Legal Issues

by Mike Masnick




Phone Call Arbitrage Is All Fun And Games (And Profit) Until AT&T Hits You With A $2 Million Lawsuit

from the so-much-for-that-plan dept

Late last year, the NY Times' David Pogue wrote a blog post describing a service called FuturePhone, which offered free international calls. You just had to call a domestic line (with an Iowa area code) and then could dial out to a long list of countries. This kicked off a lot of speculation about whether or not it was a scam or if you'd have to listen to ads or what. Tom Evslin and Alec Saunders filled in the details. Basically, as part of the efforts by government to help pay for telecom services in rural areas regulations were put in place so that long distance phone calls that are made to numbers controlled by certain rural carriers can charge a very high "termination fee," that the other telcos (such as AT&T) would have to pay. You usually don't see the cost of the termination fees, because they're included in the cost of your phone calls.

It turns out that some of the regulations allow for excessively high termination fees for rural carriers in Iowa. So, all FuturePhone needed to do was either own or partner with one of these carriers to get all or a piece of the termination fee money -- and then route the calls over much cheaper VoIP lines to international destinations. That way, the users get a "free" (or just long distance) call, FuturePhone provides a service lots of people use at a relatively low cost... and AT&T foots the bill by paying the huge termination fees which were supposed to help develop more telco services in Iowa. For every phone call that went over FuturePhone's lines, they made much more money in termination fees than they spent in the costs to send the call overseas. Except, of course, AT&T didn't like that so much -- and is crying foul. Apparently, the bill they needed to pay the telco that FuturePhone was using jumped from about $2,000 a month to about $2 million a month -- and they're suing, claiming that it's fraud, noting that since the calls didn't really terminate in Iowa, they shouldn't be billed for the fees. FuturePhone has already discontinued the service and, if it received any money at all, is probably spending it on lawyers.

No matter what happens, this demonstrates the continued problems with these attempts to build up the Universal Service Fee, or other taxes designed to provide more telco services to rural places. They're almost always misused in a way that ends up in some telco's pocket -- rather than actually being invested in telco service improvements. Of course, AT&T has been the beneficiary of many of these regulations in the past -- but it brings out the legal guns when such a plan takes money out of its pocket instead of putting it in.

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  1. identicon
    James Wanless, 8 Feb 2007 @ 9:21am

    Will Free Calls be strong-armed out of business?

    With the closure of FuturePhone it seems like the end is near for the so called FREE calling companies.

    Inevitably, AT&T's challenge will take time, but likely will stop these FREE calling companies as the payments are withheld until everyone has their day in court. That's not to mention the (prohibitive) legal cost of defending against such lawsuites which the LECs and the free calling providers are not prepared to do.

    This however is not a new situation. Back in the early 1990s AT&T were themselves enabling a similar type of business model. It was called International Settlement and was a means for AT&T to balance out the payments they paid to telcos (often monopolies) in countries like Italy against fees which Italy paid to them. There was a huge imbalance which meant that AT&T paid out much larger amounts to these foreign telcos on a monthly basis and these same foreign telcos had no incentive to renegotiate the rates which AT&T were pushing down at home.

    What AT&T quietly did was to let some service providers have numbers in the US which they would on which they would share revenue. Starting to sound familiar? You would pay the equivalent of $1 in Italy to call the US number to listen to your horoscope, football scores, chat etc. etc. AT&T would get their portion of the revenue and share it with the service provider. Now the traffic from Italy started to flow back to the US in much larger numbers and it meant that AT&T was paying out less to the foreign telcos. Italy was just one example.

    This practice happened in scores of countries. In some cases, the foreign telco would actually have to pay money to AT&T instead, in effect forcing them back to the negotiating table to talk about reducing rates. Once that happened, the rates were reduced to a point that the shared revenue model would no longer be attractive to the service providers and this flow of "other traffic" for entertainment would disappear.

    It was a VERY smart move by AT&T and ultimately a great business. It drove down international calling costs, provided incentive to bring everyone to the table for bi-lateral rate negotiations and ultimately benefited AT&Ts subscribers. I wonder if the LECs in Iowa and Nevada have a similar plan to use this as a bargaining chip for something else they want? It will be interesting to watch it play out.

    As I have said before, someone has to pay for phone calls. Itís not free to provide the service and it seems in this case AT&T was the one to pay.

    (My blog post on this topic: http://talkster.wordpress.com/2007/02/07/will-free-calls-be-strong-armed-out-of-business/ )

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