Voice Over IP – New Technology, New Challenges

January 1, 2005

For many years voice telephony has relied on the public switched telephone network (or PSTN) which works through the creation of a continuously open pathway over a system of interconnected circuits throughout the call duration (this is known as circuit switching). There is an alternative to circuit switching, known as packet switching, which has historically been used for data transmission since it involves the splitting of data into packets which are sent to their destination by a variety of routes. Packet switching has only recently been used for the transmission of voice since the separation and reassembly of the packets led to call quality problems but these problems have now largely been solved.

The improved quality of voice over IP services, combined with the lower cost of this form of transmission has meant that voice over IP (or VoIP) is becoming increasingly used both for business telephony and residential voice telephony. VoIP now presents a viable and attractive alternative to traditional PSTN based voice services but the development of this new form of telephony presents, along with commercial and technical benefits, interesting legal and regulatory challenges for both suppliers and customers.

Benefits for Businesses

Businesses can generate large cost savings by implementing a VoIP solution. These mainly come from the use of one infrastructure to carry both data and voice, the ability to deal with only one supplier for both voice and data traffic and more efficient running and maintenance of the network through the use of only one supplier.

VoIP also allows businesses greater functionality. For example, businesses can streamline their working environment by being able to link computer applications and communications technologies – this could lead to unified messaging through the integration of telephone, fax, e-mail and other applications. In addition, VoIP enables enhanced facilities such as video conferencing.

Probably the most significant commercial issue for a business looking to implement a VoIP solution is the potential cost of transferring to a VoIP system, given the already significant cost of existing separate IT and telecoms systems. There will also be migration issues associated with moving to a VoIP system. The business will have to consider whether all existing services will migrate without problematic disruption, what timescale will be required in order for that migration to be completed without disruption to its activities and whether existing suppliers will assist in that migration process.

Those are the commercial and practical issues. However, there are also legal issues that businesses will have to consider in contemplating a switch to a VoIP solution:

· if a switch to VoIP services involves a migration to a new supplier the business will have to examine the existing contract to establish whether the existing contract is capable of being terminated and whether it requires the existing provider to provide assistance in connection with the migration;

· VoIP services are an emerging technology and therefore the contract with the VoIP provider will have to deal with technology refresh and the fast pace of technological change;

· service quality and service levels will be key – although the quality and reliability of VoIP services is fast improving, service quality may be an issue and consequently the business will need to be sure that the contract provides service level guarantees that ensure that the services meet the needs of the business;

· the regulation of VoIP services is in its infancy (see below) and so the customer should make sure that the provider takes the risk of (and cost of) compliance with law and also regulatory change; and

· if switching to VoIP enables the switch to the use of one supplier and one infrastructure, the contract must ensure that a level of redundancy is built into the services and that disaster recovery plans are put in place by the service provider to ensure continuity of service in the event of an emergency.

Regulation of VoIP

VoIP presents a significant opportunity for regulators in the sense that it has the potential to open up the calls and access market thereby challenging the market positions of some of the dominant PSTN operators. Consequently, regulators have to be careful not to stifle the development of the VoIP market through the imposition of unworkable regulation. This objective, however, must be balanced against the risk of replacing one form of market power with another. Regulators are therefore facing an interesting challenge – how to regulate VoIP in a manner that is sympathetic with the fact that it is a nascent market whilst ensuring that there are proper safeguards to ensure consumer protection and effective competition.

The basis for the regulation of VoIP in the EU is to be found in the EU regulatory framework for the regulation of electronic communications, which came into effect in July 2003. The aim of this suite of directives was to deal with the increasing convergence of the telecommunications, media and information technology sectors. Accordingly the new regime deals with the regulation of ”Electronic Communications Networks” (or ECNs) and ”Electronic Communications Services” (or ECSs) in a technology neutral manner.

Most VoIP services are regulated since they fall within the definition of an “Electronic Communications Services” set out in the Framework Directive[1] which encompasses services:

· normally provided for remuneration; and

· that consist wholly or mainly in the conveyance of signals on Electronic Communications Networks.

Some VoIP offerings do not fall within the scope of this definition since they involve the provision of a product (such as a software program to be run on a personal computer) with no ongoing provision of a service and some VoIP offerings (such as peer to peer services) do not fall within the scope of this definition since they are not normally provided for remuneration. However, other publicly available VoIP offerings will fall within the definition and therefore within the scope of the regulatory regime and it is worth noting that, if the provider of the VoIP service also operates an electronic communications network, the operation of that network will also be regulated.

Whilst VoIP services are likely to be regulated there is no need for providers of VoIP services in the EU to hold a licence since the Authorisation Directive[2] establishes a system of general authorisations to be implemented by Member States so that those providing ECNs or ECSs (including providers of VoIP) may operate without the need for individual licences. Instead communications providers must operate within the scope of obligations set out in the general authorisation. Failure to comply with these obligations may lead to penalties and even suspension or withdrawal of the authorisation to provide an ECN or ECS. However, not all of the obligations apply to all communications providers, since specific conditions apply to communications providers that provide certain types of service. There are in fact three types of ECS and a provider of regulated VoIP services will be considered as providing one of these types of regulated service:

· a private ECS

· a public ECS

· a publicly available telephony system (or PATS).

Private ECS providers are subject only to a limited number of authorisation conditions. Those providing a public ECS are subject to more authorisation conditions as are, to a greater degree, providers of PATS. The important question for VoIP providers is which category they fall into and, in particular, whether they qualify as a PATS provider.

According to the Universal Service Directive,[3] the core elements of a PATS are:

· it is a service available to the public;

· it is used for originating and receiving national and international phone calls;

· it gives access to emergency services; and

· it operates through a number or numbers in a national or international telephone numbering plan.

However, this definition is capable of differing interpretations and this has led to some debate as to how EU Member States’ regulators should apply the definition of PATS. This in turn creates uncertainty for providers of VoIP services who could find themselves subject to differing levels of regulation throughout Europe. A narrow interpretation of the definition of PATS looks only at the components of the definition and in particular the reference to the provision of access to emergency services. Those providing access to the emergency services and fulfilling the other elements of the definition therefore fall within the scope of PATS regulation. However, this approach effectively allows operators to choose the level of regulation applicable to them and in particular operates as a disincentive to provide access to emergency services. Accordingly, more appropriate, some argue, is a broad interpretation which looks not at the components of the definition of PATS but rather whether the VoIP services are a direct competitor to (and a substitute for) normal PSTN services. This approach has the advantage of not allowing operators to choose the level of regulation applicable to them but could result in VoIP providers being subjected to onerous levels of regulation. It appears that the EU Commission favours the narrow interpretation but the Commission is consulting on the regulation of VoIP and we can expect further guidance shortly.

The UK Position

Ofcom regards only those VoIP providers that provide access to emergency services as providing a PATS service. Ofcom does acknowledge that, since it is only PATS providers that are obliged to provide access to emergency services, this approach means that VoIP providers could provide services that look and feel like a traditional PSTN service without having to provide access to emergency services. Accordingly, Ofcom is encouraging VoIP providers choosing not to provide access to emergency services to take steps to inform users of the service (which includes not only the subscriber but also other potential users) that emergency services are not available.

However, a scenario of voice telephony providers not providing access to the emergency services clearly does not serve the public good. So, in a recent statement on VoIP services,[4] Ofcom has taken steps to encourage VoIP service providers to provide access to emergency services even if the access to the emergency services may not necessarily be uninterrupted and even if the provider is unable to provide caller location data to the emergency services (as is required by PATS regulation). Ofcom has taken the view that it would be better for VoIP providers to provide limited access to the emergency services than none at all. Accordingly, Ofcom will forebear from enforcing all elements of PATS regulation against providers of VoIP services that provide access to emergency services and thereby fall within the definition of PATS. However, established providers of voice telephony will not be allowed to avoid full compliance with PATS regulation.

Another important issue connected with VoIP in the UK is numbering. Ofcom has consulted on the numbering arrangements that may be applicable to VoIP[5] and in particular has addressed the issue of whether a specific number range should be applied to VoIP services or whether ordinary geographic numbers may be used for VoIP services. Ofcom has concluded that VoIP providers should be able to use geographic numbers (reversing its preliminary conclusion in its consultation paper) and, in addition, Ofcom has allocated numbers in the “056” number range for use by VoIP service providers. However, Ofcom has acknowledged that it cannot allocate a number range by reference to the technology used to provide the service. The 056 number range has been made available to providers of “location independent electronic communications services” which could have a wider application than VoIP services since they are defined as being services where:

· the numbering plan adopted by the service provider has no geographic significance;

· the location of the customer’s apparatus identified by a given telephone number at the time of use is not necessarily permanently associated with a particular network termination point;

· number translation to a geographic number is not involved; and

· the service is not a mobile service.


Everyone involved in the VoIP arena faces an interesting time. Businesses have the opportunity to benefit from a technology that can bring significant business benefits but face the challenge of ensuring that a switch to VoIP technology does not lead to increased legal and commercial risk. Service providers have the opportunity to challenge incumbent and established voice telephony operators but face a slightly uncertain regulatory environment. Hopefully the EU Commission will provide regulatory certainty in the near future.

Alexander Brown is a Senior Lawyer at Simmons & Simmons: alexander.brown@simmons-simmons.com.

[1] Directive 2002/21/EC.

[2] Directive 2002/20/EC.

[3] Directive 2002/22/EC.

[4] Ofcom Consultation: New Voice Services – a consultation and interim guidance (06 September 2004) (www.ofcom.org.uk/consultations/current/new_voice/).

[5] Ofcom Statement on numbering arrangement for new voice services (06 September 2004)