From the perspective of any modern corporation, Steve Jobs was a misfit and never should have made it to the top of the world’s largest technology company.  Compared to his peers at AT&T, RIM, Hewlett-Packard, IBM, Samsung, LG, Lucent, Nokia, and even Google, one of these things is not like the others.  These people, while they are for the most part talented managers and/or innovators, are not brave and unconventional visionaries questioning — and challenging — the status quo.  The template of a contemporary CEO simply does not apply to Jobs.. yet it is safe to say that he created more shareholder value during his split tenure at the helm of Apple than all of these combined.

Jobs doesn’t fit as CEO material because, as I wrote a few years ago, the design of corporations systemically weeds out and ultimately purges people like Steve Jobs, tending to favour evolution over revolution; hedgehogs over foxes.  Insodoing these institutions prefer making incremental steps toward that which can be known and quantified versus embracing risk and opportunity to make great leaps forward.  HP or Microsoft would never have brought us the iPod.  Certainly not the iPhone.  And the efforts of Apple’s competitors in the tablet space?  Hmph.

The lesson with the greatest gravitas from Steve Jobs’ famous 2005 Commencement Address is in my opinion the following:

You can’t connect the dots looking forward; you can only connect them looking backwards. So you have to trust that the dots will somehow connect in your future. You have to trust in something — your gut, destiny, life, karma, whatever. This approach has never let me down, and it has made all the difference in my life.

So what made Steve special is that, having ascended to the top of the technology industry ecosystem, he was seemingly a fluke.  Those dots — The iPod led to the iTunes Music Store and to a flattening of media distribution and to the iPhone and iPad and beyond — all connected back to a single leap where a computer company decided to sell some portable music devices and see what happened.  Jobs made big bets all the way along and knew that the dots would somehow connect down the road, and staked his personal and corporate reputation on quality in every regard.  No focus group or market research could have supported the decision to place these bets, and so no other CEO did.

Many of us think that we have the courage to make big bets.  Far fewer among us are given the resources and leeway to execute these broadly.  Still fewer among those are actually successful in both ideation and execution.  Steve Jobs danced on that razor’s edge and always came away unscathed, teaching us all that it can be done and that the rewards for success await.

Steve Jobs created new markets and made us crave things we didn’t know we would need; he helped us consume information and ideas in ways we never knew we could; he literally tore apart the media business and set forth reshaping it to be more consumer-friendly.  All the while he dazzled us with things which are ‘insanely great’ like a magician entertaining a crowd of transfixed six-year-olds.

The saddest aspect of Steve Jobs’ passing is simply that without him it will be a long time before a similar revolutionary will ascend the treacherous climes of corporataucracy to lead another hugely successful company to create things which dazzle and inspire us.  If ever.

Here’s hoping there’s another Steve in the wings somewhere.  Until then, we’ll likely have to make do with a whole lot less magic in our world.

Since I made my purchase, though, there have been three major developments:

1. Apple announced there will be an SDK. This seems (because of odd timing) that either the announcement or possibly the entire program is the result of bowing under pressure built up within the developer (and user) marketplace, or the fact that with jailbreaking they’ve lost control of the 3rd party developers already.
2. Various analysis is leading to a consensus that Apple profits as much as $565 per iPhone, assuming you keep it hooked up to AT&T. Roughly $432 of that comes from the payments from AT&T to Apple over the course of your two-year contract.
3. AT&T said it has activated 1.1M iPhones, but Apple says it has sold more than 1.4M iPhones. This means that there are 250K-300K iPhones which have obviously been unlocked. Unlocking your iPhones means that Apple is losing out on almost $130 million in gross profit over two years already. AT&T loses entirely. Ouch.

So, what’s a self-respecting geek to do? The reality is that the iPhone is enticing. Even though the call failure rate is actually pretty high (not sure if this is true of locked iPhones) it is an excellent phone with great acoustics and with a tremendous UI.

I’ve noticed some real flaws, of course: The fact that this is the first Apple device with a keyboard that can’t copy & paste in over 10 years should be embarrassing to Steve-O, as would the fact that you can’t Search anywhere on the platform. The fact that although it has Bluetooth you can’t talk to it from your bluetooth-enabled Mac rather contradicts Apple’s entire modus operandi with regard to connectivity, as does the astonishing iRealization that it inexplicably uses iTunes, and not iSync to.. uh… Sync.. Ouch.

As a new unlocked iPhone user, Apple still might be at war with you. But the reality is that these problems are largely software-fixable. Apple will solve them, or some plucky third-party developer will step in and hand-grenade Apple’s stranglehold on the users.

The best way to play the iPhone game is not to abstain from purchasing one (I know you want to) until RSJ opens the platform properly… The best way to launch your missile attack and enter the iPhone war is to buy one, unlock it immediately, and take it to your favourite GSM carrier (using it with or without the data plan — I’m finding free WiFi to be quite readily available most of the places I want to do email etc.).

In this way, you vote with your feet. And your wallet. And any vote against AT&T is a good one, in my view.

And if half or more of iPhone buyers point their radios at “anyone but AT&T” it’ll start to hit Apple where it lives, and they’re realize that the Blackberry-style lock-in is not the appropriate business model for invoking change in the wireless industry.

Apple’s customers, embracing the simplicity of its products, want to move their music and movies around (particularly ones they actually pay for) unfettered by DRM: Apple says no. With its market clout, Apple has the opportunity to take a stand against the music insultry and the movie biz. It has consciously chosen not to.

Apple’s customers want to buy its slick new iPhone and use it anywhere in the world, on the network of their choosing. Apple says no. With its brand power, Apple could have created and released an unlocked phone (like, say, Palm) and allowed the market to embrace it as a platform. And as users and hackers have developed workarounds to get what they want, Apple is attempting to punish them by frying infringing iPhone firmware.

In the case of iTunes, the market has been free to work around Apple’s ignorance as there has long been a thriving DIVX and MP3 bazaar thanks to a number of file sharing networks over which to exchange them, and with some effort those are playable in iTunes and transferable to iPod. In the case of the iPhone, though, Apple has inadvertently catalyzed a real revolution. From the iPhoneSimFree.com web site today:

“…for our customers who have no immediate need to use alternate providers and are still using their AT&T card, you are welcome to update your phone. For the rest please be patient, as the jailbreak issue is something that affects much more than just the unlocking. The thousands of open source developers who have put a cumulative 10s of thousands of man hours into various apps and tools now have no way to get them onto the phone as well. We are all looking into the jailbreak issue as it affects us all, and we will keep updating our site as well as the open source community at large with any information we can about this.”

In both operating modes, Apple has partnered with a cabal and taken their side, rather than the market’s side. They’ve thoroughly misjudged the ingenuity of the mob and the ill will that has been built up over decades between the market and the companies that service them. And by sitting at the wrong side of the table in the ongoing war, Apple has not only passed over a perfect opportunity to affect positive change, shift the lumbering elephants of industry, and stimulate growth, but it has jeopardized its credibility and brand equity.

Apple doesn’t just need to “Think Different” … it needs to “Act Different”. People will not forget their behaviour through this era, just as Mac enthusiasts still vilify John Sculley for rejecting numerous fundamentals that made the original Mac (even in its time) as successful as it was.

Thinking Different was supposed to be Apple’s raison-d’etre. Here’s the text from the icon above, originally penned by Jack Kerouac, which is the TextEdit icon in OS X Leopard:

“Here’s to the crazy ones. The misfits. The rebels. The troublemakers. The round pegs in the square holes – the ones who see things differently. They’re not fond of rules and they have no respect for the status quo. You can praise them, disagree with them, quote them, disbelieve them, glorify or vilify them. About the only thing that you can’t do is ignore them. Because they change things.”

This was the cornerstone of Apple’s 1997 “Think Different” campaign, and it’s unsurprising that it lives on as an Easter Egg nestled within a core application of their operating system. Since the 1980s, Apple has leveraged its entire brand identity on rebelliousness. Every campaign, up to and including the smug, polarizing “I’m a Mac” series have extended this equity, largely with products that truly were “different”.

In dancing with the devil by partnering with the Movie, Music, and Wireless industries, Apple has achieved things that few other companies could have and to a limited extent has torn down some walls.  But the compromises, such as its revenue sharing arrangement with wireless carriers, are downright faustian.  And as Apple has been attempting to “evolve” these arrangements to greater customer-friendliness and openness, they are learning the price one pays when one’s business (and quarterly reporting) becomes enmeshed with the whims of a dinosaur.

The iPhone takes this the furthest at both extremes: It’s the most limited platform Apple has created, and it’s also the one with the most potential to be revolutionary. Like a date with Ann Coulter, buying and using an iPhone begins all shiny and pretty and ends up on the rocks amid a boil of hostility, frustration and creative limitations. That the source of all of that negativity is the smoldering heap of what used to be Cingular wireless is not something that the market will acknowledge or forgive.

With these two bubbling issues, Apple is quickly approaching a brand crisis. It has drawn to its corner just the sort of people who are revolutionaries, who affect change, and who decry cronyism. These people have actively laboured to help Apple to continue to push the envelope there, but at the same time they are prone to fickleness.

Miller Brooks, an ad firm, points out that a Brand Crisis can hit any company, no matter how well-entrenched — and quickly. They recommend starting to manage the situation by finding your ethical compass, and then rapidly thereafter accepting reality. Apple is fortunate in that it need only look to its users to find its ethical compass. Many of them are bloggers. All of them are vociferous. 🙂

Apple needs to listen to the wisdom of the crowd. I believe they are at a critical fork in the road. “Brand Crisis” and “Apple” are not terms usually read in the same paragraph, but perhaps this is a sign of things to come.

When the Fake Steve Jobs is more in touch with the market than the Real Steve Jobs, Apple may have officially jumped the shark.

It’s definitely a secondary phone service, as when you instantiate calls it actually signals their VoIP-based call back service to “ring both ends”. Yes, it’s a CallBack service. The result is a fairly long wait time (20-30 seconds) to connect calls. But the savings when you roam across continents or even in the next country over are profound. The fact that it operates on a pre-paid, non-subscription model helps you cost-justify it as a secondary phone.

I’ll skip the phone, thanks, but I plan to use it, but only for incoming calls, when I travel to the U.S. as an alternative to a prepaid plan with the evil AT&T. It also does SMS at reasonable rates but, as yet, not data. So I’ll still be extorted for using my BlackBerry and iPhone on the road.

Feature request: One major issue with using a secondary phone is that when you make outgoing calls, nobody knows it’s you. My calls are far more likely to be avoided by my board members and business contacts because they don’t know the number. Problematically I don’t want to give them that number and add it to my swelling list of phone numbers because it adds complexity and creates a potential dead-end: my MaxRoam number, unlike my mobile phone number, is not mine… and I can’t take it with me.

To resolve this, and much of this depends on the quality of the termination networks and the strength of their relationships with these termination partners, MaxRoam could ask me which phone number I want to identify myself as when instantiating outbound calls via their web site. They could then rewrite the outbound dialing number on their terminating gateways for the leg of the call destined to whomever I’m calling so that it appears as it should on their phone and my name, etc. pops up.

Of course, there are others among us who might enjoy that anonymity. >:)

A problem for MaxRoam in the short term is that all this fiddling, plus the extra call wait times (75% of calls are incomplete, so 25-30 seconds just to get a busy signal or somebody’s voice mail will get frustrating), is not for the faint-hearted consumer market. I anticipate that they will develop a rabid audience of tens of thousands of global roamers who absolutely love their service, but until big strides are made in the usability model it’ll be difficult to break through to the broader market and really kick the snot out of the mobile carriers.

Their greater effect may be to sensitize the mobile phone consumer market further to the gouging that occurs between carriers for roaming, and the utter fleecing which carriers subject their customers to for Long-Distance. Given the myriad benefits in reducing operating cost for VoIP, and given that VoIP has been widely deployed in mobile phone networks for more than 5 years, it is positively criminal that they want me to pay $2/min. to call Brussels from my mobile phone while I’m at home.

I’m worried that, like Vonage, companies like Cubic will invest significant dollars to champion the charge to fairer pricing in mobile telecom, only to get smote by the carriers as they finally cave under consumer, media, political, and market pressures and adjust their margins accordingly.

Despite vehement denials and warnings from Rogers spokespeople, I have it on slightly better authority from an unnameable closer-to-the-source Rogers employee that the date for launching the Rogers iPhone in Canada will land in December — making those overnight lineups outside the Apple Store so much more pleasant!

It is, however, unclear to me whether this will be the impotent 2.5G iPhone a la AT&T, or the kick-ass 3G iPhone rumoured to be teeing up to launch in Europe in October. Launching a 3G iPhone in Canada that is rather unlocked would be great for T-Mobile and other U.S. GSM carriers, such as they are, because it’d allow people to hook up an iPhone to existing GSM accounts with other service providers, despite AT&T‘s rumoured two-year exclusivity lockout.

What most of the hysterical journalists I have read in the past few weeks have overlooked is that the iPhone is a service, and not just a device: there are provisioning systems, security standards, and feature interactions (specifically, the visual voicemail tool is not exactly out-of-the-box wireless voicemail technology) which are client-server and which require service providers to deploy network equipment to coincide with the iPhone launch. Some carriers’ architectures will lend themselves better to this than others. So it’s not simply a case of getting the handsets, and some carriers are more stuffy than others about third-party hardware and protocols riding in their network.

In this sense, iPhone is interesting not just because it’s a cool, game-changing device .. but moreso because it’s the first fundamentally new network approach to break down the bunker doors to the wireless carriers metro switching networks since RIM. And as Richard McManus points out, it’s a platform that’s carrying a lot more applications than just email.

In the meantime, insofar as wireless device crazes go, the iPhone has big shoes to fill in outselling the RAZR.

It also means that the current raft of criticism lobbed toward Apple (and toward the irrational exuberance of Apple investors hoping that Apple will turn the mobile biz on its ear) is largely a criticism of AT&T Wireless, and the limitations of a combination of the AT&TW network and the structure of the deal they likely struck with Apple.

Apple’s not stupid. They’re betting big on GSM and GSM-based 3G wireless. The unlocked “TriPhones”, available in Europe (possibly also in Canada?) come this October, will be the items to have. If you buy an iPhone this weekend then you’re going to lose a lot of value very quickly.

I can say this now, since I no longer work at EQO and have no vested interest in partnering with Cingular, and have been waiting for a long time to do so:

I have never been so professionally insulted, so humbled, and so totally and completely discouraged by any interaction with a telecommunications company, as I have been by Cingular’s misguided, counterproductive, and inane FastPitch program. If you are a software, service, or application developer I would encourage you to boycott this program, and if you are considering a partnership with Cingular (now, comically, marketing itself as AT&T) my advice is: Don’t.

The FastPitch program is ostensibly supposed to provide a vetting mechanism for the hundreds of ideas which cross the paths of wireless carriers every year, and is somehow supposed to encourage developers to bring those ideas into Cingular’s service development organization. It’s an interesting idea, that has been absolutely ruined by inexperienced, arrogant personnel, and should IMHO be the laughing stock of the mobile industry.

Most carriers employ Service Development Managers, Business Deveopment Managers, and Channel Managers to entertain partnerships with 3rd party developers in order to bring new and innovative products and services to their customer base. These people actively pursue and field new ideas from all over the place, and are mandated to come up with new ideas and bring the good ones to market.

Not so with Cingular, it would appear. Instead, they’ve attempted to create a formalized process which subjects potential partners to a “Gong Show” style 3-minute panel pitch, in order to separate the wheat from the chaff of third-party applications in an efficient manner. But the effect is rather the opposite. Here’s Cingular’s boilerplate (and believe me, the whole program is boilerplate) spiel:

The FastPitch session at CTIA is an opportunity for the Cingular Developer Program and Business Development teams to gather preliminary information about ISV applications. These events are not designed to be lengthy go-to-market discussions with prospective partners.

ISVs registered for the Cingular FastPitch sessions at CTIA are asked to bring a 3 minute demonstration and pitch to present to our team. You will have 12-15 minutes total with our group, which will encompass 3 minutes for you to present your application and 9 to 12 minutes of survey about your solution.

This sounds like a compromise to the usual method of business development in Telecom: find an authorized representative, build a rapport, create an internal advocate, and work together to understand each company’s motivations and market drivers, and hopefully end up as partners bringing a new service to market.

But in practice, even the somewhat plausibly workable structure of the boilerplate was corrupted. First, when you arrived for your FastPitch appointment you were given nametags, filled in and signed a form which effectively nullified your rights to ownership of your own intellectual property, and were asked to queue in a lineup of other hapless courtiers. I stood behind one gentleman whose idea had something to do with birdhouses, and in front of a couple from a major software vendor.

When you got to the front of the line, there before you sat four Cingular employees, each in their Mid-20s (I’m guessing they weren’t VPs) who would only tell you their first name and would not, for love nor money, give you their business cards. Instead of pitching all four of these people together, who for all I know were junior sales reps from the local mall, and engaging in a quality 15-minute discussion, you instead pitched each one individually, for three minutes. Todd and I attempted to do this, but our 9-slide PowerPoint and product demo overflowed every time. During our session, just before we were to start in on the third intern, he got up and left, leaving us cooling our heels for three minutes… and we couldn’t help but chuckle at the insanity of the process. A woman surveying the whole scene held a stopwatch and literally yanked the birdhouse guy out of the way to ensure that we advanced to each successive intern in a timely fashion.

The whole process was comical. The interns asked no questions. They could not have possibly discussed our company or services with each other. Instead, they graded us on forms, wrote occasional notes (which they carefully concealed) and generally looked disinterested and weary (apparently they were subjected to these 3-minute pitches all day — accounting for lunch and time slippage, that’s 105 pitches per day for three days).

With that process and volume, I’m not sure who could pass through the filter and make it into Cingular’s developer program, but even when we did it really did little to further our objectives to work with Cingular. There were still no real points-of-contact, no internal advocates, not steps forward to advance the conversation. Instead, we were now being marketed to with the same disdain as Cingular’s victims customers.

Other carriers have indeed taken a more enlightened approach. Vodafone has a team in Walnut Creek that I’ve gotten to know quite well, and their role is to search for new ideas and applications, reaching out to partners where possible. And most ascribe to the traditional method of building personal relationships with companies who have interesting applications.

For Cingular/AT&T, though, I can think of no more appropriate fate than to be out-innovated by competitors and outsmarted by third parties who figure out a way to relegate them to the dumb-pipe providers that they are ultimately destined to become. And for the employees who represented their company so well during our FastPitch settings, I’m reminded of the myriad job postings from 2001 which were subtitled “Telecom workers need not apply.” … these may experience a renaissance during the next great Telecom purge which will inevitably arise.

-Ian.

By Ben Charny Staff Writer, CNET News.com January 27, 2003, 4:00 AM PT

Read more about VoIP

A group of telecommunications giants is quietly pushing a proposal that could create hang-ups for up-and-coming Internet-telephone rivals.

At stake are rules used to divvy up the 5.2 billion unassigned phone numbers set aside for use in North America, one of the biggest potential markets for Internet, or voice over IP (VoIP), telephone services.

VoIP technology allows people to make phones calls that travel over the Internet rather than solely across wires owned by long-distance phone companies. Such calls can be made from telephone systems that tap into the Internet, and from PCs.

The cost of making such calls is significantly less than that of basic long-distance service because the calls bypass the phone companies’ lines. As a result, many large corporations and tech-savvy consumers are using VoIP to make long-distance calls.

Net telephony providers such as Vonage and Net2Phone enjoy an unfettered stream of new numbers passed down from other carriers, which they can hand out to customers as they wish. Now, Verizon Communications, BellSouth and Qwest Communications International want federal regulators to tell the newcomers to heel.

Verizon and the others raised their concerns most recently at a meeting Wednesday of the North American Numbering Council (NANC). The industry group is chartered by the Federal Communications Commission and is charged with developing policies on how to distribute telephone numbers.

If successful, some observers warn, the lobbying push could dampen the market for Internet-telephone service in the United States.

“The results could choke off the industry before it really gets going,” according to a source familiar with the ongoing debate.

The looming fight over phone number allocations comes amid a supply crunch , just as VoIP services are shaping up as a significant new challenge to both local and long-distance carriers.

Once denigrated for spotty reception more similar to that of a CB radio than that of a phone, Internet calling has improved in quality to the point where analysts expect the industry to soar over the next few years. TeleGeography , a phone industry analysis firm, estimates that there were 18 billion minutes of VoIP phone calls in 2002, or about 10 percent of all the calls made.

As VoIP makes up a bigger proportion of the overall phone market, it is poised to join a growing field of competitors that are vying for an increasingly limited phone-number pool.

Your number’s up U.S. government reports estimate that the United States, Canada, Guam, Bermuda and Trinidad will run out of 10-digit numbers by the year 2025, driven by demand for cell phones, faxes and other devices. The coming crunch has led at least one industry organization to draw up a plan for a 12-digit future that could add some 640 billion new numbers to the pool.

In the meantime, the FCC composed two conservation measures, both opposed by the phone carriers. One, “number portability,” would let people keep their phone numbers even if they switch carriers. The second would force carriers to be assigned a smaller amount of telephone numbers at a time.

Against this backdrop, some carriers said they are concerned about what they see as unorthodox number allocation practices among VoIP providers.

At the Jan. 22 NANC meeting, proponents of VoIP phone number regulation said they want agencies including the FCC to examine the Internet-phone industry’s use of “designer numbers,” among other things. Because of the nature of the Web, computer phone providers can offer customers a choice of different area codes, regardless of where they live.

“The idea is not to choke this thing off, but to explore the issues and reach some agreements so we can go forward,” said Randy Sanders, BellSouth’s director of regulatory and external affairs.

NANC members were interested enough in the problems to order a subcommittee to come up with some of the possible technical problems involved with telephone numbers and VoIP.

Others, however, have dismissed the concerns as overblown for an industry that is barely getting its legs in North America.

In a white paper called “Much Ado About Nothing,” AT&T recently argued that Internet phone providers aren’t attracting enough customers now to even pose a possible problem to be addressed.

“The sky is not falling,” AT&T wrote to the NANC in a follow-up to the white paper.

Worldwide, there were around 2.93 million cable telephony subscribers in 2001, more than the 2.5 million most analysts were predicting, according to a study last year by Allied Business Intelligence, an Oyster Bay, N.Y.-based research firm. That number was expected to almost double by the end of 2002, reaching 5.2 million subscribers, the study predicted.

By contrast, only a handful of companies sell computer telephone service in the United States, with fewer than 100,000 people now using broadband connections to make phone calls. The leading computer phone provider is Vonage, which has about 10,000 customers.

NANC and the North America Numbering Plan Administrator (NANPA) distribute phone numbers in blocks to so-called incumbent local exchange carriers (ILECs), which then transfer some of those numbers to competitive local exchange carriers, or CLECs, that ride on their lines.

Vonage representative Brooke Shultz said the company gets its telephone numbers from CLECs, although she declined to name the suppliers or the terms of the transfer deals.

Shultz dismissed the lobbying effort as a competitive tactic.

“This is really the first sort of tactic to get us regulated,” said Shultz. “We’re not misusing numbers.”

Industrywide makeover Regardless of where the industry stands now, there is no doubt of the momentum behind a new way of delivering voice communications at a fraction of the cost of traditional phone networks.

VoIP providers generally require two things–a broadband connection and either an adapter for a landline phone or a microphone and speaker device for computers.

The calls travel mostly over the Web, avoiding the toll roads that are traditional phone lines. As a result, computer phone services can offer plans with unlimited dialing and no long-distance charges. The average monthly price is $40.

VoIP’s efficiencies come through its use of packet-switching technology, which breaks up communications into small bits that are dispersed to find the fastest path across the network and recombined at the end point. Traditional telephony, by contrast, is “circuit-switched,” creating a dedicated channel for the duration of the call.

Analysts have cautioned that traditional phone companies could get squeezed out of VoIP technology. Responding to the threat, big carriers, including Verizon and Qwest, have been inking billion-dollar deals with equipment makers such as Nortel Networks, to add packet-switching capabilities. Sprint began adding packet switching to its network in 2002, after a $1.1 billion deal with Nortel. Qwest has also announced that it will adopt packet-switching technology.

Norm Bogen, a communications infrastructure and services analyst with Cahners In-Stat, expects the sale of media gateways, the equipment needed to install VoIP systems, to increase from $883 million in 2003 to $2.74 billion in 2006.

Even as the big carriers race to get into this area, however, Bogen tipped the advantage to the upstart VoIP providers.

“They are replacing the local phone company,” Bogen said.

FBI seeks Internet telephony surveillance

The Justice Department and the FBI ask regulators for expanded technical capabilities to intercept Voice Over IP communications… and anything else that uses broadband. By Kevin Poulsen, SecurityFocus Mar 27 2003 1:11AM

The FBI and Justice Department are worried that Voice Over IP (VoIP) applications may become safe havens for criminals to communicate with one another, unless U.S. regulators make broadband services more vulnerable to lawful electronic eavesdropping, according to comments filed with the FCC this month.

The government filing was prompted by the efforts of telecom entrepreneur Jeffrey Pulver to win a ruling that his growing peer-to-peer Internet telephony service Free World Dialup is not subject to the regulations that govern telephone companies.

Free World Dialup has been called “Napster for Phones.” It’s a free service aimed at developing Internet telephony as a mainstream alternative to the public switched telephone network. After an initial investment of about $250 for a Cisco SIP telephone — a device that functions much like a conventional analog phone, but plugs directly into an IP network — users can “dial” each other over the Internet anywhere in the world at no cost. Free World Dialup provides a directory service that assigns each user a virtual telephone number, and sets up each phone call. Since it was launched in November, the service has gathered over 12,000 users.

If it catches on, FWD could be a nightmare for old-fashioned telephone companies. Those companies were likely agitated further when Pulver asked [pdf] the FCC in February for a “declaratory ruling” that his service is outside the commission’s jurisdiction. Pulver argues that FWD is not a telecommunications service, but is just an Internet application, no different from e-mail or instant messaging. Verizon, SBC and other phone companies filed comments in opposition to Puliver’s petition.

And on the last day of the public comment period, so did the FBI.

It turns out that one of the regulations from which FWD would be incidentally exempt is the Communications Assistance for Law Enforcement Act (CALEA), the federal law that required telecommunications carriers to modify their networks to be wiretap-friendly for the FBI. Crafted in 1994, before the Internet was a household word, it’s not entirely clear that CALEA even applies to Voice Over IP , but the government has had some success persuading companies that it does, or soon will, according to Stu Baker, a partner in the Washington law firm of Steptoe and Johnson. “Right now, I think Justice would lose a case trying to apply CALEA to VoIP,” Baker wrote in an e-mail interview. “But eventually… VoIP will be a mainstream substitute for the switched network. So a lot of companies are complying now to avoid a hassle later.”

The government worries that Free World Dialup’s petition could buck that trend: if the FCC finds that FWD is free from the plug-and-play wiretap requirements, other Internet companies handling VoIP traffic might start thinking they’re exempt as well. “The DOJ and FBI are concerned that if certain broadband telecommunications carriers fail to comply with CALEA due to a misunderstanding of their regulatory status, criminals may exploit the opportunity to evade lawful electronic surveillance,” reads the government filing.

Pulver says it’s the government that misunderstands the situation. “My hope is that the DoJ/FBI did not take the time to fully understand what Free World Dialup is and isn’t, and after some proactive education it will be clear that we don’t fall under the definitions,” says Pulver. “It is much easier to build the wiretap function into the access method, which is infrastructure based, rather than on every Internet application that comes along.”

Easier Broadband Surveillance Sought Indeed, extending CALEA to cover Free World Dialup and services like it would likely be futile, says Orif Arkin, founder of Sys-Security Group and an expert on IP telephony security. Arkin says users determined to skirt surveillance could easily set up their own ad hoc directory services on the fly. “It’s like a buddy list on instant messaging,” says Arkin. “They just have to build up such a server, and give everyone access to it.”

Arkin says the FBI’s best bet for spying on VoIP users is to eavesdrop directly on a target’s broadband connection, perhaps using the Bureau’s “Carnivore” DCS-1000 network surveillance tool. With access to the raw traffic, VoIP phones become exceedingly easy to listen in on. “Those phones don’t have a lot of CPU power, so the communication between the two ends is not encrypted,” Arkin says. “Whoever was to sniff the information on the uplink or downlink or between those two can hear whatever is said.”

That point isn’t lost on Justice and the FBI. The government is asking that, should the FCC not reject FWD’s petition outright, the commission at least delay its decision until after it’s ruled on two other broadband proceedings that the Justice Department filed comments on last year.

In those proceedings, Justice is asking the FCC to reinterpret CALEA as extending to DSL and cable modem service — not just telephone calls. It’s also asking the commission to expand the scope of the law to include raw data communication — Web surfing, e-mail, and anything else that crosses the wire. Broadband providers are already obliged to cooperate with court-ordered surveillance requests; the government’s FCC proposals would go beyond that and require companies to reengineer their networks to make Internet eavesdropping easier technically, and dirt cheap on a case-by-case basis. “It would be a major expansion of the CALEA requirements,” says David Sobel, an attorney with the Electronic Privacy Information Center. “It would really obliterate the distinction between voice and data.”

Opponents of the CALEA expansion include AT&T and the National Cable and Telecommunications Association. But the government’s argument for the additional capabilities is the same one that persuaded Congress to pass CALEA in the first place eight years ago, and it only carries more weight today. “Although we cannot describe in this forum the particular circumstances, the FBI has sought interceptions of transmissions carried by broadband technology, including cable modem technology, in terrorism-related … investigations involving potentially life-threatening situations,” the Justice Department wrote [pdf] in one of its filings last year. “Unless carriers are required to ensure such access, law enforcement surveillance capabilities will suffer a serious and dangerous gap.” If the FCC adopts the government’s position, then broadband’s last mile will be the FBI’s listening post, and Free World Dialup will be off the hook.

The Bush administration is planning to propose requiring Internet service providers to help build a centralized system to enable broad monitoring of the Internet and, potentially, surveillance of its users.

The proposal is part of a final version of a report, “The National Strategy to Secure Cyberspace,” set for release early next year, according to several people who have been briefed on the report. It is a component of the effort to increase national security after the Sept. 11 attacks.

The President’s Critical Infrastructure Protection Board is preparing the report, and it is intended to create public and private cooperation to regulate and defend the national computer networks, not only from everyday hazards like viruses but also from terrorist attack. Ultimately the report is intended to provide an Internet strategy for the new Department of Homeland Security.

Such a proposal, which would be subject to Congressional and regulatory approval, would be a technical challenge because the Internet has thousands of independent service providers, from garage operations to giant corporations like American Online, AT&T, Microsoft and Worldcom.

The report does not detail specific operational requirements, locations for the centralized system or costs, people who were briefed on the document said.

While the proposal is meant to gauge the overall state of the worldwide network, some officials of Internet companies who have been briefed on the proposal say they worry that such a system could be used to cross the indistinct border between broad monitoring and wiretap.

Stewart Baker, a Washington lawyer who represents some of the nation’s largest Internet providers, said, “Internet service providers are concerned about the privacy implications of this as well as liability,” since providing access to live feeds of network activity could be interpreted as a wiretap or as the “pen register” and “trap and trace” systems used on phones without a judicial order.

Mr. Baker said the issue would need to be resolved before the proposal could move forward.

Tiffany Olson, the deputy chief of staff for the President’s Critical Infrastructure Protection Board, said yesterday that the proposal, which includes a national network operations center, was still in flux. She said the proposed methods did not necessarily require gathering data that would allow monitoring at an individual user level.

But the need for a large-scale operations center is real, Ms. Olson said, because Internet service providers and security companies and other online companies only have a view of the part of the Internet that is under their control.

“We don’t have anybody that is able to look at the entire picture,” she said. “When something is happening, we don’t know it’s happening until it’s too late.”

The government report was first released in draft form in September, and described the monitoring center, but it suggested it would likely be controlled by industry. The current draft sets the stage for the government to have a leadership role.

The new proposal is labeled in the report as an “early-warning center” that the board says is required to offer early detection of Internet-based attacks as well as defense against viruses and worms.

But Internet service providers argue that its data-monitoring functions could be used to track the activities of individuals using the network.

An official with a major data services company who has been briefed on several aspects of the government’s plans said it was hard to see how such capabilities could be provided to government without the potential for real-time monitoring, even of individuals.

“Part of monitoring the Internet and doing real-time analysis is to be able to track incidents while they are occurring,” the official said.

The official compared the system to Carnivore, the Internet wiretap system used by the F.B.I., saying: “Am I analogizing this to Carnivore? Absolutely. But in fact, it’s 10 times worse. Carnivore was working on much smaller feeds and could not scale. This is looking at the whole Internet.”

One former federal Internet security official cautioned against drawing conclusions from the information that is available so far about the Securing Cyberspace report’s conclusions.

Michael Vatis, the founding director of the National Critical Infrastructure Protection Center and now the director of the Institute for Security Technology Studies at Dartmouth, said it was common for proposals to be cast in the worst possible light before anything is actually known about the technology that will be used or the legal framework within which it will function.

“You get a firestorm created before anybody knows what, concretely, is being proposed,” Mr. Vatis said.

A technology that is deployed without the proper legal controls “could be used to violate privacy,” he said, and should be considered carefully.

But at the other end of the spectrum of reaction, Mr. Vatis warned, “You end up without technology that could be very useful to combat terrorism, information warfare or some other harmful act.”

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