Exploiting Telco Regulations For Free Calls And For Profit (Lots And Lots Of Profit)

from the so-easy,-it's-almost-criminal... dept

Earlier this year, we wrote about how suddenly a bunch of "free" calling services were popping up that all seemed to use phone numbers in Iowa. This included a service that would let you call an Iowa number and from there call anywhere in the world for free as well as a variety of "free conference calling" services. All of these systems were actually exploiting some legacy telco regulations, that were officially designed to help rural telcos get extra money to build out more rural service. Basically, the government allowed rural telcos to charge high termination fees to other telcos when calls from their lines terminated on one of the rural telco's lines. So, if you had AT&T and called your cousin in Iowa who had some small rural telco, AT&T would actually have to pay that telco some charge per minute, with the idea being that the telcos would use that money to invest in infrastructure. Of course, the infrastructure they invested in wasn't exactly building more lines to wire up others in the town, but in VoIP systems so they could reroute calls in to anywhere else, and then team up with various online sites to get as many calls as possible routed through those systems. Then they could just sit back and collect the millions of dollars rolling in from telcos. Broadband Reports points us to an article at the Wall Street Journal going into more details about how this happened -- and how the FCC is now scrambling a bit to see if there's a way they can stop it. In the meantime, the WSJ piece notes that while the telcos have been told by the FCC that they have to keep connecting these calls, they've simply stopped paying any of the termination fees as they await the results of the various lawsuits. Of course, all that's done for now is made the various free conference call services switch to other rural telcos in other states. Eventually, though, they'll run out of other states to go to (or the regulators will finally realize how their regulations are being exploited) and the little regulatory exploit will go away.
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Filed Under: arbitrage, free conference calls, iowa, telcos, termination fees
Companies: at&t, fcc, freeconference.com, qwest, sprint, verizon

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  1. identicon
    Alex, 8 Oct 2007 @ 11:39am

    Re: Not defending big companies

    FreeConference.com has been around for 6 years. Why is AT&T getting the FCC to do its bidding now? Because of all the new fly-by-night companies and chat companies who were running to the most extreme abusers of this regulatory system. In the free conferencing industry case, this is a reasonable balancing act. AT&T is making 5 to 10 cents a minute on the new long distance business FreeConference generates and only paying 1 to 4 cents to rural telcos for access (that is why they never prompted FCC action previously--they are making a very large profit on this business). "Exploiting the system" is something AT&T, Sprint, Verizon, and Qwest are masters at and you can find dozens of examples of them playing the regulatory game for fun and profit at the user's expense. In this case, everyone benefits. Users pay for long distance service to consume services they want. Carriers earn incremental profit. Rural telcos profit and can compete across the spectrum of services in their areas without needing to pull as hard from the Universal Service Fund. Free Conferencing companies profit and continue to innovate to drive down conferencing costs with more and better features--another win for consumers.

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