The Next Wave of Telecommunication Bankruptcies: VOIP Providers
by Evan D. Smiley; Weiland, Golden, Smiley, Wang Ekvall & Strok LLP; Costa Mesa, Calif.
Small-to-medium-sized providers of voice services utilizing the Internet Protocol (“VOIP”) appear to be at risk of becoming the next wave of bankruptcy filings in the telecommunications industry. The telecommunications industry drastically changed when Congress passed the Telecommunications Act of 1996. This legislation resulted in the creation of competitive local exchange carriers (“CLEC”). Over time, the CLECs painfully learned that customer demand could not keep up with the enormous infrastructure cost while competing with the baby bells for local service.
VOIP service is typically much less expensive than traditional land-based telephone services. Large companies like 3M and IBM are rapidly transitioning their voice traffic to a VOIP platform. However, the equipment cost to business users of a VOIP platform can be substantial. Growth in consumer VOIP demand is outpacing business demand. Consumers, who are willing to settle for lower quality phone connections in exchange for inexpensive service, are able to plug into their personal computers with inexpensive terminal adaptors. As a result, the VOIP industry continues to see exponential growth in revenue. Moreover, the quality, security and technology of VOIP continues to improve. While this may sound like a rosy outlook for VOIP providers, the infrastructure costs of a VOIP provider can be enormous and disabling. Similar to many CLEC’s, VOIP providers face staggering start-up costs and debt loads before they are able to connect their first customer.
Although the price of telephone services continues to decline because of the migration to a VOIP platform, several of the baby bells and AT&T now offer their own VOIP services. Similar to the problems experienced by CLECs, this has created intense competition in an industry hungry for new customers.
The largely unregulated VOIP industry is now also under intense scrutiny from regulators such as the FCC. VOIP providers have argued that its services are legally different than land-based telephone services, thereby avoiding many costs. Regulators recently ruled that VOIP providers must pay access charges for the use of local carrier facilities to originate and terminate calls. If these access charges are made retroactive, this could force the immediate insolvency of many small-to-mid-size VOIP providers. The FCC also recently ordered VOIP providers to provide 911 service to its customers adding yet additional costs.
In summary, because of competition, start-up costs, and increasing regulation, small to mid-size VOIP providers may be the next wave of telecommunications-related bankruptcies.