By Sara Kehaulani Goo
Washington Post Staff Writer
Thursday, June 22, 2006

Vonage Holdings Corp. and other Internet phone service firms must begin paying a percentage of their revenue to a federal program to subsidize telephone service for rural and low-income customers, the Federal Communications Commission ruled yesterday.

The FCC said the move marks the beginning of an effort to retool the Universal Service Fund, which is based on an old model that largely relies on the telecom industry's long-distance revenue. The fund subsidizes phone service and pays for programs to connect schools and libraries to the Internet. The FCC yesterday also approved higher fees for cellphone companies to contribute to the fund.

Telecom analyst Jeff Kagan said the FCC's decision removes an early advantage Vonage had on its traditional telecom competitors and could make it more difficult for the firm to be a big player in the industry. "The only reason customers opted for Vonage was to save money," Kagan said. "The smaller the percentage savings, the smaller the group of customers who would be interested in making the switch."

FCC Chairman Kevin J. Martin said yesterday's move was "furthering the principle of competitive neutrality" because it imposed for the first time a requirement for some Internet firms to contribute to the fund. "We take these steps because we recognize the changing telecommunications marketplace," Martin said in a statement issued after the vote. He added, "I still believe that this system needs fundamental reform."

Vonage spokeswoman Brooke Schulz said the FCC's decision would add a $1 fee to a typical customer's $25 monthly bill. The news appeared to be another hurdle for the newly public firm, whose shares have slumped since its initial public offering in May. Yesterday, Vonage shares fell 7 cents, to $8.85, on the New York Stock Exchange. Vonage also faces a federal lawsuit filed this week by Verizon Communications Inc. that alleges patent infringement.

For a $25 monthly fee, Vonage customers can make unlimited long-distance calls using a headset and a microphone attached to their computer. The low-cost service, along with that of similar upstarts such as Skype Technologies SA, has disrupted traditional telephone companies' models of charging by the minute.

Until yesterday, the FCC's fund did not require fees from Vonage because it was not defined as a traditional phone company. Analysts said Skype will not be as affected because it doesn't charge for U.S. domestic calls. A Skype spokeswoman declined to comment yesterday.

The FCC requires phone companies to contribute to the fund 10.5 percent of a portion of their revenue from interstate and international calls. The commission increased the taxable portion of that revenue yesterday by 9 percentage points for wireless firms and imposed a new structure that will tax Internet phone services on 65 percent of the same revenue source.

A second FCC decision yesterday that raises the amount cellphone carriers contribute to the fund will probably result in a fee increase for cellphone customers by the end of the year. Carriers are not required to pass along additional feels to their customers, but they often do.

Telecom and media analyst Rebecca Arbogast of Stifel, Nicolaus & Co. said cellphone customers who average a $50 monthly bill could see 50 cents added. "My best guess would be that it will be passed along to the consumer," Arbogast said of the wireless fee. She said it was less clear whether Internet phone service firms would add fees to customers' bills.

"The prices are going to be controlled by the market, and both marketplaces are highly competitive," said Eric Rabe, spokesman for Verizon. "The reality is, our voice over IP service has gone from $35 to $25 over the last six months, and the prices are headed in that direction, not up."

Rabe did not rule out the possibility that Verizon could pass along any government fees if its competitors do the same. Sprint Nextel Corp. and Cingular Wireless LLC declined to say whether they would pass the fees or a portion of them to consumers.

Staff writer Yuki Noguchi contributed to this report.