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While more telecoms and customers are flocking to Internet telephony, the regulatory framework for this burgeoning form of phone service remains largely unbuilt. But developments in Washington recently have removed some of the uncertainty about how to govern VoIP, providing reassuring news to upstart Internet telephony companies and the venture capital investors who fund them. This month, Congress extended the ban on Internet taxes for another four years. Meanwhile, the Federal Communications Commission ruled that Washington, and not state public utility agencies, will regulate VoIP services provided by Vonage Holdings Corp. and similar offerings by other companies. “We’re happy,” says Tristen Langley, an analyst at Draper Fisher Jurvetson. The Menlo Park, Calif., venture capital firm has invested in Luxembourg-based VoIP provider Skype Technologies SA and has money in companies deploying related technologies, such as video telephony company Santa Cruz Networks and Pronto Networks Inc. of Pleasanton, Calif. Pronto is a WiFi technology company that has voice applications. “We are definitely taking meetings with companies innovating in this area,” Langley added. Though the government’s moves were widely anticipated, Langley and other VCs note that having them in place is an important step. Some states — Minnesota in particular — had taken aggressive approaches to Internet telephony regulation. Given leeway from Washington, every state public utility commission could have crafted its own VoIP rules. “It was time for the FCC to rule on this petition and end state jockeying on regulation of VoIP providers,” said Jason Talley, the CEO of wholesale VoIP service provider Nuvio Corp. “If you’re putting millions of dollars into a company, that’s a threat you have to look at and take seriously,” he added. Nuvio closed an undisclosed round of funding before the FCC’s Nov. 9 decision, and Talley suggested that the ruling would help companies tap the financial markets. Gerd Goette of Siemens Venture Capital GmbH in Munich echoed the sentiments from across the Atlantic. “What we are seeing now, from an investor’s point of view, is that more and more VCs feel comfortable,” Goette said. “Some of our companies had unsolicited offers from VCs knocking on the door,” he added. “Rather than having to chase money, some people came to the table and offered them money, which is a great feeling.” Just over a year ago, for example, Siemens led a $4 million follow-on round of investment in Kagoor Networks, a San Mateo, Calif., company that develops software to ensure that VoIP calls run smoothly and securely. The company pocketed another round in September when Accel Partners and Concord Ventures invested $9 million. In addition to the tax ban and Vonage ruling, Goette says that an October decision from the FCC to free the Bells from sharing fiber built within 500 feet of customers has also helped, by spurring investment in new networks and technology. “That will release a lot of capex spending that so far has been held back,” said Goette. Large, well-funded companies such as AT&T Corp. and cable service providers are also staking out their claim in the Internet telephony arena, ensuring a market for VoIP equipment and technology. There are still unanswered questions about how the government will regulate this bustling new market. For instance, the FCC has not ruled whether it will fall in the realm of information services, which are largely unfettered, or telecommunications services, which face substantial regulation. That decision will have broad implications for VoIP companies. “Everything is still on the table,” said Dianne Northfield, Yankee Group program manager for global regulatory research, explaining that the FCC will still have to establish rules on matters ranging from access charges paid to other carriers to 911 policies. “All they have said is services such as Vonage is interstate in nature.” FCC Commissioner Michael Copps emphasized at the Nov. 9 hearing that much work remains to be done, saying that “difficult and urgent” regulatory questions remain. “We need a framework to explain the consequences for homeland security, public safety and 911,” he said. “We need a framework for consumer protection. We need a framework to address intercarrier compensation, state and federal universal services, and the impact on rural America.” Still startups and investors seem more at ease knowingone set of rules will evolve, instead of 50 reflecting the quirks of just as many locales. “Each state has its own whims and its own personality,” Langley said, “as we saw in this last election.” Aside from creating a puzzling regulatory environment, empowering each state would have forced heavy legal costs for VoIP companies. “That would have been disastrous, particularly for an early-stage company that a venture capitalist might fund,” said Craig Walker, CEO of Milpitas, Calif.-based VoIP company Dialpad Communications Inc., which is not seeking VC funds. “They don’t want their money to pay for a bunch of lawyers, they want it to pay for a bunch of engineers.” Copyright �2004 TDD, LLC. All rights reserved.

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