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
    Jim, 23 Apr 2007 @ 10:27pm

    Re: Tekstar Communications to be sued next?

    Tekstar has not been sued, but all the other companies met with the FCC last week, demanding that the telco giants "pay up" the money they owe and unblock all calls to them.

    Both sides in the dispute expect the FCC to issue an informal ruling this week on the matter. (Superior Telephone et al)

    Last Tuesday an FCC spokesman made clear that blocking calls was forbidden, (calls are now flowing again) so it now comes down to recip comp money.

    Will the local carriers be paid by ATT (et al) for monies owed and will they continued to be paid for future calls?

    It seems the Iowa companies have made a pretty strong case for getting paid for calls made to, and terminating in Iowa. (Conference Calling)

    The made a weaker case when calls are routed thru the Iowa companies and then sent elsewhere (ie) free international calling.

    If the Iowa telcos win at the FCC, they will press for immediate payment, plus fines, plus interest, plus attorney fees. If they lose, they probably will not appeal.

    If ATT (et al) lose at the FCC they have an interesting decision to make.

    IF, they appeal the decision to the Federal Court —and they lose there— (likely since the Federal Courts usually defer to the govt.) ATT (et al) would be stuck paying high recip comp rates permanently.

    If so, look for hundreds of the services to sprout. A true nightmare for the major carriers.

    Right now neither side is ready to blink, which is dangerous for both sides.

    Both sides made offers to each other to settle the issue, but they were not even in the same “state” never mind the same “ball park”

    Possible Solutions:
    IF, the local telcos were to accept payment ONLY for calls that terminated in Iowa, and were not routed overseas, perhaps ATT (et al) would ante up the money they owe.

    But if the local telcos insists on every last dime, ATT (et al) may just sit tight and try to wait them out.

    Either way, the local telcos did nothing illegal.
    They read the tariff and went about their business.

    ATT (et al) never, in their wildest dreams thought a few local telcos in Iowa would beat the giant carriers.

    And with first quarter profits collectively over several-BILLION dollars, its hard to feel empathy for the giant telcos.
    The amount of money they owe the local telcos is probably the amount of money they spend on “entertainment expenses” every year.

    Perhaps the BEST solution would be for the giant carriers to point out to their customers, that in their TOS, the giant carriers CAN BLOCK calls due to excessive use. (in unlimited plans only)

    When a customer exceeds 6,000 minutes per month to a certain number, the carrier can block access to the number and/or cancel the account.

    Of course it is far more expensive to block individual customers than to prevent ALL customers from dialing a specific phone number.

    I would bet the FCC will choose this route as an interim solution, with an eye toward examining the entire recip comp structure at a future date.

    The FCC chairman has made it clear reexamining this issue is a priority.

    So for the Iowa telcos, “let the good times roll, while they last!”

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