The dramatic growth of VoIP, together with the parallel expansion of broadband and wireless service, is causing permanent structural change in the voice service market. This structural change is leading to a dramatic decline in revenue from landline voice services in countries around the world, including the United States. That revenue loss is only going to accelerate from 2006 for the rest of the decade. In September 2005, News Corp. Chairman Rupert Murdoch argued that voice service will be nearly free in a few years. A few weeks later, eBay’s chief executive, Meg Whitman, publicly agreed. She claimed that in three to six years users can expect to make phone calls for free with no per-minute charges. In the view of Mr. Murdoch and Ms. Whitman, voice will be part of a package of IP services upon which carriers will make money through advertising or transaction fees. While these claims should be taken lightly, the trend is unmistakable: consumers will pay little or nothing for a large proportion of their voice services by 2010.
The key driver in the regulation of VoIP services is the perceived need to address the effects on the existing voice business. Specifically, it is all about the money. The numbers are staggering. Landline voice revenues in the United States were almost $229 billion in 2000; in 2004 they were only about $196 billion. This $33 billion decline in annual landline voice revenues in the past five years dwarfs the total revenues of many U.S. industries. Hollywood movie studios, for example, make less than $10 billion a year in grosses from U.S. movie theaters, while U.S. radio networks earned only about $20 billion in annual revenues in 2004. Thus, the decline in annual voice revenues is already larger than the combined 2004 revenues for the movie and radio industries’ main sources of income. Similar declines are forecast for other countries. The worst is yet to come: those revenues are inevitably going to shrink further and faster over the rest of this decade. Even analysts who disagree with the Murdoch–Whitman “voice will be free” position estimate that United States and European landline voice revenues may decline by as much as one-third or more in the next five years.
The U.S. experience is not unique, and it is unclear whether the United States leads other countries in the rate of revenue decline. What is clear is that the trend is being repeated throughout the world. A revenue decline of this magnitude in one industry is probably unprecedented in United States or global economic experience.
The challenge for incumbents is to manage this revenue decline while transitioning to a new broadband world. How can they slow the decline of their existing voice revenue stream, while they begin generating new broadband revenue streams? One tried and true way (and, in most countries, very cost effective) is to lobby legislators and regulatory agencies to impose regulatory obligations on new VoIP competitors.
Due to the strong governmental intent in slowing the cannibalization process, this task is made easier. In most countries, substantial government revenues are derived from fees and taxes on existing voice services. Voice service in most countries is one of the largest and most heavily taxed industries. For example, it is estimated that in the United States telecommunications companies and their customers pay “an average effective tax rate that is 250% higher than the tax rate for all other industries with the exception of electric utilities.” In some areas the taxes amount to more than 25% of the customer’s bill. Governments throughout the world have come to rely on the income deprived from these taxes to fund other projects. These include, for example, the Universal Service Fund (“USF”) in the United States and communications and other infrastructure buildout in less developed countries.
This convergence of interests explains why there is now so much activity with regard to VoIP regulation, both in the United States and elsewhere. Incumbents are fighting back and in many cases governments are helping them.
Wow, great blog and a lot of great information about VOIP regulations, keep up the great work!
Posted by: Abe Walker | March 22, 2006 at 05:13 PM