More Bad News For Internet Telephony Providers

Internet telephony providers are in for some more rough times. The IRS and Department of Treasury helped traditional carriers cut their costs yesterday by eliminating the three percent Federal Excise Tax (FET) on long-distance telecoms. They also chose not to impose the tax on other services, such as IP telephony and wireless. Many IP telephony providers, however, have never included FET in their charges anyway. This follows the FCC's decision to expand the Universal Service Fund (USF) to include ???interconnected VoIP" carriers. The USF was funded from the telecommunication service revenue in order to subsidize certain services, such as telecommunications access in rural areas and Internet access in schools and libraries.

The result of those two moves will be to squeeze VoIP providers even more. Traditional telecom providers will be able to cut their costs, while many VoIP service providers will increase their costs in order to fund the USF. Verizon already announced yesterday that it would stop collecting the FET on long-distance and bundled services.

The message is clear. Internet telephony providers competing solely on price are doomed. Differentiation is their only viable, long-term solution. Just ask Vonage. The company reported more bad news yesterday in its earnings call, missing analyst expectations by $148 million.