Late last month, the government of Panama took the unusual step of banning IP telephony providers from routing voice traffic over IP-based networks, including the Internet.

Strange move, eh? Well, coincidentally enough, the country appears to have one dominant international incumbent voice provider: Cable & Wireless (NYSE: CWP). For C&W, whose business has been suffering in other parts of the globe, the ban on voice-over-IP technology couldn't be more timely (see C&W Preparing to Sell US Network?).

This will likely whip the conspiracy theorists into a lather. VOIP technology has become a popular way to cheaply route voice calls over the Internet infrastructure, thus avoiding much of the regulation and tariffs associated with incumbent voice providers. The action in Panama raises an interesting question: Are there other countries where a VOIP ban could happen, perhaps benefiting a dominant incumbent voice player?

So far, Panama looks to be the first country to impose an all-out ban on VOIP, but in other countries the incumbents feeling threatened by the new technology have been pushing for governments to limit its use. Governments in countries including South Africa and Yugoslavia are reportedly considering following in Panama’s footsteps, and several Central European countries allow VOIP only for lower-quality services.

But observers say that most countries are moving away from regulations -- not towards them. “This runs contrary to global trends,” Frost & Sullivan analyst Elka Popova says. “The dominant trend is towards deregulation.”

In the U.S., where the debates over other regulatory issues in the telecom space rage on, regulation of VOIP is not likely to happen any time soon (see Fed Reg Debate Heats Up). “The Federal Communications Commission (FCC) currently has no plans and does not have a proceeding open looking at regulating voice over IP,” according to an FCC spokesman.

Most industry analysts seem to think that Panama’s attempts at halting IP telephony will prove futile. “The traditional models are no longer valid,” says Frost & Sullivan analyst Jon Arnold. “You can’t think of [VOIP] as voice anymore.”

While Arnold says he can understand why incumbent players in small countries like Panama might feel threatened by an invasion of “first-world technology,” he says a ban isn't the right thing to do. “The AT&Ts of this world have a lot to lose, but also a lot to win if they do it right,” he says.

IP telephony is growing strong. According to a TeleGeography Inc.report out this month, IP accounts for approximately 10 percent of the global voice market in 2002.

C&W argues that unlicensed providers took advantage of Panama's liberalization of wireless and data services last year, bypassing the traditional voice market. Peter Eustace, the head of media relations at C&W, says that IP telephony is clearly not a data service: “The effect of it is that it is a voice service."

C&W says it welcomes competition on voice services in Panama, but only from legitimate providers. "Competition begins on a fair and level playing-field," Eustace says. "It’s important that everybody play by the rules… We are supportive of liberalization… and the regulators efforts to achieve fair competition.”

The VOIP ban also poses some interesting technical challenges -- and some question whether it's enforceable.

The Panamanian government has implemented a long-term ban on 24 separate User Datagram Protocol (UDP) ports. Most of these ports are commonly used for VOIP, but some other ports were included in the government’s decree as well.

ISPs in the country have been required to block the ports in their firewalls or in their main or border routers that connect with other autonomous systems. But Internet standards dictate that routers not look at anything besides the IP header, so in theory they can't actually tell if they are carrying voice or not.

“It’s practically impossible to block,” says Andrew Odlyzko, the head of the Digital Technology Center at the University of Minnesota. “You’d really have to destroy the Internet… If you’re [encrypting the traffic], how would they know if it's voice or data?”

“I’m not sure how they’re technically accomplishing this,” Frost & Sullivan's Popova says. “I think that carriers and ISPs in general have a variety of ways of bypassing regulations.”

Odlyzko says that there is no way to regulate private use of VOIP, or small providers. Instead, he says, he thinks that the law will be used to crack down on large commercial carriers. “They may be very successful at regulating [those carriers] over the next couple of years,” he says.

Dialpad and Net2Phone are reportedly among the service providers that have seen their services disrupted in Panama since the ban was imposed two weeks ago.

— Eugénie Larson, Reporter, Light Reading
www.lightreading.com