8x8 2005 Annual Report Download - page 35

32
telecommunications regulations in their home countries. The failure of these consumers and resellers to comply with
these laws and regulations could reduce our revenue and profitability. Because of our relationship with the resellers,
some countries may assert that we are required to register as a telecommunications carrier in that country. In such
case, our failure to do so could subject us to fines or penalties. In addition, some countries are considering subjecting
VoIP services to the regulations applied to traditional telephone companies. Regulatory developments such as these
could have a material adverse effect on our international operation.
In many countries in which we operate or our services are sold, the status of the laws that may relate to our services
is unclear. We cannot be certain that our customers, resellers, or other affiliates are currently in compliance with
regulatory or other legal requirements in their respective countries, that they or we will be able to comply with
existing or future requirements, and/or that they or we will continue to be in compliance with any such requirements.
Our failure or the failure of those with whom we transact business to comply with these requirements could have a
material adverse effect on our business, operating results or financial condition.
Future legislation or regulation of the internet and/or voice and video over IP services could restrict our
business, prevent us from offering service or increase our cost of doing business.
At present there are few laws, regulations or rulings that specifically address access to commerce and
communications services on the Internet, including IP telephony. We are unable to predict the impact, if any, that
future legislation, legal decisions or regulations concerning the Internet may have on our business, financial
condition, and results of operations. Regulation may be targeted towards, among other things, assessing access or
settlement charges, imposing taxes related to internet communications and imposing tariffs or regulations based on
encryption concerns or the characteristics and quality of products and services, any of which could restrict our
business or increase our cost of doing business. The increasing growth of the broadband IP telephony market and
popularity of broadband IP telephony products and services heighten the risk that governments or other legislative
bodies will seek to regulate broadband IP telephony and the Internet. In addition, large, established
telecommunication companies may devote substantial lobbying efforts to influence the regulation of the broadband
IP telephony market, which may be contrary to our interests.
Many regulatory actions are underway or are being contemplated by federal and state authorities, including the FCC
and other state and local regulatory agencies. On February 12, 2004, the FCC initiated a notice of public rule-
making to update FCC policy and consider the appropriate regulatory classification for VoIP and other IP enabled
services. On November 9, 2004, the FCC ruled that Vonage DigitalVoice and similar services are jurisdictionally
interstate and not subject to state certification, tariffing and other common carrier regulations, including 911. This
ruling has been subsequently appealed by several states. On February 11, 2004, the California Public Utilities
Commission (CPUC) initiated an investigation into voice over IP providers, including us. As a tentative conclusion
of law, the CPUC stated that they believe that VoIP providers are telecommunications providers and should be
treated as such from a regulatory standpoint. There is risk that a regulatory agency requires us to conform to rules
that are unsuitable for IP communications technologies or rules that cannot be complied with due to the nature and
efficiencies of IP routing, or are unnecessary or unreasonable in light of the manner in which Packet8 offers service
to its customers. It is not possible to separate the Internet, or any service offered over it, into intrastate and interstate
components. While suitable alternatives may be developed in the future, the current IP network does not enable us to
identify the geographic nature of the traffic traversing the Internet.
The effects of federal, state or municipal regulatory actions could have a material adverse effect on our
business, financial condition and operating results.
Several U.S. states and municipalities have recently shown an interest in regulating VoIP services, as they do for
providers of traditional telephone service. If this trend continues, and if state regulation is not preempted by action
by the U.S. federal government, we may become subject to a "patchwork quilt" of state regulations and taxes, which
would increase our costs of doing business, and adversely affect our operating results and future prospects.
We have already been contacted by several state regulatory authorities regarding our Packet8 service. On September
11, 2003, we received a letter from the Public Service Commission of Wisconsin, or WPSC, notifying us that the
WPSC believes that we, via our Packet8 voice and video communications service, are offering intrastate
telecommunications services in the state of Wisconsin without certification of the WPSC. According to the WPSC's
letter, it believes that we cannot legally provide Packet8-based resold intrastate services in Wisconsin without
certification from the WPSC. In addition, the Commission believes that Packet8 bills for intrastate services to
Wisconsin customers are void and not collectible. The letter also states that if we do not obtain certification to offer