How a new voice on the Internet found its voice in Washington

Frank Cavaliere may lack certain resources available to other lobbyists, like a network of grassroots activists or a political action committee treasure chest, but he has at least one inducement to offer: T-shirts the color of tangerines.

“Everybody on Capitol Hill loves T-shirts,” says Cavaliere, a lobbyist for the Internet phone company Vonage Holdings. “It’s a good icebreaker, and it’s very much under the gift ban.”

“Who can say no to a bright orange T-shirt?” he asks.

Vonage, a 5-year-old company in the midst of preparations for an initial public offering, hopes Congress says no to very little it offers, or at least doesn’t make life more difficult by adopting a host of new regulations.

If a lighthearted way to make an impression, the T-shirts are part of a serious push to build a Capitol Hill network of friends as Congress moves to rewrite telecommunications policy.

The effort distinguishes Vonage from other high-tech startups that turned their backs on the tedium of the usual inside-the-Beltway cajoling and backslapping.

In the past year, Vonage has assembled an in-house lobbying team, going from zero full-time lobbyists to three, and hired a string of K Street firms that include ex-members and staffers, as well as former administration officials.

The stakes are huge for the company, as it tries to protect its access to networks, such as broadband cable lines, owned and operated by potential rivals.

“A law could be written tomorrow that writes Vonage’s business model away,” says Cavaliere, who was a senior policy aide to Sen. George Allen (R-Va.) before moving to Vonage.

In the four months he’s been with the company, Cavaliere estimates, he’s given away around 40 T-shirts, emblazoned with the words “Team Vonage.”

ZERO TO $250K IN ONE YEAR

Vonage’s story illustrates both how the telecommunications industry is changing and the obstacles a relatively small company can face as it navigates official Washington.

There have been a few bumps on the road. Vonage is still working to put together a political action committee, a critical piece of doing business in Washington.

In the meantime, CEO Jeffrey Citron is making up for the lack of PAC by doling out campaign contributions from his personal account. Citron has contributed more than $16,000 to members of Congress during the past two years.

Some of that money has gone to co-sponsors of a bill that would give Vonage access to local 911 networks often owned by Baby Bells, which are also potential rivals. But that bill — the company’s top priority — has been slow to move.

Vonage did, however, get a recent boost from an unlikely source: Hurricane Katrina. The huge storm, which devastated the Gulf Coast, has put a spotlight on the need to have communications systems operating in emergency situations and revived hopes for the bill.

That measure is part of a mark-up at the Senate Commerce Committee scheduled for tomorrow.

The last time Congress took a serious look at telecommunications policy, Vonage didn’t exist. The company was founded in 2001 with 50 employees. It now employs around 1,500 people in New Jersey and counts more than 1 million customers.

As its business grew, however, so too did the potential for government interference. Vonage’s lobbying expenditures, which were nonexistent in 2003, grew to $250,000 in 2004 to compensate.

In addition to Cavaliere, Vonage’s lobbying team includes Chris Murray, a telecom lawyer who joined the company last year from the Consumers Union, which publishes Consumer Reports, and Steve Seitz, who previously was a lobbyist for the National Emergency Number Association.

Murray is the elder statesman of the bunch, both by age (he’s 32) and time with the company (16 months.) Cavaliere is just 28, while Seitz is 30. The three work out of a first floor at 3000 K St. N.W. that looks like a Seattle start-up before the bust. A Golden Tee video game and a foosball table offer opportunities to unwind.

Unlike other start-ups, which spent little time inside the Beltway, Vonage executives always kept an eye on Washington.

“Our industry is heavily regulated, and with that we understand the challenges that we are up against,” says Brooke Schulz, Vonage’s vice president for corporate communications.

‘NETWORK NEUTRALITY’

One early fight involved Minnesota and New York state telecom regulators, who claimed jurisdiction over the company so that they could require it to provide customers with 911 service.

Vonage officials worried their start-up company would be hamstrung by a patchwork of regulations that didn’t fit its high-tech, quick-moving model. One problem: The Internet isn’t confined to a local area, unlike traditional phone networks, so state regulations would not fit easily.

Falling under state jurisdiction “would have put us out of business,” Schulz says.

Ultimately, the Federal Communications Commission (FCC) agreed with Vonage and ruled that the federal agency had primary jurisdiction over the company, although 911 service was to remain an issue for Vonage.

Company executives found themselves traveling to Washington on a monthly basis to explain the benefits of Internet phone service to curious staffers and members. They soon realized the company needed a permanent presence in D.C., and hired Murray.

As a law student at Georgetown, Murray says, he specialized in telecommunications law because he was “obsessed with the openness of the Internet and the possibility that regulatory and business decisions could close some of that openness down.”

As a lobbyist, he has helped defend Vonage’s “Broadband Bill of Rights,” a declaratory document that boils down to the philosophy that Internet applications — such as voice over Internet protocol (VOIP) or instant messaging — should have unfettered access to Internet networks such as broadband.

In industry lingo, the debate is described as “network neutrality,” where one company isn’t able to block the content of another.

“If Vonage can survive, so too can a whole host of companies,” Murray says.

Vonage’s potential rivals — principally Baby Bells and cable giants — spend millions of dollars each year lobbying and donate millions more to political campaigns. What’s more, the cable and phone industries have thousands of employees spread across hundreds of congressional districts who can pressure lawmakers back home.

Cavaliere, who says he too was attracted by what he saw as a “unique and interesting” opportunity to lobby for a new tech company, says his Hill colleagues were surprised at his career move.

“Why would you want to do that?” he says they asked. “Look who you are up against.”

Fault lines can shift in telecommunications policy on seemingly mild alterations of language in a bill, for example. But, in general, cable and traditional phone companies have resisted efforts by Vonage and other VOIP companies to persuade Congress to mandate open network access, although they have promised not to block other companies’ content.

The rival companies worry that such a directive over a complicated issue could have the potential to limit their ability to disseminate their own content over the networks, which they built.

Like other VOIP providers, Vonage uses broadband — cable, wireless or DSL — operated by other companies to carry customer calls.

Another issue is what government imposed fees VOIP users should pay.

Rural lawmakers, for example, routinely bring up the issue of how much and through what mechanism Vonage will pay into the Universal Service Fund, which subsidizes rural telecommunications networks. Fees on traditional phone service go into the fund.

Each new regulatory burden represents a potential new charge that could undercut Vonage’s main selling point: It offers 500 free minutes of long-distance service for $14.99 a month, cheaper than traditional phone service.

Murray says he often has to convince lawmakers that Vonage plans to pay into the Universal Service Fund, and to meet other regulatory burdens, such as providing federal law-enforcement officials with wiretap access.

“You are always facing a constant onslaught of messages against you,” Murray says.

But George Reed-Dellinger, who studies telecom policy for Washington Analysis, a group that advises Wall Street on Congress and regulatory agencies, says Vonage and other VOIP companies will face increasingly more regulation, which will raise the price of their technology.

“Their high-water mark of regulatory arbitrage may be behind them,” he says.

THE ‘MICROSOFT MOMENT’

A more immediate problem is the issue of 911 service. Customers in some states have reported problems getting through to an emergency operator on a Vonage line, sometimes to disastrous results. Texas and Connecticut have sued Vonage for inadequately informing customers that they may not have the same access to the 911 network they did under traditional phone service.

Because the calls aren’t part of the regular phone network, it sometimes is not immediately clear to a 911 operator where a call is coming from on a VOIP line.

The FCC has mandated that VOIP providers ensure that when their customers dial 911 they are connected with an operator who can immediately tell the location of the call. That deadline is Nov. 28. Vonage says it supports the mandate because it has put pressure on Bell companies to provide access to emergency networks.

But it isn’t clear what will happen to customers who don’t have the access required by the FCC. One option is that they would lose their service entirely.

Only around 10 percent of Vonage’s customers now have that capability, Schulz says. Murray says the company will be closer to meeting the FCC’s directive by the deadline but is not likely to have met it completely because of the difficulty in accessing emergency networks, called public-safety answering points (PSAPs). There are 6,500 PSAPs in the country.

The FCC’s aggressive push was, according to some telecom lobbyists, the industry’s “Microsoft moment” — the time when it realized how much Washington could affect its business. Microsoft paid little attention to Capitol Hill until it had to fend off anti-trust investigation by the Justice Department.

Vonage and other VOIP providers, such as Nuvio, have sought help from Congress to mandate that they be given the access they need to provide the service.

“We just didn’t have the bandwidth,” Murray says, using industry parlance to describe the company’s inability to handle all the issues it faced.

Cavaliere, whose Republican contacts were particularly attractive to the company, first asked who were the  company’s champions on Capitol Hill.

“When the chips are down, who can Vonage go to to get some help?” he says he asked.

When an answer wasn’t forthcoming, he decided his first step would be to reach out to a natural ally, New Jersey’s congressional delegation. Unlike phone and cable companies, Vonage’s employees are clustered in one spot: Edison, N.J.

Vonage hired Winning Strategies, a firm whose principals are former staff members to several current and former members of the state delegation, to help.

It also hired the Nickles Group, a new firm founded by former Senate Budget Committee Chairman Don Nickles (R-Okla.), to make inroads to congressional leaders, who decide what bills will be debated on the floor.

Murray called hiring the firm a “no-brainer” because of Nickles’ experience.

But another factor weighed in on the decision, Murray says: “We couldn’t find a single firm that was conflict-free.”

Telecommunications, when coupled with technology companies, spends more than any other sector other than healthcare on lobbying, according to politicalmoneyline.com, which tracks campaign and lobbying expenditures.

The United States Telecom Association, which represents the Bell companies, alone spent nearly $15 million on lobbying last year.

Even though some already represented telecom clients, Vonage also signed contracts with Swidler Berlin, Dutko Worldwide and Brownstein, Hyatt & Farber.

Lobbyists working for Vonage include former aides to Sens. Trent Lott (R-Miss.), Rep. Clay Shaw (R-Fla.) and ex-Treasury Secretary Robert Rubin, a Democrat.

Even with the added help, however, Vonage has been unable to move the 911 bill.

The bill would require that VOIP providers be given access to 911 networks, and it would give these companies liability protection if a 911 call is lost — a safeguard that wire-line and wireless providers already have.

JUICE FROM A HURRICANE

Murray, a native of California, says Vonage didn’t have the “juice” to get the bill moving. That’s not unusual; even large, well-established companies have difficulty moving a measure that is not on leadership’s list of priorities. And recently Congress has had a full plate of battles over judges, federal spending, tort reform and energy policy.

But then the company got a break. The Wall Street Journal wrote an article that detailed how stranded officials in New Orleans working out of a hotel linked a laptop to an Internet connection. President Bush’s first contact with local officials after the storm was made on a Vonage connection.

Seeing an opportunity, Cavaliere says, he sent the article to staffers on the Hill. That prompted an invitation to CEO Citron to testify before the Senate Commerce Committee last month.

“The aftermath definitely helped push things along,” Cavaliere says.

Beyond the 911 bill lies the debate over telecom policy, which is likely to be continued next year. This month, a new issue emerged: a patent-infringement lawsuit filed by Sprint has made Vonage a supporter of a patent-reform bill also being debated on Capitol Hill.

“Everything we do at Vonage is like in dog years,” Murray says.

“I’ve never been at a place where the playing field changes so often.”

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