Last week FreeConference, a company that offers “free” teleconferencing services, sued AT&T for blocking access by AT&T/Cingular customers to FreeConference’s services. FreeConference’s complaint says the blocking is anticompetitive and violates the Communications Act.
FreeConference’s service sets up conference calls that connect a group of callers. Users are given an ordinary long-distance phone number to call. When they call the assigned number, they are connected to their conference call. Users pay nothing beyond the cost of the ordinary long-distance call they’re making.
As of last week, AT&T/Cingular started blocking access to FreeConference’s long-distance numbers from AT&T/Cingular mobile phones. Instead of getting connected to their conference calls, AT&T/Cingular users are getting an error message. AT&T/Cingular has reportedly admitted doing this.
At first glance, this looks like an unfair practice, with AT&T trying to shut down a cheaper competitor that is undercutting AT&T’s lucrative conference-call business. This is the kind of thing net neutrality advocates worry about – though strictly speaking this is happening on the phone network, not the Internet.
The full story is a bit more complicated, and it starts with FreeConference’s mysterious ability to provide conference calls for free. These days many companies provide free services, but they all have some way of generating revenue. FreeConference appears to generate revenue by exploiting the structure of telecom regulation.
When you make a long-distance call, you pay your long-distance provider for the call. The long-distance provider is required to pay connection fees to the local phone companies (or mobile companies) at both ends of the call, to offset the cost of connecting the call to the endpoints. This regulatory framework is a legacy of the AT&T breakup and was justified by the desire to have a competitive long-distance market coexist with local phone carriers that were near-monopolies.
FreeConference gets revenue from these connection fees. It has apparently cut a deal with a local phone carrier under which the carrier accepts calls for FreeConference, and FreeConference gets a cut of the carrier’s connection fees from those calls. If the connection fees are large enough – and apparently they are – this can be a win-win deal for FreeConference and the local carrier.
But of course somebody has to pay the fees. When an AT&T/Cingular customer calls FreeConference, AT&T/Cingular has to pay. They can pass on these fees to their customers, but this hardly seems fair. If I were an AT&T/Cingular customer, I wouldn’t be happy about paying more to subsidize the conference calls of other users.
To add another layer of complexity, it turns out that connection fees vary widely from place to place, ranging roughly from one cent to seven cents per minute. FreeConnection, predictably, has allied itself with a local carrier that gets a high connection fee. By routing its calls to this local carrier, FreeConnection is able to extract more revenue from AT&T/Cingular.
For me, this story illustrates everything that is frustrating about telecom. We start with intricately structured regulation, leading companies to adopt business models shaped by regulation rather than the needs of customers. The result is bewildering to consumers, who end up not knowing which services will work, or having to pay higher prices for mysterious reasons. This leads a techno-legal battle between companies that would, in an ideal world, be spending their time and effort developing better, cheaper products. And ultimately we end up in court, or creating more regulation.
We know a better end state is possible. But how do we get there from here?
[Clarification (2:20 PM): Added the “To add another layer …” paragraph. Thanks to Nathan Williams for pointing out my initial failure to mention the variation in connection fees.]
I’ve tried a bunch of supposed “free” conference sites. The only one that really gave me free conference calls was conferencetown.com.
The Iowa Telcos are enlisting the aid of two very powerful Senators in their battle to make sure calls continue to be connected to their companies and they are paid the million dollars owed to them by AT&T and others.
Senators Grassley and Harkin, the two Senators from Iowa, have met with a delegation from the Iowa Telco group. The Senators no doubt realize the political clout and savvy the local phone companies have in Iowa, since most of the state is served by small independent phone companies.
(AT&T may have cash, but the local telcos have something more valuable—thousands of votes)
At the very least Grassley and Harkin will no doubt contact the F.C.C. demanding to know “what’s going on?â€
Such contact will put pressure on the F.C.C. to act on the matter.
The local phone companies want an order from the F.C.C. requiring full payment of moneys owed and a fine for blocking calls.
There are hints the local telcos might be willing to negotiate future recip rates
along with signs that grassroots support for the local telcos is growing, with a large number of complaints being filed at the FCC on behalf of the local telcos.
Ironically, AT&T last week announced 1st quarter profits of over $2-Billion.
Several Wall St. analysts predicted AT&T would earn over $11-Billion this year.
Earning that kind of cash, and complaining of paying out a few million dollars in legally owed recip comp money does not engender much sympathy for AT&T and the other large carriers.
What AT&T fails to point out, in their blitz of press releases about the local telcos, is that the local telcos are merely following a legal tariff which AT&T did not fight when proposed and implemented.
AT&T arguments, are lame and empty, but as they say in Texas, “empty drums do make the most noiseâ€
Forgot to add that the liberal answer to “too many layers of regulation” is “raise taxes”…
There’s a smaller issue and a larger issue here.
The smaller issue is the botched handling of this particular incident. The obvious thing to do, if the .07 fees at that exchange are because it used to produce a low volume of traffic, is to reduce it commensurate with the increased traffic due to FreeConferenceCall, and similarly to change the connection fees in response to changes in usage patterns more generally, preventing such abuse from ever working in the future, but letting things like FreeConferenceCall be tried more honestly.
The larger issue is nothing less than telecom policy itself. Curiously, the mess of telecom makes a mockery of all three major political belief systems hereabouts.
Liberals (as embodied in the Democratic Party): Any market distortion can be solved by adding more layers of regulation. Except, of course, too many layers of regulation. But it’s obvious what we really need is less regulation.
Conservatives (as embodied in the Republican Party): Capitalism and free enterprise, with responsible oversight and regulation, should rule the day, but private ownership of stuff is sacrosanct. Which leads to the existing problem.
Libertarians: Government should get out of the way entirely and private ownership of stuff is not merely sacrosanct but the First Commandment. Yeah, but with infrastructure like telecom networks, the result is big, abusive monopolies because building out a competing, parallel and redundant network is a huge expensive barrier to entry. Result being even worse — unbridled monopoly abuse and market distortions, not even somewhat tamed by an (itself untamable) thicket of regulations.
What’s actually needed has policy components unpalatable to each. Government must be involved, which libertarians wouldn’t like. The actual cables probably need to be nationalized, which conservatives wouldn’t like and libertarians would HATE. On the other hand, it’s not like private stewardship has worked well; they have little incentive to build out into thinly-populated areas. But government expense and inefficiency is no good either, so building out infrastructure should be contracted out to the same telcos that have the experience and expertise doing so. Only now they’re guaranteed to be paid, wherever they get paid to build out. The government of course would rent the capacity back to the telcos who’d provide services over the infrastructure and bill the end-users. And those services are taxable. Government collects rents and taxes to fund expansion and capacity enhancements. Telcos don’t dislike capacity enhancements now, because it means rents may go down as capacity scarcity drops. Everyone wins, at least in theory…but liberals don’t like leaving so much up to private industry!
It seems pretty easy to work this one out… If the problem is local connect fees and FreeConference has “allied itself with a local carrier that gets a high connection fee” then logic dictates that AT&T would be either blocking that entire local carrier or else charging back to the caller for all calls inside that carrier. Whether the call is a conference service or a talking clock or someone’s grandma doesn’t make a bean of difference.
Thus, AT&T is clearly doing something dodgy by selectively blocking calls based on the service that the calls provide (i.e. the internal content of the call) rather than based on the cost of placing the call.
On the other hand, we don’t actually need the FCC to knock AT&T into line, nor do we need extensive regulation. All we need is regulation with regards to honesty. Demand that anyone who is blocking calls must make the information available to their customers at least 6 months prior to any changes so the customers have time to move to a different carrier. The carriers must be given the option to charge-back their connection costs to their customer on top of their regular call fees but when they do this they must make a public declaration of where the additional charge-back came from (and once again be subject to honesty laws).
The free market can work in suitable circumstances, but you need well informed consumers.
Ed Felten gives a more balanced view of the situation than your website.
In response to the outpouring of support from bloggers like you, industry thought leaders, consumer interest groups and the media, FreeConferenceCall.com has created a special web site — http://blog.freeconferencecall.com/Default.aspx — to set the record straight on the call blocking and law suits being leveraged by the major carriers including Cingular/AT&T Wireless and Sprint/Nextel. This site includes links to current blog postings, blocking FAQs, forum for visitors to blog, and, most importantly, a “Know your Rights” section directing people to the Federal Communications Commission (FCC) web site so customers fully understand how their rights are being violated. The Know your Rights section includes links to learning about current FCC regulations, filing a complaint with the FCC, contacting your state attorney general and reading about historic cases that refute the claims of the telecommunications carrier “Goliaths.” FreeConferenceCall.com is also encouraging site visitors to subscribe to a list to join the fight in a class action suit.
The fact that Free Conference can arbitrage access charges points to insufficient rate setting oversight by the FCC. The rural Iowa telcom has to file tariffs with the FCC for terminating interstate traffic. If 7 cents a minute is overly generous the FCC should reject the rate. Surely the Commission would alow a rate increase if lower rates were “confiscatory.”
In any event AT&T has no legal right to resort to self-help and refuse to perform its telecommunications service provider, common carrier duty and interconnect.
The key factor here is that the conference bridge is going to rural Iowa for no reason having to do with technology and everything to do with forced payments.
What we have here is a cheap 900 number, a number where the money supposedly paid for LD fees is going not to the telco, but to the recipient. Like those small country PTTs that charged large fees and kicked it back to the company that got you to call.
Except here, retail telcos are not allow to charge you the real price. I buy from a wholesale telco. I pay half a cent/minute to call big cities everywhere, but I pay 3 to 7 cents to call places like freeconference. It never looked free to me. That it looked free to some was an illusion, an abuse of the flat rates with somebody forced to pay. You don’t want to have a fee where the person paying can’t negotiate the price.
There used to be a lot of free ISP’s based on the same thing. The best part is that the phone company’s origionally pushed for this rule – I think it was because of cell phones. The charge also applies to “local” calls that terminate at another carrier’s exchange.
There were problems with payments to the ISP’s because they had so many incoming cals, and no outgoing calls. I think the rule was sosposed to be a money maker because they figured there would be many more calls origionatiung from cell phones then going to them. (Probably based on the old mobile phone experence, before things change to cell phones.)
If you look at AT&T’s complaint, they say that their termination fees to one of the tiny Iowa telcos with about 57 customers used to be $2,000/month, but then jumped to $2 million/mo when they got Freeconference and a bunch of other customers that were reoriginating calls to Asia, i.e., you call Iowa, the call actually rings in China.
These telcos are co-ops that rebate any surplus to their owners, so the 57 customers were each looking to get about a $100K/yr windfall. That’s absurd and abusive. On the other hand, there FCC rules about what AT&T can do in situations like this, which I gather do include arbitration and do not include refusing to complete calls. So what we have here is the bad guys vs. the worse guys. Take your pick.
Nathan makes an important point, which I somehow neglected to mention in the original post. I have updated the post to discuss this.
Nathan’s argument helps to explain why AT&T/Cingular might see FreeConference’s business model as unfair. High connection fees for certain local carriers are intended to offset those carriers’ higher costs, not (AT&T/Cingular would argue) to provide a profit center for third parties who choose to route calls through those carriers.
The detail that this post left out is that termination fees vary by region. They’re higher in rural regions, roughly on the idea that the fixed costs of telephone service are spread among fewer users and calls. I’ve seen claims that the “normal” rate that is $0.01/min, and the extreme rate for rural exchanges is more like $0.07/min. So it does cost Cingular/AT&T more to connect these calls; they expect it to not be an issue because there are few people there to make and receive calls, but this service upsets that assumption.
I’m unclear on the regulatory issues around whether Cingular is permitted to do this – sounds like something to keep telecom lawyers going for a while – but one potential long-term approach would be to rescale the exchange fees based on actual usage.
This is all about ATT pining for the monopoly days.
Compare and contrast the following:
ATT/Cingular provides its own conference call service, charges high fees
ATT/Cingular decides to undercut the conference market by chargin only enough to give it a thin profit margin
An incumbent local exchange carrier provides a conference call service, charging high fees.
An incumbent local exchange carrier provides a conference call service, charging only enough to give it a thin profit margin.
An incumbent local exchange carrier discovers that the connection costs it recovers from the long distance carriers will fund its conference call service free of charge
An incumbent local exchange carrier subcontracts its conference call service to an independent provider and splits the fees.
ATT is simply whining that the regulatory structure allows the ILEC’s to undercut its price on conference service. The best answer to that from the consumer perspective is to preserve neutrality and deregulate the price. Of course, *that’s* never going to happen in the real world.
I’m with the Tims. Can we have some hypothetical numbers here? Like, if i call my mother-in-law on the other side of the country, and i pay Verizon $1 for that, where does that dollar go? What portion goes to the cell provider, to the long-distance company, and to the local carrier on the other end?
If, instead of my mother-in-law, i call FreeConference, do the numbers change? If FreeConference charges 75 cents for incoming calls, and a regular local carrier charges 2 cents, then i can understand shutting them down.
But if they both charge 2 cents, then AT&T is being a dick.
If FreeConference can supply conferencing services for a fraction of the fee that the local phone company gets for setting up the connection, then AT&T, whose pricing structure is presumably already capable of recouping from their customers more than the cost they pay to local phone companies for their customers’ connections, should be able to undercut FreeConference by supplying conferencing services at the same cost, then offering their customers those services for *less* than the cost of an ordinary call (since they wouldn’t have to pay a local phone company the connection fee for those conference calls).
Apparently, though, AT&T, instead of giving their customers a discount for their connections to AT&T conference calls, actually charges their customers *extra* for those calls–which are actually cheaper for them to provide than normal long-distance calls. No wonder their conference call service is so lucrative–and no wonder they’re so annoyed at being undercut. Why anyone else should have the tiniest bit of sympathy for them, though, is beyond me.
I quite agree with the other Tim, what’s the big difference between this and any other call? The users are paying to make the call, and the company they are connecting to are taking a cut of that; presumably just like premium-rate numbers, except less costly.
A similar device exists in the UK: we have 0845 numbers which cost the same as a national rate call, but part of that money goes to the 0845 operator. It’s straightforward and makes it very easy for anybody to set up a phone-based business or system that is both reasonably priced and profitable for the operator.
I can’t see this as anything other than AT&T unfairly blocking out competition.
It not that it costs AT&T/Cingular any more money. To them it looks just like a regular long-distance call. The problem is they are losing business to a competitor that is offering a free service. The kicker is that the the cut from that long-distance call that is supposed to go only to the local phone company.
Instead it is being split by the local company with FreeConference. So I can see why they are pissed because the local company they are sharing the revenue with are now directly under-cutting their business. Now whether they have the right to control what the local company can do with that money is the issue, I guess.
I don’t understand how what FreeConference is doing is different from any other long-distance call. If I call my grandma (who’s in another area code), I pay my cell phone provider (T-Mobile) for the minutes I use, and they connect me to my grandmother. Based on this description, it sounds like T-Mobile is required to pay my grandmother’s telephone company for the privilege of connecting to her phone.
Presumably, T-Mobile prices its services such that, on the average, it’s able to recoup the fees it must pay phone companies at the other end of the connection and still turn a profit. We don’t consider it unfair if I call my grandmother a lot. So how is it different if I call FreeConference?
I wonder if futurephone.com, RIP had a similar arrangement. Same wonder about podlinez.com. Are there any other companies out there offering free services, subsidized by this mechanism?