Where the NTC VoIP Guidelines will most likely fail

So, I’ve taken the time to check out the NTC’s draft rules on vocie over IP (VoIP) and it’s now clear to me that even if the telcos don’t sue in court to delay its implementation, they have other levers under the draft rules.

The draft rules declare VoIP as being a value-added service (VAS) - a term that is indirectly defined in the Public Telecoms Policy Act as an “enchanced service” not usually offered by telcos. Since that law also permits VAS providers to operate without a franchise, this means that VoIP providers need only register with the NTC. Excellent.

Here’s the rub: Section 4 of the draft rules requires the VAS provider to enter into an agreement with the telcos before offering VoIP. The agreement is intended to cover VoIP access and interconnection charges. Interestingly enough, Section 4 harks back to Exec. Order No. 59 which mandated interconnection between the Telcos and we remember what happened there. For all of EO 59’s language about mandated interconnection, the fact of the matter is that NTC did not vigorously require interconnection. I recall the Smart-Globe interconnection problem that took months (if not years) to resolve and then only with the intervention of the President. Even in cases where interconnection was established (say between PLDT and BayanTel), the service was inadequate.

More importantly, Section 4 means the telcos can simply set terms and conditions for VoIP VAS providers and if the latter don’t want to accept them, then they can’t offer the service even if those terms and conditions are unreasonable. Note that Section 4 allows the NTC to require interconnection but only if the telcos “refuse” to negotiate. This provides enough leeway that if the telcos negotiate in bad faith or without any sense of urgency or even discriminatorily (in favor of their own subsidiaries and allies), the NTC can’t require interconnection.

I’m not even sure if the Section 4 interconnection agreement is necessary at all. The law for VAS providers merely states that they must secure telecom facilities from the telcos. Well, there are existing VAS providers with those facilities and agreements, that are already in place. For example, MozCom has already procured the bandwidth necessary to offer VoIP to the public. There’s nothing in the law that says MozCom must pay more to the telcos. Section 4 in effect allows the telcos to charge for something that they’re already supplying to the VAS providers. What’s the rationale for the interconnection charges except to offset any potential revenue loss the telcos might suffer as a result of VoIP liberalization?  If the telcos are efficient at passing losses from their international gateway to VoIP providers, then the economic benefit of VoIP will not be felt by the general public.

Section 4 is in danger of ruining the lofty ideals of the Draft Rules because it can be used by the telcos to impose its will on the market through contractual arrangements. If VoIP becomes popular and threatens their long distance income, the telcos can always raise the rates on the VoIP providers. Telcos can also choose who can enter the market simply by varying terms and conditions across providers. This is the kind of market failure that the NTC is tasked to solve — not create.

The NTC should do more to protect the VoIP providers. They can assist in the negotiation of interconnection agreements by requiring the telcos to supply the government agency with cost structures and other relevant information. This way, the VoIP providers are not negotiating in the dark.  The NTC can also negotiate in behalf of the VoIP providers for a standard rate and fair terms and conditions. For example, the telcos may want to keep their options open by entering only into one year agreements which allows them to review the commercial terms and make them more advantageous to them (e.g., charging higher rates simply because they want to). Economists call this rent-seeking — again, something that the NTC is mandated to eliminate in the local telecoms market.

I’m afraid that if the NTC passes the draft rules as is, then the benefits of VoIP won’t trickle down efficiently to the consumer because the telcos will extract more value higher up the chain through rent-seeking.

The public hearing on the rules is set on May 3, 2005. If you care about a free and open VoIP market, be there and let yourself be heard.