prices are dramatically higher than here.

The advantage of internet telephony is that it will push the price consumers pay for calls much nearer to the actual cost of international calling -- and you can bet this is a lot closer to 13 cents than to 88 cents.

So we at the FCC enthusiastically welcome the arrival of internet telephony on the scene, and hope it will over time provide price competition for traditional, high-priced international telephone service.

Unfortunately, it's apparent that not all foreign regulators feel the same way. But we're working on bringing them around.

Background:

We've all watched Internet telephony evolve at an astounding speed: going from niche markets (computer-computer since 1994, computer-phone since 1996) to the beginnings of mass-marketed services (phone-phone, video conferencing since 1997). And it's not just phone but fax service also, especially to Asia.

In this new form it has significant potential to put pressure on accounting rates and excessive profits of international telephony providers, primarily because the internet's flat rate, non-distance sensitive pricing bypasses the settlements system.

Internationally, there remain frustrating obstacles to internet becoming a substitute for the circuit switched network: including network congestion, delays of packet delivery, poor quality and reliability.

This presents a real opportunity and challenge for the FCC and other regulators. I hope we can foster market-oriented policies which will encourage the global development of alternative competitive platforms -- like internet telephony -- for delivery of traditional communications services, while assuring the reliability and quality of the telecom network.

As Chairman Hundt recently observed, "Washington can't make the Internet succeed. But it can be an obstacle to its success -- through unwise action and unwise inaction."

Foreign regulation of internet telephony:

There's a lot going on in terms of unwise regulatory action overseas on the internet telephony front.

Threats to development of internet telephony

Some European countries have already banned internet telephony (e.g., Czech Republic (total ban); Hungary (can't connect internet to public switched network); Iceland (only its telecoms authority can offer voice services); and Portugal (voice services may not be permitted on internet).

Several countries are now contemplating treatment of Internet voice applications under the same rules as traditional long-distance service. The ACTA petition before the FCC seeks a similar result domestically.

Some ISPs have complained that foreign governments are imposing burdensome licensing restrictions as a condition of operation. For example, the Telecommunication Authority of Singapore announced that it would require ISPs to have a "public basic telecoms license" if they want to provide phone-phone service.

ISPs that are providing international service may not be able to access the necessary elements of the Internet backbone in foreign countries.

Some countries have restricted the connection of computer devices to the public network. Even where competition in telecommunications has been introduced, many "type approval" regimes have operated to slow the ability of consumers to keep pace with rapid technological development.

Pro-competitive developments

The EU has tentatively concluded that internet telephony is not "basic telephony". But, its last report on voice over the internet failed to recognize that phone-to-phone internet telephony exists today, and implied that such services may be regulated like traditional services.

Some foreign carriers have begun offering or announced that they will offer internet telephony services (e.g., Telecom Finland, KDD, DT (T-NetCall trial)).

Cost and Pricing Issues:

There are a couple of key regulatory policy issues I see evolving as international internet telephony emerges as a viable commercial offering. First and foremost, are issues relating to what internet telephony may do to the costs and prices of international telephone calls -- and what foreign regulators and telcos may do in response.

As some of you may know, traditional international calls are carried under a convention known as the accounting rate or settlements system.

This simply means that the originating carrier pays the terminating carriers a negotiated settlement rate to terminate the call. It's conceptually similar to the access charges which long distance carriers pay local carriers to complete a call here in the United States.

The problem is that these international settlement rates are absurdly high -- far higher than our domestic access charges. And U.S. carriers pay much more of these above-cost settlement rates than any other carriers internationally because Americans originate many more calls than we terminate.

The fact that these settlement rates are so far above cost is in large part responsible for traditional international calls being so expensive.

The FCC is taking aggressive action to get these settlement rates down over time, including an order we put out just last month setting "benchmark" settlement rates that would be phased in over time.

We have also adopted a policy which encourages U.S. carriers to negotiate "flexible" settlement arrangements with their foreign correspondent carriers which either bypass the settlements system altogether, or cut the prices for call termination from the current high levels.

We expect these measures will have a dramatic effect over time, particularly as the implementation of last February's WTO Basic Telecom Agreement introduces competition starting next January.

But I fear the settlements system and the familiar cartel will continue to be the prevailing mode for delivery of international telephony for some years to come.

In this context, the advantage of internet telephony is that it puts healthy pressure on inflated rate structures, especially international settlement rates, because it bypasses the settlements system.

We at the FCC are so supportive of internet telephony in part because we hope it will help to break down the artificially high cost and pricing scheme that has helped to keep international calling prices so expensive for consumers.

But it's not clear how the underlying cost structure for international internet will evolve. For example, there may have to be changes in the cost allocation and pricing arrangements among backbone and service providers for international traffic. We've heard complaints from foreign carriers that costs of international leased private lines used for internet traffic are not fairly allocated (US pays nothing while foreign end picks up entire bill).

Universal Service:

And then there's the difficult issue which will surely arise internationally: how to factor internet telephony into universal service obligations. If a large portion of international traffic moves off the circuit-switched network, and/or the volume of Internet telephone traffic grows to a certain level, should ISPs be required to contribute to universal service in each country, and what would that do to the service's underlying costs?

Congestion:

Congestion attributable to internet traffic will also be a challenging problem internationally because of the coordination difficulties in ensuring adequate capacity and interoperability when communicating between countries.

ISPs and carriers will have to address congestion of the internet backbones and switching points. This congestion can compromise the quality of internet telephony service (with congestion there is delay of delivery of packets, echo and deterioration in quality and reliability in comparison to circuit-switched call) and therefore reduces its acceptability as a viable competitor to circuit-switched network.

In the last year we have seen an increasing concern with congestion of international transport, especially transoceanic submarine cables, the transmission medium of choice. Internet usage is gobbling up large chunks of submarine cable capacity, way beyond carriers' projections.

This has resulted in a temporary shortage of transatlantic capacity in particular, which has not yet affected operations, but has limited capacity available for new entrants.

Hopefully this will be relieved in the next year by new cables coming on line and new multiplexing techniques creating more capacity, but it is a problem for the moment.

Network reliability:

As the pressure on the Internet backbone increases and as Internet becomes relied upon more for 'serious' traffic, industry and regulators must together consider how best to protect against shutdowns of the system.

In light of the potential for problems in one country to spill over to others, we at the FCC and other foreign regulators should work with industry in the lead to proactively ensure the reliability of the internet and the public switched network.

Maybe there should there be a global Internet reliability and interoperability council, led by the private sector but with public sector involvement.

Impact on future regulation

If internet telephony becomes a real substitute for the provision of traditional international calls, the big question will be whether regulators should treat VON like traditional voice, or change the regulation of traditional voice to treat it more like the way we DON'T regulate the internet today.

We and foreign regulators will have to decide which approach is best for our consumers in terms of price and choice of service.

I, along with my colleagues at the FCC and throughout the U.S. Government, will continue to spend a lot of time in the next year or two talking with our foreign counterparts to try to influence their regulatory approach to internet telephony.

We will do our best to develop and promote a market-oriented and deregulatory approach to emerging internet telephony services, and I look forward to working with all of you to help us achieve that goal.